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In recent years, automobiles have been associated with nearly 29,000 traffic fatalities annually in the United States, including the deaths of both automobile occupants and others involved in collisions with automobiles.The National Highway Traffic Safety Administration (NHTSA), a unit of the Department of Transportation (DOT), has the lead role in federal government efforts to reduce the number of traffic crashes and to minimize their consequences. Some types of automobiles have higher fatality rates than others. (For example, small cars generally have higher rates than large cars.) In addition, some categories of drivers are more likely to be involved in serious crashes than others. (Young drivers, for example, have higher involvement rates than other drivers.) However, as we previously reported, one cannot conclude from differences in fatality rates that some types of cars, or some types of drivers, are in fact more dangerous than others, because driver and automobile characteristics are highly related (GAO, 1991). For example, since small cars have a disproportionate percentage of young drivers, do the high fatality rates for those cars stem from vehicle characteristics or the recklessness with which they are operated? The goal of this report is to isolate the independent effects of important crash-related factors on the likelihood of injury in a collision. The report focuses on the most important predictors of occupant injury in a collision: crash type and crash severity, automobile size, safety belt use, and occupant age and gender. The report is concerned with both crashworthiness (protecting automobile occupants) and aggressivity (protecting other roadway users struck by automobiles). The report also considers prospects for improving the safety of automobile occupants. This report is one of three GAO reports examining automobile safety. One of these, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), examines the independent effects of driver characteristics and automobile size on crash involvement. Another, Highway Safety: Reliability and Validity of DOT Crash Tests (GAO/PEMD-95-5), looks at the extent to which results from the crash test programs conducted by NHTSA accurately predict injury in actual automobile crashes. Since the mid-1960’s, both the number of traffic fatalities and the fatality rate per registered vehicle have sharply decreased in the United States. The fatality rate for automobile occupants has declined by 36 percent since 1975. The continued emphases on reducing drunk driving and increasing safety belt use, along with the introduction of antilock brakes, air bags, and other safety enhancing features, have increased the chances that this favorable trend will continue. Nonetheless, in 1991 automobiles were associated with nearly 29,000 traffic deaths in the United States.About 22,000 of the automobile-related fatalities were automobile occupants (about 10,000 killed in single-car collisions and 12,000 in multiple-vehicle collisions), about 2,500 were occupants of other types of vehicles (for example, light trucks, vans, or motorcycles) involved in collisions with automobiles, and approximately 4,000 were pedestrians or cyclists hit by automobiles. (See table 1.1.) Different models of automobiles appear to make very different contributions to this fatality toll. For instance, the Insurance Institute for Highway Safety (IIHS) has reported that the most “dangerous” automobile models have occupant fatality rates more than nine times higher than the “safest” models. Further, some of the automobile characteristics associated with this variation in fatality rates are well known. For instance, sports cars have higher fatality rates than station wagons, and small cars have higher fatality rates than large cars. However, this does not mean that types of automobiles with high fatality rates are necessarily more dangerous than those with low fatality rates. This is because different types of drivers prefer particular types of automobiles, affecting both the number of collisions involving particular autos and, perhaps, the probability of serious injury in the event of a collision. For example, young drivers are much more likely to be involved in fatal accidents than others—drivers age 16 to 20 are involved in fatal accidents at a rate three times higher than that for drivers age 45 to 54—thereby inflating the fatality rate for types of cars preferred by young drivers. Similarly, some types of automobile occupants are more likely to be seriously injured in a collision than others. For example, in collisions in which at least one vehicle was towed from the accident scene, NHTSA (1992a) recently estimated that women automobile occupants are about 36 percent more likely to be hurt than men occupants in similar collisions. This suggests that types of cars with a disproportionate number of women occupants may have higher fatality rates than other cars. As automobiles abruptly stop or change direction in a collision, occupants continue moving in the original direction of travel. This independent movement of an occupant within a rigid vehicle that is decelerating more quickly than its occupant provides several opportunities for injury. First, some occupants are injured by being ejected (either partially or totally) from the vehicle. Ejection substantially increases the risk of serious injury—ejected occupants are three to four times more likely to be killed in a collision than occupants who do not leave the vehicle. Second, occupants can collide with the interior of the vehicle or other objects intruding into the passenger compartment. This “second collision” (following the “first collision” of the automobile striking an object) is understandably worse if it occurs at high speed, involves impact with a sharp or unyielding portion of the car’s interior, or involves contact with part of another vehicle or a roadside object that has penetrated the passenger compartment. Finally, because different portions of an occupant’s body decelerate at different rates, internal injuries can be caused by the “third collision” of soft tissues against hard, bony structures. For example, in high-speed collisions, the skull decelerates more quickly than the brain, potentially causing injury to the brain as it strikes the hard skull. Automobiles, and federal automobile safety regulations, are designed to protect their occupants from these dangers in several ways. One way is to attempt to reduce the deceleration forces acting on occupants. Deceleration forces can be reduced by designing the structure of a vehicle to absorb as much energy as possible before the crash forces are transmitted to the passenger compartment or by giving the occupant more time to slow down, thereby reducing the maximum force level the occupant is subjected to. The latter can be accomplished by starting the deceleration period more quickly (for example, by designing safety belts that begin holding back the occupant sooner) or by increasing the total deceleration period (for example, by lengthening the front end of the vehicle). Another way cars may protect their occupants is by encasing them in a protective compartment that preserves a living space and prevents the intrusion into the passenger compartment of striking vehicles or other objects (such as light posts or trees) that a car hits. Third, automobiles are designed to keep their occupants both in the vehicle and away from interior surfaces. This is most obviously accomplished through the use of safety belts, but a number of other components are also intended to keep the occupant in the vehicle, including door latches and windshields that are reinforced to eliminate potential ejection routes. In addition, automobile interiors are designed to absorb energy from the occupant and to limit the occupant’s movement rather than serve as a rigid barrier. Energy absorbing steering columns are one example. There is little doubt that cars from recent model years, as a group, are safer than automobiles from past model years and that some of this improvement can be attributed to federal government safety regulations. For instance, in comparing the crash test results of cars from model years 1980 and 1991, NHTSA researchers found that one set of scores measuring injury potential had declined about 30 percent during the intervening years (Hackney, 1991). Similarly, Evans (1991b) estimated that the total effect of nine federal motor vehicle safety standards enacted by 1989 had been to reduce the occupant fatality rate by about 11 percent. The objective of this report is to examine the independent effects of a number of factors—crash type, crash severity, automobile weight and size, safety belt use, and occupant age and gender—on the risk of injury in an automobile crash. We are concerned with both crashworthiness and aggressivity. Crashworthiness refers to the extent to which automobiles protect their occupants in a collision, and aggressivity refers to automobile characteristics that affect the safety of the occupants of the other vehicles in a collision. We restricted the scope of the study in several ways in order to obtain a clear picture of the most important phenomena. First, we looked only at the safety of automobile occupants and the dangers automobiles pose to occupants of other vehicles. We were not directly concerned with factors affecting the safety of occupants of other types of passenger vehicles, such as pickup trucks, vans, minivans, and multipurpose vehicles; we considered these vehicles only as they affect the safety of automobile drivers in two-vehicle collisions. In our judgment, concerns about the safety of light trucks and other passenger vehicles differ significantly from that of automobiles. Light trucks and other passenger vehicles are less stable and thus roll over more frequently than automobiles, and they have been subject to less stringent safety regulations than automobiles. Second, our statistical analysis focused on model year 1987 and later cars, because the safety experiences of those cars are more likely to apply to today’s new cars than are the safety experiences of older ones. Finally, we considered in our analysis only the injury experiences of drivers, not those of automobile passengers or factors specifically affecting the safety of child occupants. (Roughly half of the automobiles on the road have no occupants other than the driver.) To meet our objective, we reviewed technical reports from NHTSA and other sources and consulted auto safety experts and representatives of automobile manufacturers. We also conducted our own statistical analyses of traffic safety databases obtained from NHTSA. Our primary data set was compiled from the National Accident Sampling System—Crashworthiness Data System (NASS) for 1988 through 1991. NASS is a nationally representative probability sample of all police-reported crashes involving a passenger car, light truck, or van in which at least one vehicle was towed from the scene. In addition, all the automobiles included in NASS were towed from the crash site. Thus, the automobiles in NASS, as a whole, are much more likely to have injured occupants than are cars involved in typical crashes. Not only are police-reported crashes more severe than those not reported to the police, but tow-away crashes on the whole are also more severe than those not involving tow-aways. Indeed, almost all serious occupant injuries occur in police-reported tow-away collisions. For our analysis, we selected a subset of cases from the NASS data for 1988 through 1991. We included all one-car collisions involving a 1987 or newer model year automobile and all collisions between a model year 1987 or later automobile and any other car, van, pickup truck, or other light truck. These crash types, taken together, accounted for about 81 percent of all automobile occupant fatalities in 1991. The remaining 19 percent occurred in types of crashes that we did not include in our data set because of a lack of cases, principally collisions with medium and heavy trucks (about 10 percent of the 1991 total). In our statistical analyses, we used logistic regression to look at the independent contributions of a variety of factors on the probability of driver injury. Driver injury was indexed with a dichotomous outcome variable coded “1” if the driver was hospitalized or killed in the crash and “0” otherwise. The regression analysis allowed us to isolate the effects of one factor (for example, automobile weight) while statistically holding constant the other factors (for example, collision severity as well as driver age and gender). Regression analysis answers the question: If there were no differences among these drivers except for the factor of automobile weight, for example, how would that factor predict the probability of driver injury? (The data sets and analyses are described in appendix I.) The studies that we reviewed from the traffic safety literature differed in several ways that increase the difficulty of comparing their results and of relating their conclusions to our own findings. For instance, some studies focused on injuries to automobile drivers, as we did, while others examined injuries to all automobile occupants, not just drivers. Similarly, different studies looked at slightly different sets of automobile crashes—at tow-away crashes (as we did) or at all police-reported crashes or only at crashes in which a fatality occurred. In addition, the studies employed different outcome measures. Our analysis concerned driver hospitalizations or deaths, while other studies looked only at fatalities or at injuries considered serious or worse or at injuries categorized as moderately severe or worse, for example. While these and other differences mean that the studies we cite rarely produced precisely equivalent findings, in most the findings were roughly the same. In particular, the direction of the findings was almost always the same (that is, whether a factor increases or decreases the risk of injury), and there was usually approximate agreement about the size of the effect (that is, whether a factor has a large effect on injury risk or only a minor influence). Our work was performed in accordance with generally accepted government auditing standards. Chapter 2 looks at the effects of crash type and crash severity. It also discusses the effects of automobile size and safety belt use in three different configurations: one-car rollover crashes, one-car nonrollover crashes, and collisions between cars and other light vehicles. Chapter 3 examines the influence of driver age and gender on injury probability. Chapter 4 discusses the relative contributions of driver and automobile factors to driver injury. Chapter 5 discusses the potential for improving automobile safety. Appendix I describes our data set and statistical analyses. This chapter discusses the safety consequences of crash characteristics, automobile weight and size, and safety belts and air bags. The chapter begins with a discussion of crash characteristics that are related to occupant injury, including the injury risk associated with one-car rollover crashes, one-car nonrollover crashes, and collisions with an automobile, a van, or a light truck. It then examines the safety consequences of automobile weight and size as well as of safety belt use in the different crashes. Each section summarizes relevant findings from the literature and then presents the results of our analyses of the NASS data. The chapter ends with a look at the effects of air bags. The great majority of traffic crashes do not involve serious injury. A large proportion of all traffic crashes are not reported to the police (Evans, 1991b). And NHTSA has estimated that about one third of crashes reported to the police involve personal injury (two thirds having property damage only) and that just 6 percent involve a severe or fatal injury (NHTSA, 1991b). Nonetheless, some crashes are much more likely to lead to serious injury than others. First, some types of crashes are more severe than others. Overall, single-car crashes are more likely to seriously injure occupants than are multiple-vehicle collisions. Single-vehicle crashes account for about 30 percent of police-reported crashes annually, yet in 1991 about 45 percent of all automobile occupant fatalities were in these collisions. Single-car rollover crashes are particularly dangerous, accounting for only about 2 percent of all police-reported accidents but about 20 percent of occupant fatalities (NHTSA, 1991b). A major reason for the relative severity of single-car crashes is that most crashes involving drunk drivers are single-car incidents, and crashes involving drunk drivers tend to be more severe than other collisions. For example, NHTSA reported that 53 percent of drivers killed in single-vehicle crashes in 1991 were intoxicated, compared with only 21 percent of the drivers killed in multiple-vehicle collisions (NHTSA, 1993b). Second, for nonrollover crashes, some points of impact on the automobile are more dangerous than others. The preponderance of fatal crashes other than rollovers involve frontal impacts, followed at a distance by left- and right-side impacts. For example, table 2.1 indicates that 43 percent of all automobile occupant fatalities in 1991 occurred in frontal impacts, or more than half of all fatalities that did not occur in single-car rollovers. Third, crashes at high speeds are more dangerous than others. For example, Joksch (1993) estimated that the risk to drivers of fatal injury in two-car collisions was about 1 percent for a 20 mph collision, 10 percent for a 35 mph collision, and 44 percent for a collision involving a change in velocity of 50 mph. NHTSA (1993e) recently reported similar findings for restrained vehicle occupants, noting, for instance, that the probability of fatal injury is about nine times as great in frontal collisions with a change of velocity of 40 mph as in those with a change of 30 mph. That the probability of death increases sharply with impact speed is one reason for the predominance of frontal impacts in fatal crashes, since frontal impacts are likely to involve cars that are moving forward. Here we report how injury risk and driver and automobile characteristics vary by crash type. Our data, from NASS, were for model year 1987 and later cars in three types of police-reported tow-away crashes in 1988-91: one-car rollovers, one-car nonrollovers, and collisions with other cars, vans, and light trucks. The pattern of injury risk by crash type that we found in the NASS data set reflects the pattern described in the literature. As table 2.2 indicates, one-car crashes are more dangerous than multivehicle collisions. One-car rollover crashes, in particular, are much more dangerous than other crash types, with a rate of driver hospitalization or death that is double that of one-car nonrollover crashes and four times that of collisions with cars and light trucks. In addition to having a higher rate of driver injury, one-car crashes are disproportionately likely to involve men drivers and young drivers. (See table 2.2.) We found that about 60 percent of the drivers in one-car crashes were men, compared with approximately 46 percent in two-vehicle collisions. In addition, while close to half of the drivers in one-car crashes were 16 to 24 years of age, only about one third of the drivers in collisions with other cars or light trucks were that young. These findings are consistent with those of our companion report, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), in which we found that driver age and gender are more strongly related to involvement in single-vehicle crashes than they are to involvement in two-vehicle collisions. In addition, as table 2.2 indicates, the average curb weight of automobiles in one-car rollover crashes was somewhat lower than that of cars involved in other crashes. As we noted in Highway Safety: Factors Affecting Involvement in Vehicle Crashes, involvement in rollover crashes increases as automobile weight decreases. Just as the literature suggests, we found that the risk of injury to drivers is significantly affected by impact point. In particular, we found that two-vehicle collisions involving head-on impacts between vehicles moving in opposite directions are much more dangerous than other two-vehicle crashes. The risk of driver injury or death is about five times as great in head-on collisions as in other two-vehicle collisions. For crashes other than head-on collisions, frontal impacts and left-side impacts had higher rates of driver hospitalization or death than others. Finally, we found that high impact speeds are, not surprisingly, more dangerous than low impact speeds. Considering the three crash types together, we estimated that each increase of 10 mph in the change of velocity at impact increases the probability of driver hospitalization or death nearly sevenfold. As we have previously reported, safety experts agree that, in general, heavier and larger cars are both more crashworthy and more aggressive than lighter and smaller automobiles (GAO, 1991). Thus, in the event of a collision, occupants are less likely to be hurt when they are in heavier and larger cars and when they are struck by lighter and smaller cars. However, there is some disagreement in the literature about which is the more important dimension for occupant safety, weight or exterior size (that is, overall length and width). Proponents of weight as the important dimension argue that automobile mass protects occupants from injury because it is aggressive—that is, heavier cars knock down objects and push other vehicles back, thereby transferring momentum and energy to the struck object, including other vehicles, that could otherwise affect occupants of the striking vehicle (see, for example, Evans and Frick, 1992). In contrast, proponents of exterior size as the more important dimension maintain that large vehicles protect their occupants by absorbing crash energy without increasing the injury risk of other roadway users (for example, see Robertson, 1991). In most cases, this debate is of little practical significance now, since weight and exterior size are very highly correlated—that is, heavy cars are almost invariably also long and wide—but it has important implications for the design of future automobiles. If exterior size is the more important dimension, using lighter weight materials could make future automobiles lighter without decreasing exterior size, thus increasing fuel efficiency without exacting a safety cost. Conversely, using lighter weight materials would involve a safety cost if weight is the more important dimension. In addition, estimates of the amount of additional protection offered by a given increase in automobile weight vary considerably. For example, consider the effects of a 500-pound increase in the weight of one automobile in a collision with another, assuming no change in the weight of the latter. Klein, Hertz, and Borener (1991) used data from two states to generate two different estimates of the decreased risk of serious driver injury from that automobile weight increase—13 percent and 20 percent. Other estimates are higher. For example, Evans (1982) concluded that this increase in automobile weight would reduce a driver’s risk of fatal injury by about 29 percent. Further, the protective effect of automobile size appears to differ by crash type. First, it is likely that this effect is somewhat less pronounced in one-car nonrollover crashes than in multivehicle collisions (Evans, 1991b). For example, in the 1991 paper by Klein and colleagues, NHTSA researchers estimated that a 500-pound increase in automobile weight reduces the risk of driver fatality by not quite 5 percent in one-car nonrollover crashes, somewhat less than the estimates of 13 percent and 20 percent for two-car collisions. Second, although it is well documented that small cars are much more likely to be involved in one-car rollover crashes than are large cars (see, for example, GAO, 1994), the literature is less clear about the safety consequences of automobile size once a rollover has occurred. On the one hand, in examining the effects of reduced automobile weight and size on safety in rollover crashes, some researchers have focused on the increased number of rollover crashes among light and small cars (Evans, 1991b; Kahane, 1990; NHTSA, 1991a). The implication of these studies is that automobile weight and size do not affect crashworthiness in rollovers; otherwise, these researchers would have included weight and size as factors in their calculations. On the other hand, some direct studies of crashworthiness in rollovers have found that drivers of larger cars are more likely to be injured than drivers of smaller cars in rollovers (see, for example, Partyka and Boehly, 1989). One explanation for this finding is that it takes more energy to roll over a heavy automobile than a light one, meaning that the typical rollover crash involving heavy autos is more severe (that is, occurs at a higher speed) than the typical rollover involving light cars (see, for example, Terhune, 1991). After combining all the crashes in our database (one-car rollovers, one-car nonrollovers, and collisions with cars and light trucks), we found that the risk of injury to drivers was significantly reduced as car weight and wheelbase increased in our sample. (See figure 2.1.) We estimated that the risk of driver hospitalization or death decreases about 14 percent for every additional 500 pounds of automobile weight and about 13 percent for each additional 5 inches of wheelbase. (See tables I.1 and I.2.) Further, considering all crash types taken together, we could not statistically differentiate the injury reduction effects of curb weight and wheelbase. That is, the benefits of increasing weight and wheelbase were roughly equivalent in reducing injuries, and we were unable to establish that one had a stronger influence than the other. The nearly equivalent slopes of the lines for weight and wheelbase in figure 2.1 demonstrate this. The endpoints of the lines in figure 2.1 represent approximately the 5th and 95th percentiles of automobile weight and wheelbase in this data set. Thus, 2,000-pound cars are among the lightest and 3,600-pound cars are among the heaviest in this database of cars involved in serious crashes; similarly, cars with a wheelbase of 93 inches are among the shortest, 113 inches among the longest. Figure 2.1 shows that, for all three crash types taken together, whether measured by weight or wheelbase, drivers in the heaviest and largest cars had a risk of hospitalization or death about 40 percent less than the drivers of the lightest and smallest cars. However, these overall effects mask the fact that automobile weight and wheelbase have very different safety consequences in different types of crashes. Figure 2.2 shows the estimated effects of curb weight separately for the three crash types (see also tables I.3-I.5); figure 2.3, the estimated effects of wheelbase (see also tables I.6-I.8). Most importantly, although increasing weight and wheelbase reduces the risk of driver injury in one-car nonrollover crashes and in collisions with other cars or light trucks, drivers in heavier cars were much more likely to be hospitalized or killed in one-car rollover crashes than were drivers of lighter automobiles. For one-car rollover crashes, we estimated that each 500 pounds of additional automobile weight increases the risk of driver hospitalization or death by about 59 percent. This effect is solely a function of automobile weight, not of wheelbase; we found that the relationship between wheelbase and driver injury was not statistically significant in one-car rollovers. This finding agrees with the report of Partyka and Boehly (1989) that drivers of heavier and larger cars are more likely to be injured in rollovers than drivers of lighter and smaller cars. This finding is also consistent with the explanation that it takes more energy to roll over a heavy automobile than a light one, meaning that rollover crashes involving heavy autos occur at higher speeds than rollovers involving light cars. However, it is important to keep in mind that the rate of involvement in one-car rollover crashes is much greater for light cars than for heavy ones, so this finding does not necessarily mean that, considering both involvement and crashworthiness, drivers of heavy cars are more likely to suffer injuries in one-car rollovers. Figures 2.2 and 2.3 also show that we found a tendency for the risk of driver hospitalization or death to decrease with increasing car weight and size in one-car nonrollover crashes, but neither curb weight nor wheelbase was a statistically significant predictor of driver injury in those crashes. In contrast, we found that in collisions with other cars and light trucks, both automobile weight and wheelbase were statistically significant predictors of driver injury. In those crashes, we estimate that each additional 500 pounds of automobile weight decreased the risk of driver hospitalization or death by about 23 percent and each 5 inches of additional wheelbase lowered the risk of driver injury approximately 19 percent. These findings reflect the pattern, described in the literature, that the protective effects of automobile weight and wheelbase are somewhat greater in multivehicle collisions than in single-car nonrollover crashes. In two-vehicle collisions, the injury risk of an automobile occupant is affected not only by the characteristics of his or her own automobile but also by the characteristics of the other vehicle. We looked at the effects of the weight and vehicle type of the other vehicle on the probability of injury for the first driver: both factors affect the aggressivity of the other vehicle. First, not surprisingly, heavier vehicles pose more of a risk than lighter vehicles. (See figure 2.4.) In our analysis, each increase of 500 pounds in the weight of the other vehicle increased the probability of hospitalization or death by about 13 percent, holding other factors constant. (See table I.5.) It is important to note that the magnitude of this aggressive effect of vehicle weight is less than that of the protective effect of weight described earlier. (We estimated that each additional 500 pounds of automobile weight reduces the probability of injury by about 23 percent.) After statistically controlling for the influence of other factors, we found that this ratio of the protective effect to the aggressive effect of automobile weight of 1.77 to 1 is roughly consistent with the findings of other researchers. For example, Klein, Hertz, and Borener (1991), analyzing data from two different states, generated two estimates of the size of this ratio in two-car collisions: 1.54 to 1 and 1.30 to 1. Second, figure 2.5 shows that driver injury risk is strongly influenced by the body type of the other vehicle. We found that while pickup trucks do not pose more danger than automobiles, vans and other light trucks are more aggressive than automobiles. Indeed, statistically controlling for the weight of the driver’s car and of the other vehicle, we estimate that the risk of hospitalization or death for the driver is more than twice as great in collisions with vans and light trucks than with other cars or light vehicles. (See also table I.5.) This finding reflects two characteristics of vans and light trucks. One is that because vans and light trucks can carry heavy cargo loads, these vehicles may be, in reality, heavier than the curb weight measurements available to us indicate. The second characteristic is that the structure and design of vans and other light trucks make those vehicles especially dangerous for automobile occupants in two-vehicle collisions (National Research Council, 1992; Terhune and Ranney, 1984). Safety belts greatly reduce the risk of injury and death in roadway crashes. In a recent review of studies of safety belt effectiveness, we concluded that most studies show that belted vehicle occupants have a risk of serious injury or death that is approximately 50 to 75 percent less than that of unrestrained occupants (GAO, 1992). Other researchers have found safety belts to have slightly smaller effects. For example, NHTSA (1993d) estimated that when manual lap and shoulder safety belts are used in serious crashes, they reduce fatality risk by 45 percent. Similarly, Evans (1986) estimated that three-point lap and shoulder safety belts reduce a driver’s risk of fatality by about 43 percent, with about half of that benefit the result of eliminating or attenuating impacts with the interior of the vehicle and about half the result of preventing occupant ejection. There are three other important points about safety belt effectiveness. First, the effectiveness of safety belts varies by crash type. Belts are most effective in rollover crashes because they largely prevent occupant ejection (Evans, 1990; Partyka, 1988). They are also more effective in one-car crashes than in multivehicle collisions. For example, Evans and Frick (1986) estimated that safety belts reduce the risk of driver fatality in one-car crashes by 62 percent but by only 30 percent in two-car crashes. Second, belt effectiveness also varies by point of impact. Belts are most effective in frontal impacts and least effective in left-side impacts (Evans, 1990). Since one-car crashes are more likely to involve frontal impacts than are two-car collisions, this offers one possible explanation for the greater efficacy of safety belts in one-car crashes. Third, it is likely that manual lap and shoulder belts are somewhat more effective than other safety belt configurations. For example, Evans (1991a) estimated that lap and shoulder belts reduce fatality risk in serious collisions by about 41 percent, compared with estimated risk reductions of 18 percent for lap belts only and 29 percent for shoulder belts only. Evans speculated that these two components have somewhat different functions, with lap belts primarily preventing ejection and shoulder belts mitigating contact with the interior of the vehicle. Comparing manual lap and shoulder belts to automatic belts, NHTSA (1993d) estimated that automatic safety belts, when used in serious crashes, reduce the risk of fatality by 42.5 percent, compared with an estimated fatality reduction of 45 percent for manual lap and shoulder belts. Considering all three crash types together, NASS researchers categorized 73 percent of the drivers in the NASS data set as using a safety belt at the time of collision, with those involved in one-car rollovers slightly less likely to be belted than others. This figure is higher than might be expected from the results of other estimates of safety belt use among the general driving population, particularly given that drivers involved in crashes are less likely to wear safety belts than others and that all the drivers included in our analysis had been involved in a crash. In one point of comparison, NHTSA estimated a 51-percent safety belt usage rate for all passenger cars in 1991 (NHTSA, 1992a). Further, it is well established that unbelted drivers are more reckless than belted drivers (Evans and Wasielewski, 1983; Evans, 1987; Preusser, Williams, and Lund, 1991; Stewart, 1993). As a result, unbelted drivers have much higher crash involvement rates than belted drivers: NHTSA (1992a) estimated that unbelted drivers have an involvement rate in potentially fatal crashes that is more than double that of belted drivers. We cannot determine with certainty if, or to what degree, the safety belt use figures reported in NASS are incorrect, nor can we determine with certainty the extent to which any potential bias in those figures affected our analyses. For that reason, our results should be interpreted with caution. Nonetheless, because the results of our analyses concerning the relative effectiveness of different safety belt configurations in different types of crashes are consistent with the findings from the traffic safety literature, we believe that any potential bias has not seriously affected our findings. For each of the three categories of crashes, we examined the performance of three safety belt configurations: (1) manual lap and shoulder belts, (2) automatic and manual belts combined (most commonly automatic shoulder belts and manual lap belts), and (3) automatic belts without manual components. Other safety belt configurations, including manual lap belts alone, had too few cases in the data set for us to estimate their effectiveness. Statistically controlling for crash severity, driver characteristics, and other background factors, we found that, compared with unbelted drivers, drivers using any of the three safety belt configurations had greatly reduced risks of injury. We also found that, looking at the three types of crashes together, manual lap and shoulder belts were somewhat more effective in preventing driver injury than the other configurations. (See figure 2.6.) Compared with unbelted drivers, the estimated risk of hospitalization or death was reduced about 70 percent for those using manual lap and shoulder belts, about 63 percent for those using automatic and manual belts combined, and about 54 percent for those using automatic belts without manual components. (See also table I.1.) We also found small variations in safety belt performance among the different types of crashes. Safety belts were somewhat less effective in collisions with other cars or light trucks than they were in single-car crashes. For example, in our analysis, manual lap and shoulder belts reduced the risk of driver hospitalization or death by 83 percent in one-car rollover crashes and by 80 percent in one-car nonrollover crashes but by only 64 percent in collisions with other cars or light trucks. (See tables I.3-I.5.) Evaluations of the effectiveness of air bags are hampered by the relatively small number of cars now equipped with them (although all passenger cars, vans, and light trucks will be required to have both driver- and passenger-side air bags by the 1998 model year). There were too few automobiles with air bags in the NASS data set for us to conduct our own analysis of air bag effectiveness. Nonetheless, some of the characteristics of air bag performance have already been established. First, air bags are effective only in frontal impacts; they do not protect drivers in side impacts or other nonfrontal collisions (see, for example, Zador and Ciccone, 1993). While frontal impacts account for by far the greatest proportion of automobile occupant fatalities, more than half of occupant fatalities do not involve frontal impacts. (See table 2.1.) Second, air bags offer additional protection to drivers already wearing safety belts. Researchers have found that belted drivers with air bags are about 10 percent less likely to be fatally injured than are belted drivers without air bags (Evans, 1991b; Zador and Ciccone, 1993). For example, NHTSA (1993d) estimated that lap and shoulder safety belts alone reduce automobile driver fatality risk by about 45 percent. In that paper, NHTSA also estimated that drivers with lap and shoulder belts and air bags are about 50 percent less likely to be killed than unbelted drivers, for a safety increment of close to 10 percent (50/45 = 1.11, or about 10 percent). Finally, safety belts alone are much more effective than air bags alone. Estimates of the effectiveness of air bags for drivers who do not wear safety belts indicate that those drivers are approximately 20 to 30 percent less likely to be killed in a collision than are unbelted drivers without air bags (NHTSA, 1993d; Zador and Ciccone, 1993). In contrast, as noted previously, drivers wearing lap and shoulder safety belts are, by the most conservative estimate, 41 percent less likely to be killed than unbelted drivers. DOT had one general comment concerning the topics presented in this chapter: it maintained that the subset of the NASS data we used in the report is inappropriate for studying the effect of car size on safety and, more particularly, that the sample size is inadequate for assessing the consequences of changing the weight of both vehicles in a two-vehicle collision. We disagree. As the findings presented in this chapter demonstrate, the NASS data set we constructed clearly was adequate for uncovering a number of statistically significant relationships (the analyses are described in appendix I). In addition, our findings are similar to NHTSA’s findings from statistical analyses of state accident databases (particularly concerning the effects of the weights of both vehicles in two-car collisions; see Klein, Hertz, and Borener, 1991) and to NHTSA’s findings from statistical analyses of a slightly different NASS database (see table I.1 and NHTSA, 1992a, p. 72). Safety researchers have consistently found that women automobile occupants have a greater risk of injury in a collision than men and that the risk of injury increases with occupant age. For example, NHTSA (1992a) found that women vehicle occupants involved in tow-away crashes are 36 percent more likely than men to suffer an injury categorized as moderately severe or worse. NHTSA also found that the risk of moderate injury increases about 2 percent for each year of age, meaning that, compared with 20-year-olds, 30-year-olds have a 21-percent greater risk of injury and 60-year-olds are more than twice as likely to be injured. Similarly, Evans (1988b) reported that 30-year-old women have a fatality risk in traffic crashes about 31-percent higher than 30-year-old men and that the risk of fatality increases about 2 percent for each year of age. Our analysis of the NASS data set of police-reported tow-away crashes produced similar findings. For statistically equivalent crashes, we found that women drivers are about 29 percent more likely to be hospitalized or killed than men drivers. We also found that drivers 65 and older are about 4.5 times more likely to be seriously hurt than drivers 16 to 24 years old in equivalent crashes. (See table I.1.) One explanation for the greater vulnerability of women drivers and older drivers emphasizes their inherent physical frailty. This view postulates that the same degree of physical trauma is more likely to produce injury in women than in men and in older automobile occupants than in younger ones, because women and older people are physically less resilient than men and younger people. Indeed, there is some support for the view that women are physically more vulnerable than men (Evans, 1988b), and that older people are more fragile than younger ones is well documented (for example, Mackay, 1988; Pike, 1989). The implication of this view is that the greater vulnerability of women and older persons is not amenable to correction through automobile design changes, because weaker individuals will be hurt more often than stronger ones no matter what. Other possible explanations have not been carefully developed in the literature, but they tend to involve speculation that some characteristic of the vulnerable group interacts with automobile design to cause a safety problem. For example, because women are shorter than men, on the average, they may sit closer to the steering wheel, causing them to hit the steering column more quickly in a crash. Similarly, the interaction of lower height and safety belts designed for average-sized drivers may oblige women, for reasons of comfort, to wear safety belts incorrectly more than men do, thereby increasing the injury risk of ostensibly belted women drivers relative to that of belted men drivers (see, for example, National Transportation Safety Board, 1988). Here, we discuss whether the factors we examined in chapter 2 differentially affect the probability of injury of women and men and of older and younger drivers. If the “inherent frailty” view is correct, women should be injured more than men, and older drivers more than younger drivers, regardless of crash type, automobile weight, or safety belt use. If any of these factors affect the relationship between gender or age and injury risk, the credibility of this view would be called into question, as this would mean that something other than frailty also makes an important difference. It would also indicate that the safety of women and older drivers could be at least somewhat improved by automobile design changes. Crash Type. The pattern of injury by crash type varies for women drivers and men drivers. Multivehicle collisions are a greater source of injury for women than they are for men. Figure 3.1 shows our finding that 67 percent of the women drivers hospitalized or killed were injured in collisions with cars and light trucks, with only one third injured in one-car crashes (11 percent in rollovers, 22 percent in nonrollovers). In contrast, only 45 percent of the men drivers hospitalized or killed were injured in collisions with cars and light trucks; most of the men drivers were hurt in one-car crashes (20 percent of the total in rollovers, 35 percent in nonrollovers). One reason for these differences in the pattern of injury is that men and women drivers tend to be involved in different types of crashes, as described in chapter 2. Men drivers are involved in one-car crashes more often than women drivers. In our analysis, 69 percent of the crash involvements of men drivers were in collisions with cars and light trucks, with about 31 percent in one-car crashes. In contrast, about 79 percent of the crash involvements of women drivers were in collisions with cars and light trucks, with only about 21 percent in one-car crashes. However, another reason is that women drivers are much more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks. That is, women drivers are especially likely to be hurt in the type of crash that they are also particularly likely to experience. In statistically equivalent crashes, women drivers are 52 percent more likely than men drivers to be hospitalized or killed in collisions with other cars or light trucks, but injury risks for women drivers are roughly the same as those for men drivers in one-car crashes—4 percent higher in one-car rollovers and 6 percent lower in other one-car crashes. (See tables I.3-1.5.) Automobile Weight. In our data set, women drove lighter and smaller cars than men. The automobiles women drove had an average curb weight of 2,615 pounds and a mean wheelbase of 100.7 inches; for men drivers, the figures were 2,715 pounds and 101.5 inches. We also found that the protective effect of increasing automobile weight was less evident for women drivers than for men drivers. Since increasing weight generally offers protection in a crash, the average automobile weight for drivers who were hospitalized or killed should be lower than the average weight for those who were not injured. This was true for men but not for women. The average curb weight of the cars driven by men who were hospitalized or killed was 2,626 pounds, compared with a greater average curb weight of 2,719 pounds for men who were not injured. In contrast, the average automobile curb weight for women drivers who were hospitalized or killed was 2,611 pounds, compared with an equivalent average curb weight of 2,615 pounds for women drivers who were not injured. Safety Belts. Each of the safety belt configurations that we examined (manual lap and shoulder belts, automatic and manual belts, and automatic belts only) significantly reduced the injury risk of both men and women drivers. However, we also uncovered evidence that, in this data set, safety belts were somewhat less effective for women drivers than for men drivers. Table 3.1 compares men and women automobile drivers hospitalized as the result of a crash by safety belt use. For all three types of crashes, the table separates the percentage of drivers who were hospitalized or killed from those not hospitalized as well as separating men and women in each group. Safety belt use did not differ by gender for drivers who were not hospitalized: about three quarters of both the men and women drivers in that group were belted. If safety belts offered equivalent protection to men and women drivers, the belt use percentages among hospitalized or killed drivers should reflect the same pattern—in this case, rough equivalence for men and women. However, the table shows that among drivers who were hospitalized or killed, women were more likely to have been wearing safety belts than men. In particular, injured women drivers were about 50 percent more likely to have been wearing manual lap and shoulder belts than were injured men (36 percent to 24 percent). Crash Type. The patterns of injury by crash type are very different for drivers 65 and older and for younger drivers. Figure 3.2 shows that, in our analysis, nearly four fifths of the drivers 65 or older who were hospitalized or killed were injured in collisions with cars or light trucks, while only about one fifth were injured in one-car crashes (and almost none were hurt in one-car rollovers—just 3 percent). Conversely, just over half of the drivers 16 to 64 who were hospitalized or killed were injured in collisions with cars or light trucks, while about 29 percent were hurt in one-car nonrollovers and 17 percent were in one-car rollovers. The primary reason for this difference between the age categories is that drivers in the two groups are involved in different types of crashes. Drivers younger than 65 are involved in collisions with cars and light trucks less often, and in one-car crashes more often, than are drivers 65 and older. In our analysis, 73 percent of the crash involvements of drivers 16 to 64 were in collisions with cars and light trucks, about 22 percent in one-car nonrollover crashes, and about 5 percent in one-car rollover crashes. In contrast, about 86 percent of the crash involvements of drivers 65 and older were collisions with cars and light trucks, with only about 11 percent one-car nonrollover crashes and just 3 percent one-car rollovers. Older drivers are much more likely to be hurt in crashes than younger drivers in almost all circumstances. For one-car nonrollover crashes, we found that, in statistically equivalent crashes, drivers 65 and older were hospitalized or killed about 6.6 times more often than the youngest drivers, those 16 to 24. Similarly, for collisions with cars and light trucks, drivers 65 and older had a probability of injury more than four times as great as drivers 16 to 24. Automobile Weight. Drivers 65 and older operated heavier and larger cars than younger drivers. The automobiles of drivers 65 and older had an average curb weight of 2,874 pounds and a mean wheelbase of 104.9 inches. The automobiles of drivers 16 to 64 had an average curb weight of 2,649 pounds and a mean wheelbase of 100.8 inches. We also found that the protective effect of increasing automobile weight was only slightly less strong for drivers 65 and older than for younger drivers. Thus, the average curb weight of the cars driven by those 16 to 64 who were hospitalized or killed was 2,590 pounds, compared with a larger average curb weight of 2,652 pounds for those who were not hospitalized. The average automobile curb weight for drivers 65 and older who were hospitalized or killed was 2,836 pounds, compared with an average curb weight of 2,878 pounds for drivers who were not hospitalized. Safety Belts. Although the safety belt use figures in the NASS data set may be inflated, as we discussed earlier, we found that safety belts reduced the risk of injury for drivers in both age categories. We also found that the effectiveness of safety belts was roughly equivalent for drivers 16 to 64 and for drivers 65 and older in this data set. For example, table 3.2 shows the percentage of belted drivers separately for those hospitalized or killed and for those not hospitalized, as well as separating these categories by age. The table shows that drivers 65 and older used safety belts more often than drivers 16 to 64 and that this pattern holds both among those who were hospitalized or killed and among those who were not hospitalized. Thus, while older drivers use safety belts more frequently, this difference from younger drivers is found across the board, rather than only among the hospitalized and killed, as it was for the comparison between women drivers and men drivers. Taken as a whole, the evidence indicates that the “inherent frailty” hypothesis does not accurately describe the injury experience of women drivers in automobile crashes but is consistent with that of older drivers. This is because the relative injury risk of women drivers compared with men drivers differs as a function of crash type, automobile size, and safety belt use, while the relative injury risk of drivers 65 and older compared with younger drivers is largely unaffected by those three factors. Women drivers are more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks but not in one-car crashes, and women drivers may be protected less well by heavier cars and by safety belts than are men drivers. In contrast, drivers 65 and older have a greater risk of hospitalization or death than younger drivers in one-car as well as multivehicle crashes, and they are afforded roughly the same degree of protection as drivers 16 to 64 by greater automobile weight and safety belt use. The NASS data set did not allow us to pursue more specific explanations for differences stemming from gender and age. For example, men and women differ in many ways—on the average, women are shorter than men, weigh less than men, and have bones that are less strong than men’s, among other potentially relevant differences. It is difficult to identify the key difference that accounts for women’s greater injury risk. Our findings about the applicability of the inherent frailty hypothesis suggest that the concerns of women drivers are more likely to be ameliorated by automobile design changes than are those of older drivers. This means not that it is impossible to reduce the injury risk of drivers 65 and older but only that it may be difficult to close the gap between older and younger drivers. The implications of our findings for future automobile safety are discussed in chapter 5. Three other points are worthy of mention. First, it is not surprising that the injury risk in one-car rollover crashes is similar both for women and men drivers and for drivers older and younger than 65. One-car rollover crashes are very severe events, meaning that differences between individual drivers are likely to be overwhelmed by the magnitude of the crash. Further, few of the drivers in one-car rollover crashes were either women or 65 or older. Second, while our finding that safety belts may not protect women drivers as well as men drivers is far from definitive, other researchers examining data from other sources have also reported that the benefits of safety belts are not as great for women as they are for men. (See, for example, Hill, Mackay, and Morris, 1994; Mercier et al., 1993.) Third, the types of crashes experienced by drivers 65 and older reduce the protective influence of automobile weight for them. Not only are older drivers much more likely to have multivehicle than one-car crashes; also, those multivehicle collisions occur disproportionately in intersections and, therefore, disproportionately involve side impacts. (See Viano et al., 1990.) Automobile weight offers less protection in side-impact collisions than in frontal impacts. As we demonstrated in chapters 2 and 3, crash severity, crash type, automobile weight and wheelbase, safety belt use, and driver age and gender, taken separately, each significantly influences the probability of driver hospitalization or death. For this chapter, we also assessed the relative importance of these factors simultaneously to see which ones are the most important predictors of injury in a crash and which ones have relatively little influence. We found that crash severity is the most important predictor of driver hospitalization or death, followed by crash type, safety belt use, driver age and gender, and automobile weight. Crash severity refers to the speed of impact, while crash type refers to the number of vehicles in a crash, whether the car rolled over, and its points of impact. If information about only one of these several factors were available for predicting whether the driver would be seriously injured, having access to crash severity information would lead to the greatest number of accurate predictions. If crash severity information could not be obtained, information about the crash type would give the best chance of accurately predicting whether or not the driver would be injured. And so on down the list of factors. Table 4.1 documents this finding. It shows a statistical measure of the “explanatory power” of each factor. The table shows that the largest value for this measure is for crash severity, followed by crash type, and then the other factors in the order previously noted. The “explanatory power” of automobile weight is substantially less than that of all the other factors. Another way to illustrate the great importance of the crash severity and crash type factors is presented in figure 4.1. Each column in the figure shows the estimated increment in risk of injury associated with a change in the associated crash-related factor, combining the three types of crashes in our analysis. Thus, the “crash severity” bar in the figure shows that crashes involving a change in velocity of 23 mph have an estimated risk of driver injury 25 times as great as crashes with a change in velocity of only 6 mph. The bar for crash type shows our estimate that drivers involved in one-car rollover crashes are about nine times more likely to be hurt than drivers involved in collisions with cars and light trucks that are not head-on crashes. Similarly, figure 4.1 shows that drivers 65 and older are about 4.5 times more likely to be hospitalized or killed than drivers 16 to 24 and that unbelted drivers have an injury risk more than three times as great as drivers wearing manual lap and shoulder safety belts. Drivers of 2,000-pound automobiles have an estimated injury risk in a crash that is about 1.63 times (or 63 percent greater than) that of drivers of 3,600-pound cars. Finally, the estimated injury risk for women drivers is about 1.29 times (or 29 percent greater than) that of men drivers. Here we discuss the implications of our findings for future automobile safety. The first section below reviews the safety initiatives from NHTSA that have the greatest importance for automobile crashworthiness. The next section discusses ways to reduce the injury risk for particular categories of automobile drivers. The last section discusses the most effective uses of available safety technologies. It is important to keep two points in mind when considering alternative approaches to automobile crashworthiness. First, crashworthy automobiles must offer as much protection as possible for a broad matrix of crash types, crash speeds, and occupant characteristics that pose very different occupant protection problems. For example, we found that one-car crashes, particularly rollovers, are much more dangerous than collisions with cars and light trucks. We also found that men drivers and young drivers are disproportionately involved in one-car crashes, while women drivers and older drivers are more likely to be involved in collisions with cars and light trucks. Protecting young men in severe one-car crashes is very different from protecting women and older drivers in multivehicle collisions. Second, individual safety features often affect only one portion of the matrix of crash types and occupant characteristics. For example, air bags clearly help protect occupants in frontal collisions, but they do not contribute to occupant safety in side-impact collisions or rollover crashes. Starting with the 1990 model year, all automobiles sold in the United States have had to demonstrate driver and right-front-seat passenger safety with passive restraints in a full-frontal crash at 30 mph into a rigid barrier. “Passive restraint” means without the use of any safety device requiring actions by the driver or passenger, such as manual safety belts.In model year 1987, the first year of the phase-in period for this regulation, all the automobiles NHTSA tested met this requirement with automatic safety belts. By 1993, almost all the tested cars fulfilled the passive restraint requirement with air bags rather than automatic belts alone, although many of the cars with air bags also had automatic safety belts. NHTSA has announced major changes in this regulation. All cars manufactured in September 1997 or later will be required to have both air bags and manual lap and shoulder safety belts for both drivers and right-front-seat passengers. Very importantly, the revised regulation prohibits automatic safety belts—not just for use in the compliance tests but as safety equipment. All cars will have to be equipped with manual safety belts. Beginning with the 1994 model year, NHTSA began phasing in a requirement for automobile occupant protection in side impacts. By model year 1997, all automobiles will have to meet safety standards in crash tests simulating the impact of a 3,000-pound vehicle hitting the target car in a side-impact collision at 33.5 mph. Unlike the frontal impact crash tests, active restraint systems, such as manual safety belts, must be used in these tests. NHTSA is also undertaking a variety of efforts to deal with particular mechanisms of occupant injury rather than points of contact on the automobile. For example, to reduce head injuries, NHTSA is developing a regulation that would require energy-absorbing padding in the areas of automobile interiors that occupants’ heads frequently strike in side-impact collisions. Also, NHTSA is studying ways to further reduce injuries in rollover crashes, primarily by reducing the risk of ejection, by improving door latches and increasing the strength of automobile windows other than windshields, as well as by considering tougher roof crush standards. Other NHTSA activities are concerned with particular types of automobile occupants, especially children and elderly persons. It is important to note that NHTSA is seeking ways to improve protection for elderly drivers, although a major focus of NHTSA’s work involves programs to improve their driving skills or otherwise reduce their likelihood of crash involvement. (See Transportation Research Board, 1992, and NHTSA, 1993a; see also NHTSA 1992b for its activities priority plan through 1994.) Automobile manufacturers understand that different segments of the consumer market for automobiles prefer different types of cars. For example, young men are likely to prefer sports cars over station wagons, and older drivers disproportionately prefer large cars over smaller ones. In other words, in the marketplace for automobiles, one size does not fit all. Similarly, one size does not fit all when it comes to automobile safety: the crashworthiness problems of different types of drivers, and of drivers involved in different types of crashes, require a variety of different solutions. Here, we look at the differential safety concerns of segments of the safety “marketplace” that are defined by safety belt use and driver age and gender. Drivers involved in traffic crashes, on the whole, operate their vehicles in a riskier manner than drivers who are not involved in crashes. For example, the rate of safety belt use for drivers involved in crashes is less than the use rate for the general driving population. Estimates of the degree to which drivers who do not wear safety belts are overinvolved in roadway crashes vary considerably. For example, NHTSA (1992a) estimated that unbelted drivers experience potentially fatal crashes 2.2 times more than belted drivers, while Hunter et al. (1993) found that unbelted drivers had a crash involvement rate 35 percent higher than belt users. Unbelted and belted drivers have very different injury experiences in a crash. Unbelted drivers are more likely to suffer severe injuries, and their injuries are more likely to result from contact with the steering wheel or windshield (Danner, Langieder, and Hummel, 1987; Lestina et al., 1991). These differences are explained by the mechanisms of safety belt effectiveness. Safety belts tie the occupant to the car, helping the occupant decelerate over a relatively long period. In addition, by restricting movement, safety belts reduce the chances of the wearer’s striking the interior of the vehicle and help make his or her course of motion within the car more predictable. In contrast, unbelted occupants keep moving within the automobile in the moments after collision, the direction of their movement within the vehicle is relatively unpredictable, and it is likely either that their rapid motion will be abruptly stopped by contact with a rigid surface within the vehicle or that they will be ejected from it. Therefore, optimally safe vehicle interiors are conceptually dissimilar for belted and unbelted occupants (Mackay, 1993). For belted occupants, the more interior space the better, as increasing the space reduces the odds of contact with interior surfaces. Conversely, for unbelted occupants, the goal is to restrict movement and provide a soft place to land, so heavily padded interiors that minimize interior space are preferred. How can crash protection be improved for unbelted and belted drivers? For unbelted drivers, the obvious answer is to put them in safety belts. In practical terms, the best way to do this is to increase the number of automobiles with automatic safety belts. As NHTSA (1992a) and Williams et al. (1992) have reported, automobiles equipped with automatic safety belts have much higher belt usage rates than those with manual belts. While experimental vehicles have been designed with substantial protection for unbelted occupants, we do not believe that any combination of interior padding, air bags, and other passive restraint systems will be able to rival the effectiveness of safety belts in production automobiles for the foreseeable future. One reason for this is that, as noted above, designing an optimally safe car for unrestrained drivers may require abandoning safety belts as the centerpiece of occupant protection strategies. And safety belts are extraordinarily effective; alone, they are much more effective at reducing serious injuries than are air bags alone. For belted drivers, the prospects for dramatic improvements in crash protection are less obvious. On the one hand, promising efforts are under way to reduce much of the residual risk of injury confronting belted drivers. These include improvements in safety belt technology, the greater availability of air bags, and NHTSA’s efforts to improve occupant protection in side impacts. On the other hand, the great success of recent occupant protection efforts means that further crashworthiness improvements are harder to achieve, primarily because the dwindling proportion of crashes that still cause serious injury and death to belted occupants are exceptionally severe events. For example, Mackay et al. (1992), reviewing a sample of crashes involving the death of restrained front-seat occupants in Britain, found that the deaths occurred in extremely severe crashes. Fifty percent of the deaths in frontal crashes were in collisions with large trucks, and 86 percent involved passenger compartments crushed so severely as to eliminate the space occupied by the fatally injured person before the crash. Similarly, Green et al. (1994) reported that most of the fatalities of restrained occupants that they examined involved severe intrusion into the passenger compartment and multiple injuries so severe that 90 percent of the victims died within an hour of the crash. The “market segments” for automobile safety defined by driver age and gender require very different strategies for reducing fatalities. For men drivers and younger drivers, the problem is crash involvement, not crashworthiness. As we demonstrated in chapter 2, compared to women and older drivers, not only are men drivers and younger drivers involved in more automobile crashes but also the crashes they are particularly likely to be involved in have comparatively severe consequences—that is, single-car crashes have much higher driver injury rates than multivehicle crashes. However, as we saw in chapter 3, men drivers and younger drivers are significantly less likely to be hurt in a crash than women and older drivers. That is, men and younger drivers benefit from a degree of occupant protection that is not available to women and older drivers (we will discuss some of the reasons later). In summary, the surest way to improve the safety of men drivers and younger drivers is to attempt to reduce their crash involvement rates, particularly their rates of involvement in single-car crashes. The situation is exactly the reverse for women and older drivers. The problem for them is crashworthiness, not crash involvement. Compared to men and younger drivers, women and older drivers are involved in fewer automobile crashes, and the crashes they are involved in are, on the average, less severe, since they are less likely to be involved in single-car crashes than in multivehicle collisions. However, once a crash has occurred, women and, especially, older drivers are more likely to be hospitalized or killed. In our judgment, improving the crash protection offered by automobiles to women and older drivers so that it approaches the level enjoyed by men and younger drivers offers the greatest chance for reducing roadway injuries for them. In the absence of compelling evidence for the inherent physical frailty of women compared to men, we are optimistic that crashworthiness for women can be substantially improved. In contrast, the evidence we have reviewed indicates that older drivers are, in fact, more fragile than young drivers. Nonetheless, we believe that older drivers can be afforded better protection by automobiles than they now receive (see subsequent discussion and Mackay, 1988). It is important that occupant protection for women drivers and older drivers be improved without compromising the crash protection of men drivers and younger drivers; design changes that merely shift injury risk from one group of drivers to another will not improve traffic safety in the aggregate. One possible reason for the relatively high degree of crash protection enjoyed by men drivers and younger drivers is that efforts at improving automobile crashworthiness have concentrated on the crash types and occupant characteristics most often experienced by them. Current safety regulations and automobile safety designs emphasize protection in high-speed frontal collisions, and men drivers and younger drivers are more likely to be in single-car crashes, which disproportionately involve frontal impacts. The automobile crash tests NHTSA currently requires for all cars include full-frontal crashes into a rigid barrier at 30 mph (although the introduction of a requirement for side-impact tests is under way). Air bags reduce the risk of injury in frontal impacts only, not in side impacts. Similarly, safety belts are more effective in frontal than in side impacts (for example, Evans, 1990), and because of this, safety belts have a somewhat greater benefit in single-car crashes than in collisions with cars and light trucks. A second possible reason for the crashworthiness deficit of women drivers compared with men drivers is that current NHTSA regulations require the use of only one size of crash test dummy—a dummy representing the 50th percentile of the male population, or 5 feet 9 inches tall, weighing 165 pounds. Maximizing the safety of persons with these characteristics may, in a relative sense, compromise the safety of others. Another possible explanation for the greater injury risk for women drivers is that, on the average, women are shorter and lighter than men. Automobiles designed to accommodate taller and heavier men drivers may not accommodate women as well. For example, the Insurance Institute for Highway Safety (1993) recommends that drivers sit back as far as possible from the steering wheel and dashboard in order to minimize the risk of hitting those structures in a crash. Shorter drivers obviously cannot sit as far back as taller drivers if they hope to reach the accelerator and brake pedals, and this may expose them to more risk. All safety belts are not equally effective. In particular, many cars on the market today have safety belts with automatic pretensioners or web locking devices that substantially improve their effectiveness (IIHS, 1993). Pretensioners work by reducing the amount of slack in the belts or by tightening them in a crash a fraction of a second sooner. They cause the belted occupant to begin decelerating sooner in a crash, thereby increasing the total deceleration period. In addition, they increase the chances that the occupant’s forward motion will be stopped before he or she contacts the interior of the automobile. To give an idea of the magnitude of the safety increment available from belts with these features, Viano (1988) compared the performance of several restraint mechanisms in frontal crash tests. Depending on the outcome measure used, lap and shoulder belts with pretensioners had injury scores about 15 to 40 percent below those of lap and shoulder belts without pretensioners. NHTSA has recently announced regulations that would implement the requirement in the Intermodal Surface Transportation Efficiency Act of 1991 that all passenger cars and light trucks be equipped with air bags and lap and shoulder safety belts. Beginning with all cars manufactured in September 1997, both drivers and right-front-seat passengers will have both air bags and manual lap and shoulder safety belts; automatic safety belts are prohibited. We are concerned that NHTSA’s implementation of the requirement for air bags may not achieve the greatest degree of improvement in the aggregate safety of the population of automobile occupants. Automobile occupants who travel in cars with air bags and who wear manual lap and shoulder safety belts will be well protected. However, because safety belts alone offer much more protection than air bags alone, occupants of air bag-equipped cars who do not wear lap and shoulder safety belts will be less well protected than if they were traveling in cars with automatic safety belts. This is important because cars with automatic safety belts have higher safety belt usage rates than cars with manual belts, and individuals involved in serious automobile crashes have lower safety belt use rates than others. If many automobile occupants in serious crashes do not wear manual safety belts, the aggregate safety of automobile occupants under NHTSA’s proposal would be less than if, in addition to air bags, automatic safety belts were encouraged or required. To examine this question, we compared the average amount of occupant protection available to all automobile occupants under three different safety-belt-use scenarios based on a recent NHTSA report (NHTSA, 1992a). In that report, NHTSA noted that cars equipped with manual lap and shoulder belts had a belt usage rate of 56 percent in 1991, while cars equipped with automatic safety belts had usage rates ranging from 64 to 97 percent, depending on the type of automatic belt. If all cars had air bags and manual lap and shoulder belts and a belt usage rate of 56 percent, we estimate that fatality risk would fall 37.2 percent for the average automobile occupant compared with unprotected occupants. If all cars had air bags and automatic safety belts and a belt usage rate of 64 percent, we estimate that the average automobile occupant would have a 37.7-percent reduction in fatality risk. If all cars had air bags and automatic safety belts and a belt usage rate of 97 percent, we estimate that the total fatality risk reduction would be 46 percent. Thus, from the standpoint of maximizing the aggregate safety of all automobile occupants, the best proposal may be one that requires both air bags and automatic lap and shoulder safety belts. The magnitude of the fatality risk reduction arising from that configuration compared to NHTSA’s regulation requiring manual lap and shoulder safety belts depends on the difference between the usage rates of automatic and manual safety belts for automobile occupants involved in serious crashes. As our estimates show, if that difference is small, the automatic safety belt alternative offers only a very slight aggregate safety improvement. Conversely, if the usage rate difference is high, placing air bags and automatic lap and shoulder safety belts in all cars would substantially improve the safety of automobile occupants in the aggregate. DOT had two comments regarding the implications of our finding that, holding constant crash characteristics and automobile weight, women are more likely than men to suffer serious injury in a crash. The first is that NHTSA plans to conduct crash tests with test dummies of different sizes rather than only the standard dummy that represents a 50th percentile man driver. The second is that NHTSA has recently made final a rule requiring improvements in the adjustability of safety belts that may increase the percentage of vehicle occupants using belts correctly. We applaud both these developments. Nonetheless, in our opinion, there is no definitive evidence that either size differences or patterns of safety belt use fully account for the differences in injury rates between men and women. DOT also had two comments on our discussion of NHTSA’s implementation of the requirement for air bags. First, it contended that the usage figures for automatic safety belts that we used in our example are unrealistically high. More specifically, DOT stated that the usage rates for complete automatic belt systems are much less than the 97-percent scenario we described, since some drivers use only one component but not the other (for example, using the shoulder belt but not the lap belt) and other drivers disconnect the automatic belt system entirely. Second, DOT disagreed with our conclusion that manual and automatic safety belts provide “a roughly equivalent degree of protection.” For the first point, we understand that it is extremely difficult to accurately measure safety belt use, especially the use of particular safety belt components (see chapter 2). However, NHTSA (1992a) has concluded that automatic safety belts are used more often than manual belts, and our 97-percent usage rate scenario was based on a NHTSA report, not on our own analysis. Further, our findings would not differ even if automatic safety belts had usage rates much less than 97 percent; thus, we found that the scenario with a 64-percent usage rate for automatic belts (NHTSA’s lowest estimate) still provided slightly more total protection than the other scenario we considered, manual belts with a 56-percent usage rate. For the second point, our conclusion that manual and automatic safety belts provide approximately equivalent protection is based on NHTSA’s work, not on our own analyses of automobile crash data. For example, NHTSA (1993d, p.II-13) estimated that, when used in a crash, manual lap and shoulder safety belts reduce fatality risk by 45 percent and automatic three-point belts reduce fatality risk by 42.5 percent. Similarly, NHTSA earlier reported that it was unable to find any statistically significant differences between several different configurations of manual and automatic safety belts (NHTSA, 1992a, p.66). Most importantly, neither of DOT’s comments about our discussion of NHTSA’s implementation of the requirement for air bags addressed our main point—that drivers involved in serious crashes use safety belts much less than the general driving population. Our discussion is aimed at improving crash protection for drivers who have the greatest risk of involvement in serious crashes. A comprehensive evaluation of the best ways to increase safety belt use for those drivers is beyond the scope of this report. However, as our analysis demonstrates, NHTSA’s decision to prohibit automatic safety belts may not achieve the best result from that perspective. At a minimum, NHTSA needs to continue to emphasize in its public education efforts the importance of wearing safety belts even in cars equipped with air bags.

Pursuant to a congressional request, GAO reviewed highway safety, focusing on: (1) the most important predictors of injury in an automobile crash; (2) how the risk of injury in a crash is affected by the severity and type of crash, automobile size, safety belts and airbags, and the occupants' age and gender; and (3) areas for further reducing automobile occupants' crash injury risks. GAO found that: (1) the most important determinants of driver injury in car crashes are speed at impact, the type of crash, safety belt use, driver age and gender, and automobile weight and size; (2) injury is more likely in high-speed crashes, one car crashes, frontal crashes, and rollovers; (3) occupants of heavier and larger cars are less likely to be injured, but those cars pose a greater danger to persons in multivehicle crashes; (4) heavier cars offer more protection in one-car nonrollover and multivehicle crashes, but occupants of these cars are subject to more injury in rollovers than are occupants of lighter cars; (5) although safety belts reduce injury risks overall, they are most effective in rollovers, single car crashes, and frontal crashes; (6) air bags are only effective in frontal crashes and are less effective than safety belts alone; (7) although they are involved in fewer crashes overall, female and older drivers are more often injured than male and younger drivers are in similar crashes; (8) safety belts are not as effective for women as they are for men; (9) female and older drivers are involved in more multivehicle crashes and male and younger drivers are involved in more single car crashes; (10) older drivers tend to be involved in more side impact crashes; and (11) the government and manufacturers are working to improve automobile safety for each category of driver.

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The U.S. Coast Guard is a multimission, maritime military service within the Department of Homeland Security (DHS). To accomplish its responsibilities, the Coast Guard is organized into two major commands that are responsible for overall mission execution—one in the Pacific area and the other in the Atlantic area. These commands are divided into 9 districts, which in turn are organized into 35 sectors that unify command and control of field units and resources, such as multimission stations and patrol boats. In fiscal year 2005, the Coast Guard had over 46,000 full-time positions—about 39,000 military and 7,000 civilians. In addition, the agency had about 8,100 reservists who support the national military strategy or provide additional operational support and surge capacity during times of emergency, such as natural disasters. Furthermore, the Coast Guard also had about 31,000 volunteer auxiliary personnel help with a wide array of activities, ranging from search and rescue to boating safety education. The Coast Guard has responsibilities that fall under two broad missions—homeland security and non-homeland security. The Coast Guard responsibilities are further divided into 11 programs, as shown in table 1. For these 11 programs, the Coast Guard has developed performance measure to communicate agency performance and provide information for the budgeting process to Congress, other policymakers, and taxpayers. The Coast Guard’s performance measures are published in various documents, including the Coast Guard’s fiscal year Budget-in-Brief. The Coast Guard’s Budget-in-Brief reports performance information to assess the effectiveness of the agency’s performance as well as a summary of the agency’s most recent budget request. This, and other documents, reports the performance measures for each of the Coast Guard’s programs, as well as descriptions of the measures and explanations of performance results. To continue executing its missions, the Coast Guard has programs to acquire a number of assets such as vessels, aircraft, and command, control, communications, computer, intelligence surveillance, and reconnaissance (C4ISR) systems. The Coast Guard’s Deepwater program is a 25-year, $24 billion effort to upgrade or replace existing vessels and aircraft in order to carry out its missions along our coastlines and farther out at sea. The program is eventually to include 10 major classes of new or upgraded vessels and aircraft. The Coast Guard also has an acquisition program called the National Automatic Identification System to identify and track vessels bound for or within U.S. waters. Another acquisition program is called Rescue 21, a program to replace the Coast Guard’s 30- year-old search and rescue communications systems. Rescue 21 was to be used not only for search and rescue, but to support other Coast Guard missions, including those involving homeland security. The Coast Guard’s fiscal year 2008 budget request reflects a smaller increase than in years past. Requests for new capital spending are down, as the agency slows the pace of new acquisitions for Deepwater and other capital projects. Instead, several of the budget initiatives being emphasized reflect a reorganization of internal operations and support command infrastructure. Although the Coast Guard met fewer performance targets than last year, overall performance trends for most mission programs remain positive. That is, many of the measures that Coast Guard uses to evaluate performance have improved since last year, even though the agency did not meet as many of its performance targets in 2006 as in the year before. The Coast Guard’s budget request in fiscal year 2008 is $8.73 billion, approximately $275 million, or 3.3 percent, more than in fiscal year 2007 (see fig. 1). About $5.9 billion, or approximately 68 percent, is for operating expenditures (OE). This funding supports its 11 statutorily identified mission programs; increases in cost of living, fuel, and maintenance costs; and previous administration and congressional initiatives. The greatest change from the previous year is in the AC&I request, which at $949 million reflects about a 19 percent decrease from fiscal year 2007. According to Coast Guard officials, no new appropriations are requested in fiscal year 2008 for several Deepwater assets until business case reviews can be completed to assess the viability of technology and contracting oversight. The remaining part of the request consists primarily of funds requested for retiree pay and health care fund contributions. If the Coast Guard’s total budget request is granted, overall funding will have increased by over 55 percent since 2002, an increase of $3.1 billion. The Coast Guard’s budget request for homeland security missions represents approximately 35 percent of the overall budget. Figure 2 illustrates the percentage of funding requested for homeland security versus non-homeland security funding, and figure 3 shows the funding levels by each mission program. Two key budget initiatives—both reallocations rather than increases— reflect reorganization efforts. First, a major budget reallocation within the operating expenditures category establishes a single unified command for the agency’s deployable specialized forces. These are the Coast Guard’s response teams that can deploy wherever needed for natural disasters, terrorism incidents, and other concerns. According to senior Coast Guard officials, this initiative entails a onetime, budget-neutral reallocation of $132.7 million from the Atlantic and Pacific Area Commands to a new deployable operations command, which will be located in Ballston, Virginia. No new funds have been requested for this initiative. This initiative is discussed in more detail later in this testimony. The second reallocation involves an $80.5 million transfer from AC&I into the operating expense appropriation. The operational aspect of this reallocation is associated with creating a new consolidated acquisition function, also discussed in further detail below. Coast Guard officials said this reallocation consolidates all personnel funding into the operating expense appropriation and enables the Coast Guard to manage one personnel system for the entire agency. They said although this reallocation is budget neutral in 2008, future budget requests may include financial incentives that will enable the Coast Guard to develop a more robust cadre of acquisition professionals. The 19 percent decrease in fiscal year 2008 for AC&I reflects a slowing in the pace of acquisition efforts, which, according to Coast Guard officials, is an attempt to address technology issues and contracting oversight associated with Deepwater programs such as the Vertical Unmanned Aerial Vehicle and Fast Response Cutter. The Coast Guard also recognizes that it is carrying significant unobligated balances for a number of its acquisition projects. These balances reflect money appropriated but not yet spent for projects included in previous years’ budgets. During our work for this testimony, we reviewed budget data and Coast Guard documentation showing the current status of the agency’s unobligated balances. We found, for example, that the current unobligated balances total $1.96 billion for all acquisition projects. The Deepwater acquisition alone has $1.6 billion in total unobligated balances, which is nearly double the Coast Guard’s fiscal year 2008 request for the Deepwater project. Other acquisition programs, such as the Nationwide Automatic Identification System and Rescue 21, also have unobligated balances, but these are considerably lower (see table 2). The unobligated balance for Rescue 21, for example, is $30.5 million. These unobligated balances have accumulated for a variety of reasons as the Coast Guard has found itself unable to spend previous-year acquisition appropriations. For example, we and others have documented technical design issues involving the Coast Guard’s 123-foot patrol boat and the Fast Response Cutter. These problems have led to major delays in some programs and outright cancellations in others. We asked Coast Guard officials about their plans to spend these unobligated balances either in fiscal year 2008 or beyond, but at this point they were unable to provide us with detailed plans for doing so. To the agency’s credit, steps have been taken to address the issue, including reporting quarterly acquisition spending levels. Since these unobligated balances represent a significant portion of the Coast Guard’s entire budget, the degree to which the Coast Guard spends these balances in fiscal year 2008 could have a substantial impact on the overall level of capital spending for the year. According to senior Coast Guard officials, each acquisition project is now receiving more scrutiny and oversight of how previous funds are spent. The Coast Guard is not requesting additional funds for the Offshore Patrol Cutter, Fast Response Cutter, and Vertical Unmanned Aerial Vehicle in the fiscal year 2008 budget request until business case reviews are completed to assess the viability of the technology and contracting oversight. Despite the fact that Coast Guard met fewer performance targets than last year, overall performance trends for most mission programs remain positive. Performance in 7 of 11 Coast Guard mission areas increased in the last year, but the Coast Guard also set performance targets at a higher level than it did last year. Coast Guard’s performance did not improve sufficiently for the Coast Guard to meet as many of its higher performance targets in 2006 as it did in 2005. In fiscal year 2006, the Coast Guard reported that 5 of its 11 programs met or exceeded program performance targets. In addition, agency officials reported that the Coast Guard expected to meet the target for 1 additional program when results become available in August 2007, potentially bringing the total met targets to 6 out of 11 (see fig. 4). In comparison, last year we reported that in fiscal year 2005, Coast Guard met 8 out of 11 targets. In fiscal year 2006, the agency narrowly missed performance targets for 3 programs—Search and Rescue, Living Marine Resources, and Aids to Navigation. In fiscal year 2005, it missed only 1 of these 3, Living Marine Resources. The Coast Guard more widely missed performance targets for 2 programs, Defense Readiness and Marine Safety. In fiscal year 2005, Coast Guard met its Marine Safety target, but missed on Defense Readiness. See appendix I for more information on Coast Guard performance results. Congressional committees have previously expressed concern that Coast Guard’s shift in priorities and focus toward homeland security missions following the events of September 11, 2001, may have affected the agency’s ability to successfully perform its non-homeland security missions. However, the Coast Guard’s performance on its non-homeland security indicators has not changed substantially over the past 5 years. This past year, we also completed an examination of some of the performance indicators themselves. We found that while the Coast Guard’s non-homeland security measures are generally sound and the data used to collect them are generally reliable, there are challenges associated with using performance measures to link resources to results. Such challenges include comprehensiveness (that is, using a single measure per mission area may not convey complete information about overall performance) and external factors outside agency control, (such as weather conditions, which can affect the amount of ice that needs to be cleared or the number of mariners who must be rescued). The Coast Guard continues to work on these measures through such efforts as the following: Standardized reporting. The Coast Guard is currently developing a way to standardize the names and definitions for all Coast Guard activities across the agency, creating more consistent data collection throughout the agency. Measurement readiness. The Coast Guard is developing a tool to track the agency’s readiness capabilities with up-to-date information on resource levels at each Coast Guard unit as well as the certification and skills of all Coast Guard uniformed personnel. Framework for analyzing risk, readiness, and performance. The Coast Guard is developing a model for examining the links among risk, readiness management, and agency performance. This model is intended to help the Coast Guard better understand why events and outcomes occur, and how these events and outcomes are related to resources. While the Coast Guard appears to be moving in the right direction and is about done with some of these efforts, it remains too soon to determine how effective the Coast Guard’s larger efforts will be at clearly linking resources to performance results. These initiatives are not expected to be fully implemented until 2010. The 2008 budget request reflects a multiyear effort to reorganize the Coast Guard’s command and control and mission support structures. Three efforts are of note here—reorganizing shore-based forces into sector commands, placing all deployable specialized forces under a single nationwide command, and consolidating acquisitions management programs. Each of these efforts faces challenges that merit close attention. As we reported for the last 2 years, the Coast Guard has implemented a new field command structure that is designed to unify previously disparate Coast Guard units, such as air stations and marine safety offices, into 35 different integrated commands, called sectors. At each of these sectors, the Coast Guard has placed management and operational control of these units and their associated resources under the same commanding officer. Coast Guard officials told us that this change helped their planning and resource allocation efforts. For instance, Coast Guard field officials told us the sector command structure has been valuable in helping to meet new homeland security responsibilities, and in facilitating their ability to manage incidents in close coordination with other federal, state, and local agencies. Our follow-up work found, however, that work remains to ensure the Coast Guard is able to maximize the potential benefits of sector realignment. In particular, Coast Guard officials reported that some sectors had yet to colocate their vessel tracking system (VTS) centers with the rest of their operational command centers. According to field officials, the lack of colocation has hindered communications between staff that formerly were from different parts of the agency. According to Coast Guard officials, competing acquisition priorities are limiting the progress in obtaining funding needed to colocate these facilities. The fiscal year 2008 budget does not provide funds to colocate the VTS centers and command centers. Coast Guard headquarters officials told us they would work to address this challenge as part of the capital investment plan to build interagency operational centers for port security, as required under the SAFE Port Act, but they had not yet developed specific plans, timelines, and cost estimates. The Coast Guard is planning to reorganize its deployable specialized forces under a single unified command, called the Deployable Operations Group (DOG). This change is reportedly budget neutral in the fiscal year 2008 request, but it bears attention for operational effectiveness reasons. According to Coast Guard officials, the agency is making this change based on lessons learned from the federal response to Hurricane Katrina. They said the response highlighted the need to improve effectiveness of day-to-day operations and to enhance flexibility and interoperability of forces responding to security threats and natural disasters. Currently, there are five different types of Coast Guard specialized forces, totaling about 2,500 personnel. Their roles and missions vary widely, ranging from conducting antiterrorism operations to conducting environmental response and cleanup operations (see table 3). The Coast Guard’s existing structure divides operational control of specialized forces into three different command authorities— headquarters, Pacific Area, and Atlantic Area. Under the planned realignment, these forces would be available under a single operational command, with the expectation of more effective resource management, oversight, and coordination. The Coast Guard plans to establish operating capability for this unified approach by July 20, 2007, with an initial command center located in Ballston, Virginia. Officials told us they were well under way in planning for this reorganization. Officials expect about 100 staff will be assigned to the center when it reaches its initial operating capability, growing to about 150 personnel once the command structure is completed. According to officials, all administrative staff selected for the center will be drawn from headquarters, district, and area levels. We have not studied this reorganization, but our prior work on other aspects of Coast Guard operations suggests that the Coast Guard may face a number of implementation challenges. Some may be similar to those that Coast Guard faced when it created its sector commands, such as obtaining buy-in from personnel that will be affected by the reorganization or addressing realignment issues at the district level. Another challenge is to ensure that the change does not adversely affect mission performance at the sector and field unit levels. Currently, for example, sector commanders make use of available local MSST units—made available by district and area commanders—to help meet shortfalls in resource availability for everyday missions, such as conducting high-risk vessel escorts and harbor security patrols. If these units were not available to support mission needs, additional strain could be put on the performance of these local units. These changes to the command structure are part of plans that extend beyond fiscal year 2008. In his recent State of the Coast Guard speech, the Commandant of the Coast Guard unveiled a proposal to combine the Coast Guard’s Atlantic and Pacific Area command functions into a single Coast Guard operations command for mission execution. In addition, the Coast Guard plans to establish a new mission support command, which will have responsibility for nationwide maintenance, logistics, and supply activities. According to Coast Guard officials, the current structure is not well suited to responding to post-September 11 transnational threats. For example, Coast Guard officials said the current structure at times works against the Coast Guard in operations with Joint Interagency Task Forces, whose operating areas are not the same as the Coast Guard’s established area boundaries. Coast Guard officials told us a working group had developed a blueprint of the new operational force structure, but the Coast Guard is not ready to release it. Guard officials told us they expected the reorganization would be implemented during the current Commandant’s 4-year term. The Coast Guard also plans to consolidate its acquisitions management offices, placing all major acquisitions programs and oversight functions under the control of a single acquisitions officer. The goals of this consolidation are to improve Coast Guard oversight of acquisitions, better balance contracting officers and acquisition professionals among its major acquisition projects, and address staff retention and shortage problems associated with the acquisitions management program. However, the Coast Guard has not adequately staffed the acquisitions management program to meet its current workload, and maintaining an appropriate staff size will be challenging, despite the reorganization. For example, a February 2007 independent analysis found that the Coast Guard does not possess a sufficient number of acquisition personnel or the right level of experience needed to manage the Deepwater program. Headquarters officials told us the reorganization would address retention problems by creating a new acquisitions specialty career ladder that could attract new pools of talent. Still, given its past history of staff shortages and difficulties retaining acquisition staff, the Coast Guard will face challenges maintaining an appropriately sized acquisition staff, at least in the near term. Coast Guard headquarters officials told us the Deepwater program had pushed other important acquisitions priorities aside, and this new organization would help the Coast Guard advance these other priorities, such as boats, piers, and other shoreside physical infrastructure. In our view, it is unclear how the reorganization of the acquisition function will improve the prospects for these other programs, given Coast Guard’s priorities and ongoing constraints on funding. The reorganized acquisition office is expected to merge the now stand- alone Deepwater acquisition project with the existing acquisition directorate and research and development centers. The new office is expected to be led by a new Coast Guard Chief Acquisition Officer who will have responsibility over all procurement projects and by a deputy who will deal largely with Deepwater issues. At the program management level, Coast Guard is establishing four program managers to lead each acquisitions area, including (1) surface assets; (2) air assets; (3) command, control, communications, computers, intelligence, surveillance, and reconnaissance; and (4) small boats and shore-based infrastructure, such as command centers and boathouses. The Coast Guard plans to begin implementing this reorganization in July 2007. It is too early to tell if the Coast Guard’s reorganization will enable it to achieve its goals—notably, better balance of acquisitions support between Deepwater and the Coast Guard’s other acquisitions programs. While some Coast Guard major acquisition projects continue to face challenges, especially the Deepwater program, several of these projects are making progress. The record for Deepwater has been mixed, with 7 of 10 asset classes on or ahead of schedule. Three classes, however, are behind schedule for various reasons and several factors add to the uncertainty about the delivery of other Deepwater assets. Contract management issues that we have reported on previously continue to be challenges to the Coast Guard. Installation of equipment for the initial phase of NAIS, an acquisition that is designed to allow the Coast Guard to monitor and track vessels as far as 2,000 nautical miles off the U.S. coast, is currently under way, but without changes to existing regulations, some vessels will be able to avoid taking part in the system. The Coast Guard’s timeline for achieving full operating capability for its search and rescue communications system, Rescue 21, was delayed from 2006 to 2011, and the estimated total acquisition cost increased from 1999 to 2005, but according to Coast Guard officials, many of the issues that led to these problems are being addressed. Coast Guard acquisition officials said they are providing more oversight to the contractor after we reported on contract management shortcomings. The Coast Guard continues to face challenges in managing the Deepwater program. The delivery record for assets is mixed and technology and funding uncertainties, recent changes to Coast Guard plans for procuring Deepwater assets, as well as the 25-year time frame for asset delivery add to uncertainties about the delivery schedule for future Deepwater assets. We have reported concerns about management of the Deepwater program for several years now and have made recommendations aimed at improving the program. The Coast Guard continues to address these recommendations as it seeks to better manage the Deepwater program. In addition to these program management issues, performance and design problems for certain Deepwater assets have created additional operational challenges for the Coast Guard. The Coast Guard is taking steps to mitigate these problems, but challenges remain. Below is a summary of our recent Deepwater work. The Coast Guard’s Deepwater program is a 25-year, $24 billion plan to replace or upgrade its fleet of vessels and aircraft. Upon completion, the Deepwater program is to consist of 5 new classes of vessels—the National Security Cutter (NSC), Offshore Patrol Cutter (OPC), Fast Response Cutter (FRC), Short-Range Prosecutor (SRP), and Long-Range Interceptor (LRI); 1 new class of fixed-wing aircraft—the Maritime Patrol Aircraft (MPA); 1 new class of unmanned aerial vehicles—the Vertical Unmanned Aerial Vehicle (VUAV); 2 classes of upgraded helicopters—the Medium- Range Recovery Helicopter (MRR) and the Multi-Mission Cutter Helicopter (MCH); and 1 class of upgraded fixed-wing aircraft—the Long- Range Surveillance Aircraft (LRS). Figure 5 illustrates the 10 classes of Deepwater assets. Our preliminary observations indicated that, as of January 2007, of the 10 classes of Deepwater assets to be acquired or upgraded, the delivery record for first-in-class assets (that is, the first of multiple aircraft or vessels to be delivered in each class) was mixed. Specifically, 7 of the 10 asset classes were on or ahead of schedule. Among these, 5 first-in-class assets had been delivered on or ahead of schedule; and 2 others remained on schedule but their planned delivery dates were in 2009 or beyond. In contrast, 3 Deepwater asset classes were behind schedule due to various problems related to designs, technology, or funding. Using the 2005 Deepwater Acquisition Program Baseline as the baseline, figure 6 indicates, for each asset class, whether delivery of the first in class asset was ahead of schedule, on schedule, or behind schedule as of January 2007. As part of our ongoing work, we are analyzing Coast Guard planning documents to evaluate the current estimates of Deepwater asset delivery dates. Several factors add to the uncertainty about the delivery schedule of Deepwater assets. First, the Coast Guard is still in the early phases of the 25-year Deepwater acquisition program and the potential for changes in the program over such a lengthy period of time make it difficult to forecast the ability of the Coast Guard to acquire future Deepwater assets according to its published schedule. For example, technology changes since the award of the original Deepwater contract in 2002 have already, in part, delayed delivery of the VUAV, and the Coast Guard is currently studying the potential use of an alternative unmanned aerial vehicle. Second, changes to funding levels can impact the future delivery of Deepwater assets. For example, despite earlier plans, the fiscal year 2008 Department of Homeland Security congressional budget justification indicates that the Coast Guard does not plan to request funding for some Deepwater assets in FY 2008, such as the OPC and the VUAV. Acquisition of these two Deepwater assets has now been delayed until FY 2013, at the earliest. Finally, the Coast Guard has recently made a number of program management and asset-specific changes that could impact the delivery schedules for its Deepwater assets. For example, the Coast Guard has begun to bring all acquisition efforts under one organization. Further, the Coast Guard announced that it has terminated acquisition of the FRC-B, an off-the-shelf patrol boat that is intended to serve as an interim replacement for the Coast Guard’s deteriorating fleet of 110-foot patrol boats, through the system integrator and plans to assign responsibility for the project to the Coast Guard’s acquisition directorate. These types of programmatic changes will take time to implement, and thus add to uncertainty about the specific delivery dates of certain Deepwater assets. In 2001, we described the Deepwater program as “risky” due to the unique, untried acquisition strategy for a project of this magnitude within the Coast Guard. The Coast Guard used a system-of-systems approach to replace or upgrade assets with a single, integrated package of aircraft, vessels, and unmanned aerial vehicles, to be linked through systems that provide C4ISR and supporting logistics. In a system of systems, the deliveries of Deepwater assets are interdependent, thus schedule slippages and uncertainties associated with potential changes in the design and capabilities of any one asset increases the overall risk that the Coast Guard might not meet its expanded homeland security missions within given budget parameters and milestone dates. The Coast Guard also used a systems integrator—which can give the contractor extensive involvement in requirements development, design, and source selection of major system and subsystem subcontractors. The Deepwater program is also a performance-based acquisition, meaning that it is structured around the results to be achieved rather than the manner in which the work is performed. If performance-based acquisitions are not appropriately planned and structured, there is an increased risk that the government may receive products or services that are over cost estimates, delivered late, and of unacceptable quality. In 2004 and in subsequent assessments in 2005 and 2006, we reported concerns about the Deepwater program related to three main areas— program management, contractor accountability, and cost control. The Coast Guard’s ability to effectively manage the program has been challenged by staffing shortfalls and poor communication and collaboration among Deepwater program staff, contractors, and field personnel who operate and maintain the assets. Despite documented problems in schedule, performance, cost control, and contract administration, measures for holding the contractor accountable resulted in an award fee of $4 million (of the maximum $4.6 million) for the first year. Through the first 4 years of the Deepwater contract, the systems integrator received award fees that ranged from 87 percent to 92 percent of the total possible award fee (scores that ranged from “very good” to “excellent” based on Coast Guard criteria), for a total of over $16 million. Further, the program’s ability to control Deepwater costs is uncertain given the Coast Guard’s lack of detailed information on the contractor’s competition decisions. While the Coast Guard has taken some actions to improve program outcomes, our assessment of the program and its efforts to address our recommendations continues, and we plan to report on our findings later this year. In addition to the program management issues discussed above, there have been problems with the performance and design of Deepwater patrol boats that have created operational challenges for the Coast Guard. The Deepwater program’s bridging strategy to convert the legacy 110-foot patrol boats into 123-foot patrol boats has been unsuccessful. The Coast Guard had originally intended to convert all 49 of its 110-foot patrol boats into 123-foot patrol boats in order to increase the patrol boats’ annual operational hours and to provide additional capabilities, such as small boat stern launch and recovery and enhanced and improved C4ISR. However, the converted 123-foot patrol boats began to display deck cracking and hull buckling and developed shaft alignment problems, and the Coast Guard elected to stop the conversion process at eight hulls upon determining that the converted patrol boats would not meet their expanded post-September 11 operational requirements. These performance problems have had operational consequences for the Coast Guard. The hull performance problems with the 123-foot patrol boats led the Coast Guard to remove all of the eight converted normal 123- foot patrol boats from service effective November 30, 2006. The Commandant of the Coast Guard has stated that having reliable, safe cutters is “paramount” to executing the Coast Guard’s missions. Thus, removing these patrol boats from service affects the Coast Guard’s operations in its missions, such as search and rescue and alien and migrant interdiction. The Coast Guard is taking actions to mitigate the operational impacts resulting from the removal of the 123-foot patrol boats from service. Specifically, in recent testimony, the Commandant of the Coast Guard stated that the Coast Guard has taken the following actions: multicrewing eight of the 110-foot patrol boats with crews from the 123-foot patrol boats that have been removed from service so that patrol hours for these vessels can be increased; deploying other Coast Guard vessels to assist in missions formerly performed by the 123-foot patrol boats; securing permission from the U.S. Navy to continue using three 179- foot cutters on loan from the Navy (these were originally to be returned to the Navy in 2008) to supplement the Coast Guard’s patrol craft; and compressing the maintenance and upgrades on the remaining 110-foot patrol boats. The FRC, which was intended as a long-term replacement for the legacy patrol boats, has experienced design problems that have operational implications as well. As we reported in 2006, the Coast Guard suspended design work on the FRC due to design risks such as excessive weight and horsepower requirements. Coast Guard engineers raised concerns about the viability of the FRC design (which involved building the FRC’s hull, decks, and bulkheads out of composite materials rather than steel) beginning in January 2005. In February 2006, the Coast Guard suspended FRC design work after an independent design review by third party consultants demonstrated, among other things, that the FRC would be far heavier and less efficient than a typical patrol boat of similar length, in part, because it would need four engines to meet Coast Guard speed requirements. One operational challenge related to the FRC is that the Coast Guard will end up with two classes of FRCs. The first class of FRCs to be built would be based on an adapted design from a patrol boat already on the market to expedite delivery. The Coast Guard would then pursue development of a follow-on class that would be completely redesigned to address the problems in the original FRC design plans. Coast Guard officials recently estimated that the first FRC delivery will slip to fiscal year 2009, at the earliest, rather than 2007 as outlined in the 2005 Revised Deepwater Implementation Plan. Thus, the Coast Guard is also facing longer-term operational gaps related to its patrol boats. Outside Deepwater, one acquisition project included in the fiscal year 2008 budget is the Nationwide Automatic Identification System, a system designed to of identify, track, and communicate with vessels bound for or within U.S. waters and forwarding that information for additional analysis. NAIS uses a maritime digital communication system that transmits and receives vessel position and voyage data. The Coast Guard describes NAIS as its centerpiece in its effort to build Maritime Domain Awareness, its ability to know what is happening on the water. NAIS is not expected to reach full capability until 2014, when the system will be able to track ships as far as 2,000 nautical miles away and communicate with them when they are within 24 nautical miles of the U.S. coast. It is being implemented in three phases, the first of which is scheduled to be fully operational in September 2007. At that time, the Coast Guard expects to have the ability to track—but not communicate with—vessels in 55 ports and 9 coastal areas. The largest areas of the continental U.S. coastline that will remain without coverage after this first phase are the Pacific Northwest and Gulf coasts. The second phase calls for being able to track ships out to 50 nautical miles from the entire U.S. coast and communicate with them as far as 24 nautical miles out. This is the phase addressed in the fiscal year 2008 budget. The $12 million fiscal year 2008 AC&I request for NAIS is expected to pay for implementing the initial operating capability for phase two. The Coast Guard has received approval from the Department of Homeland Security to issue solicitations and award contracts for this initial capability, and the agency has held information sessions to gauge industry interest in participating and to help refine its statement of work for the initial solicitation. The initial solicitation will provide requirements for full receiving and transmitting capability for two sectors within one Coast Guard area and one sector in another area. With this infrastructure in place the Coast Guard expects to be able to test identification, tracking, and communication performance, including such features as the ability to determine if the vessel transmissions are accurately reflecting the actual location of a vessel. The Coast Guard is considering whether to require additional types of vessels to install and use the equipment needed for the Coast Guard to track vessels and communicate with them. Current regulations require certain vessels (such as commercial vessels over 65 feet in length) traveling on international voyages or within VTS areas to install and operate the transmission equipment. Vessels that are not subject to current regulations generally include noncommercial and fishing vessels and commercial vessels less than 65 feet long. This means that many domestic vessels are not required to transmit the vessel and voyage information and therefore will be invisible to the NAIS. The Coast Guard has indicated in the Federal Register that it is considering expanding the requirements to additional vessels. Another non-Deepwater project covered in the budget request is Rescue 21, the Coast Guard’s command, control, and communication infrastructure used primarily for search and rescue. The fiscal year 2008 AC&I budget includes $81 million for continued development of Rescue 21. In May 2006 we reported that shortcomings in Coast Guard’s contract management and oversight efforts contributed to program cost increases from $250 million in 1999 to $710.5 million in 2005 and delays in reaching full operating capability from 2006 to 2011. Our recommendations included better oversight of the project, completion of an integrated baseline review of existing contracts, and development of revised cost and schedule estimates. According to the Coast Guard, it has taken a series of actions in response, including program management reviews and oversight meetings, conducting integrated baseline reviews on existing contracts, and meeting regularly to assess project risks. According to the Coast Guard officials we met with, the contractor is currently on time and on budget for installing the full system in 11 Rescue 21 regions, including such regions as New Orleans, Long Island/New York, and Miami. The last of the 11 regions covered by current contracts is scheduled to be completed by October 2008. Contracts for the 25 regions that remain have not been signed. To keep to current project cost and schedule baselines, however, the Coast Guard has reduced the required performance of the system. Originally, Rescue 21 was supposed to limit coverage gaps to 2 percent, meaning that the system had to be able to capture distress calls in 98 percent of the area within 20 nautical miles of the coast and within navigable rivers and other waterways. The current contract calls for coverage gaps of less than 10 percent. Rescue 21 was also intended to have the capability to track Coast Guard vessels and aircraft and provide data communication with those assets. Neither the capability to track the Coast Guard’s own assets nor data communications is included in the current technology being installed. While the fiscal year 2008 budget request contains funding for specifically addressing the projects discussed above, certain other projects were judged by Coast Guard officials to be lower in priority and were not included. We have examined two of these areas in recent work—vessels for aids to navigation and domestic icebreaking activity, and vessels for icebreaking in polar areas. Last September, we completed work for this committee on the condition of Coast Guard aids-to-navigation (ATON) and icebreaking assets. More than half of these assets have reached or will be approaching the end of their designed service lives. In 2002, the Coast Guard proposed options for systematically rehabilitating or replacing 164 cutters and boats in these fleets after determining that the age, condition, and cost of operating these assets would diminish the capability of the Coast Guard to carry out ATON and domestic icebreaking missions. We noted that no funds had been allocated to pursue these options, apparently due to competing needs for replacing or rehabilitating other Coast Guard assets. These competing needs, reflected largely in the Coast Guard’s expensive and lengthy Deepwater asset replacement program, will continue for some time, as will other pressures on the federal budget. The Coast Guard is requesting no additional spending for ATON assets or infrastructure in fiscal year 2008. Without specific funding to move forward, the Coast Guard has attempted to break the project into smaller components and pursue potential funding from within the Coast Guard’s budget, focusing on the assets most in need of maintenance or replacement. In February 2006, the Coast Guard began a project to replace its fleet of 80 trailerable aids-to-navigation boats with new boats that have enhanced capabilities to do ATON work as well as other missions. According to a Coast Guard official, this acquisition would cost approximately $14.4 million if all 80 boats are purchased and would bring on new boats over a 5-year period as funds allow. The Coast Guard official responsible for the project said the Coast Guard intends to make the purchases using a funding stream appropriated for the maintenance of nonstandard boats that can be allocated to the boats with the most pressing maintenance or recapitalization needs. Availability of these funds, however, depends on the condition and maintenance needs of other nonstandard boats; if this funding has to be applied to meet other needs, such as unanticipated problems, it may not be available for purchasing these boats. In addition to carrying out their primary missions of ATON and domestic icebreaking, these assets have also been used in recent years for other missions such as homeland security. The Coast Guard’s ATON and domestic icebreakers saw a sharp increase in use for homeland security missions after the attacks of September 11, and while this trend has moderated somewhat, the use of some assets in these missions continues well above pre-September 11 levels. This increase is most prominent for domestic icebreakers, which are being operated more extensively for other purposes at times of year when no icebreaking needs to be done. Newer ATON vessels, which have greater multimission capabilities than older vessels, tend to be the ATON assets used the most for other missions. In addition to considering options for replacing or rehabilitating its ATON assets, the Coast Guard also has examined possibilities for outsourcing missions. In 2004 and 2006, the Coast Guard completed analyses of what ATON functions could be feasibly outsourced. Although possibilities for outsourcing were identified for further study, Coast Guard officials noted that outsourcing also carries potential disadvantages. For example, they said it could lead to a loss of “surge” capacity–that is the capacity to respond to emergencies or unusual situations. Coast Guard officials noted that outsourcing or finding a contractor to do work after an event such as Katrina is difficult due to the increased demand for their services as well as the fact that the labor pool may have been displaced. When a contractor is found, it usually takes a long time to get the work completed due to the backlog of work and tends to be very expensive. In addition, this surge capability may be needed for other missions, such as those that occur when ATON assets can be used to support search and rescue efforts. In the aftermath of Hurricane Katrina, for example, some ATON assets provided logistical support for first responders or transported stranded individuals. Coast Guard officials stated that after Hurricane Katrina, its own crews were able to begin work immediately to repair damaged aids and get the waterways open to maritime traffic again. Coast Guard officials also indicated that outsourcing may adversely affect the Coast Guard’s personnel structure by reducing opportunities to provide important experience for personnel to advance in their careers. The Coast Guard confronts ongoing maintenance challenges that have left its polar icebreaking capability diminished. The Coast Guard has two Polar-class icebreakers for breaking channels in the Antarctic. Both are reaching the end of their design service lives, and given the funding challenges associated with maintaining them, the Coast Guard decided to deactivate one of the two, the Polar Star, in 2006. This reduced icebreaking capability since only one Polar-class icebreaker, the Polar Sea, was available, and for the Polar Sea it increased maintenance needs while reducing time available to conduct maintenance. Coast Guard officials and others have reported that failure to address these challenges could leave the nation without heavy icebreaking capability and could jeopardize the investment made in the nation’s Antarctic Program. According to Coast Guard officials, the remaining Polar-class icebreaker’s age and increased operational tempo have left it unable to continue the mission in the long term without a substantial investment in maintenance and equipment renewal. One option, refurbishing the two existing Polar-class icebreakers for an additional 25 years of service, is estimated to cost between $552 million and $859 million. Another option, building new assets, would cost an estimated $600 million per vessel, according to Coast Guard officials. Coast Guard officials have begun planning a transition strategy to help keep the sole operating Polar-class icebreaker mission-capable until new or refurbished assets enter service, which would take an estimated 8 to 10 years. According to officials, this 10-year recapitalization plan will identify current and projected maintenance service needs and equipment renewal projects and associated costs, alternatives to address these needs, and timelines for completing these projects. Madam Chair and members of the subcommittee, this completes my statement for the record. For information about this statement, please Contact Stephen L. Caldwell, Acting Director, Homeland Security and Justice Issues, at (202) 512-9610, or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Penny Augustine, Jonathan Bachman, Jason Berman, Steven Calvo, Jonathan Carver, Christopher Conrad, Adam Couvillion, Geoffrey Hamilton, John Hutton, Christopher Hatscher, Tonia Johnson, and Stan Stenersen. Appendix I provides a detailed list of Coast Guard performance results for the Coast Guard’s 11 programs from fiscal year 2002 through 2006. Coast Guard: Status of Efforts to Improve Deepwater Program Management and Address Operational Challenges. GAO-07-575T. Washington, D.C.: March 8, 2007. Coast Guard: Preliminary Observations on Deepwater Program Assets and Management Challenges. GAO-07-446T. Washington, D.C.: Feb. 15, 2007. Coast Guard: Coast Guard Efforts to Improve Management and Address Operational Challenges in the Deepwater Program. GAO-07-460T. Washington, D.C.: Feb. 14, 2007. Homeland Security: Observations on the Department of Homeland Security’s Acquisition Organization and on the Coast Guard’s Deepwater Program. GAO-07-453T. Washington, D.C.: Feb. 8, 2007. Coast Guard: Condition of Some Aids-to-Navigation and Domestic Icebreaking Vessels Has Declined; Effect on Mission Performance Appears Mixed. GAO-06-979. Washington, D.C.: Sept. 22, 2006. Coast Guard: Non-Homeland Security Performance Measures Are Generally Sound, but Opportunities for Improvement Exist. GAO-06-816. Washington, D.C.: Aug. 16, 2006. Coast Guard: Observations on the Preparation, Response, and Recovery Missions Related to Hurricane Katrina. GAO-06-903. Washington, D.C.: July 31, 2006. Maritime Security: Information-Sharing Efforts Are Improving. GAO-06-933T. Washington, D.C.: July 10, 2006. Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts. GAO-06-764. Washington, D.C.: June 23, 2006. United States Coast Guard: Improvements Needed in Management and Oversight of Rescue System Acquisition. GAO-06-623. Washington, D.C.: May 31, 2006. Coast Guard: Changes in Deepwater Acquisition Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring Is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Coast Guard: Progress Being Made on Addressing Deepwater Legacy Asset Condition Issues and Program Management, but Acquisition Challenges Remain. GAO-05-757. Washington, D.C.: July 22, 2005. Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-651T. Washington, D.C.: June 21, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-307T. Washington, D.C.: April 20, 2005. Coast Guard: Observations on Agency Priorities in Fiscal Year 2006 Budget Request. GAO-05-364T. Washington, D.C.: March 17, 2005. Coast Guard: Station Readiness Improving, but Resource Challenges and Management Concerns Remain. GAO-05-161. Washington, D.C.: January 31, 2005. Maritime Security: Better Planning Needed to Help Ensure an Effective Port Security Assessment Program. GAO-04-1062. Washington, D.C.: September 30, 2004. Maritime Security: Partnering Could Reduce Federal Costs and Facilitate Implementation of Automatic Vessel Identification System. GAO-04-868. Washington, D.C.: July 23, 2004. Maritime Security: Substantial Work Remains to Translate New Planning Requirements into Effective Port Security. GAO-04-838. Washington, D.C.: June 30, 2004. Coast Guard: Deepwater Program Acquisition Schedule Update Needed. GAO-04-695. Washington, D.C.: June 14, 2004. Coast Guard: Station Spending Requirements Met, but Better Processes Needed to Track Designated Funds. GAO-04-704. Washington, D.C.: May 28, 2004. Coast Guard: Key Management and Budget Challenges for Fiscal Year 2005 and Beyond. GAO-04-636T. Washington, D.C.: April 7, 2004. Coast Guard: Relationship between Resources Used and Results Achieved Needs to Be Clearer. GAO-04-432. Washington, D.C.: March 22, 2004. Contract Management: Coast Guard’s Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Coast Guard: New Communication System to Support Search and Rescue Faces Challenges. GAO-03-1111. Washington, D.C.: September 30, 2003. Maritime Security: Progress Made in Implementing Maritime Transportation Security Act, but Concerns Remain. GAO-03-1155T. Washington, D.C.: September 9, 2003. Coast Guard: Actions Needed to Mitigate Deepwater Project Risks. GAO-01-659T. Washington, D.C.: May 3, 2001. Coast Guard: Progress Being Made on Deepwater Project, but Risks Remain. GAO-01-564. Washington, D.C.: May 2, 2001. Coast Guard: Strategies for Procuring New Ships, Aircraft, and Other Assets. GAO/T-HEHS-99-116. Washington, D.C.: Mar. 16, 1999. Coast Guard’s Acquisition Management: Deepwater Project’s Justification and Affordability Need to Be Addressed More Thoroughly. GAO/RCED-99-6. Washington, D.C.: October 26, 1998. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The U. S. Coast Guard is a multimission agency responsible for maritime safety, security, and stewardship. It performs these missions, relating to homeland security and non-homeland security in U.S. ports and inland waterways, along the coasts, and on international waters. The President's budget request, including the request for the Coast Guard, was transmitted to Congress on February 5, 2007. This testimony, which is based on current and past GAO work, synthesizes the results of this work as it pertains to the following: budget requests and performance goals, organizational changes and related management initiatives, current acquisition efforts and challenges, and challenges related to performing traditional legacy missions. The Coast Guard's fiscal year 2008 budget request totals $8.7 billion, an increase of 3 percent over the enacted budget for fiscal year 2007 and a slowing of the agency's budget increases over the past 3 fiscal years. The Coast Guard expects to meet its performance goals in 6 of 11 mission areas in fiscal year 2006, down from 8 in 2005. Trends indicate increased homeland security activities have not prevented meeting non-homeland security goals. Two new reorganization efforts are under way. One creates a single command for all specialized deployable units, such as those for responding to pollution or terrorist incidents. However, experience with an effort to reorganize field units suggests there may be challenges in such matters as merging different operating approaches and addressing resource issues. The other effort merges the Coast Guard's various acquisition management efforts under a single Chief Acquisition Officer. The reorganization of acquisition management is in part a response to past troubled acquisition efforts. This change in the acquisition structure is too new to assess. Current major acquisitions include Deepwater for cutters and aircraft, the Rescue 21 communication system, and the National Automatic Identification System for vessel tracking. Deepwater and Rescue 21 have had schedule delays and performance reductions in the past, but the Coast Guard has been taking actions to improve oversight. Installation of equipment for the first phase of the National Automatic Identification System is under way, but the Coast Guard is still determining which types of vessels will have to participate. All three programs have also accumulated sizeable carryover balances of unspent moneys from previous years. Competing funding priorities have placed aging polar icebreakers and aids-to-navigation assets at risk. Many aids-to-navigation vessels are near the end of their service lives. The Coast Guard is exploring alternatives for replacement or extending their service. Similarly, high maintenance costs prompted the Coast Guard to take one of two Antarctic icebreakers out of service, increasing reliance on the remaining one.

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DOD’s personal property program is used by personal property shipping office staff to manage household goods moves for all military servicemembers and DOD civilians when they relocate. The military services pay shipment and storage-related costs from their military personnel accounts’ permanent change of station budgets and pay for loss and damage claims and personal property shipment office expenses from their operation and maintenance accounts. Servicemembers generally work with DOD transportation officials at personal property processing offices to coordinate their moves. These offices can either be service- specific offices or joint or consolidated property offices that assist servicemembers from more than one service. These offices provide servicemembers with local points of contact for counseling about their moves and processing paperwork related to shipments of their personal property. Prior to the reengineering efforts over the last 11 years, DOD’s personal property program had remained virtually unchanged for nearly 40 years. DOD’s personal property program involves a complex process of qualifying carriers, soliciting rates, distributing moves, evaluating moving companies’ performance, paying invoices, and settling claims. Among the program’s many challenges is ensuring that the moving industry provides adequate year-round capacity, especially during the summer peak moving season when most servicemembers, as well as the general public, schedule their moves. In an effort to test alternative approaches and address some of its challenges, DOD previously evaluated three pilot programs. From those three pilot programs, DOD submitted a report to Congress in 2002 with recommendations to improve the quality of household goods moves for servicemembers that were originally contained in a U.S. Transportation Command report. Those recommendations were as follows: Reengineer the liability and claims process by adopting commercial practices of minimum valuation, simplifying the filing of claims, and providing the servicemember with direct settlement for claims with the carrier. Change the acquisition process to implement performance-based service contracts (as opposed to the current practice of providing contracts to the lowest bidder). Implement information technology improvements, which could integrate functions across such areas as personnel, transportation, financial, and claims. To respond to these recommendations, DOD developed a new program called Families First to improve the quality of household goods moves for servicemembers, DOD civilian employees, and their families. Families First is a U.S. Transportation Command program that is executed by the Military Surface Deployment and Distribution Command, an Army service component command. Since 1989, DOD’s personal property system has used the Transportation Operational Personal Property Standard System, a legacy data management system known as TOPS, which includes 25 additional legacy systems that support it. The Surface Deployment and Distribution Command determined that it was not feasible to upgrade TOPS to support the goals of Families First for several reasons. TOPS is being phased out because the software is no longer fully supportable and does not meet DOD’s technology standards, including its security requirements. TOPS also did not support the Business Management Modernization Program, the program that preceded the Business Transformation Agency in overseeing DOD’s business transformation efforts. In addition to these technical considerations, TOPS also has poor reporting and data capabilities. However, DOD expects that TOPS will need to be functional for a large part of the Families First rollout, until DPS is fully operational. Under the current system, servicemembers are provided with basic claims coverage using depreciated value for losses or damages incurred during a move that allows liability at a rate of $1.25 times the weight of the goods being shipped. For example, if a shipment’s weight is 10,000 pounds, the maximum liability for the moving company is $12,500. Additional coverage options are available for the servicemember to purchase. Under the current program, a servicemember has two options. Under option one, the servicemember can purchase depreciated value coverage above what the government currently pays, and under option two, the servicemember can purchase full replacement value coverage. Under both options, the servicemember shares the cost with the government. For moves within the United States and overseas or stored shipments, servicemembers can obtain additional coverage from a commercial insurance company. Some private insurance companies and moving companies sell insurance to cover certain items of personal property during moves. Additionally, some homeowner policies may cover some items in shipment. See table 1 for coverage and cost comparisons for the current DOD personal property program versus what is planned under Families First. We have completed several assessments that evaluated DOD’s pilot programs and plans for implementing Families First. For example, in 2000, we reported that the U.S. Transportation Command needed to complete an evaluation plan for its pilot programs and take necessary actions to resolve outstanding cost issues. In 2003, we evaluated the methodology used to estimate the costs associated with Families First that the services would incur. The Families First program was initially expected to increase the services’ costs for DOD’s personal property program by 13 percent, but we questioned part of the methodology used to generate this estimate. Specifically, we recommended that DOD quantify the risks of implementing the Families First program within the 13 percent estimate. As part of this evaluation, we also assessed a separate estimate for the cost of upgrading the information technology system used for managing the shipment of household goods. We questioned DOD’s ability to implement the upgrades to the information technology system within its cost estimate. We found that the estimate to implement the information technology recommendation was slightly higher than the $4 million to $6 million estimate DOD reported to Congress. In 2005, DOD reevaluated its estimated 13 percent cost increase and quantified the risks of implementing Families First within the expected cost increase. We found at that time that DOD used a reasonable methodology to validate the estimated increase and quantify the risk. Congress has been concerned about problems in this program, especially that servicemembers may receive less than what it would cost them to replace or repair their household goods that are lost or damaged during shipment. On November 24, 2003, the fiscal year 2004 National Defense Authorization Act amended the U.S. Code to allow the Secretary of Defense to include a clause for full replacement value in DOD’s contracts with moving companies. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that DOD provide full replacement value coverage by March 1, 2008, for servicemembers and DOD civilian employees. With full replacement value, a servicemember would receive enough funds to replace or repair a lost or damaged item at its present value. Additionally, the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense shall submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. The mandate did not specify a date for DOD to provide this information. DOD has taken some initial steps to achieve the goals and benefits of the Families First program, but delays in developing a new information management system have put achieving the program’s goals and benefits at risk. DOD continues to experience delays and missed milestones in developing and implementing DPS, and the original estimated release date for DPS has now been pushed back for more than 2 years. To meet the statutory mandate, DOD has taken steps to provide servicemembers with the full replacement value coverage benefit because of the delays in implementing DPS. However, some servicemembers may not be covered by March 1, 2008, and there are other risks associated with this backup plan. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. DOD has taken some initial steps to help achieve the goals and benefits of the Families First program. To improve the personal property program, DOD has established three goals for Families First: (1) improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts; (2) streamlining the claims process used for claiming losses or damages incurred during a move; and (3) developing an integrated information management system, known as DPS. DOD designed Families First so that achieving the first two goals of the program relies heavily on completion of the third goal of the program, DPS. DOD identified numerous benefits of the Families First program, including reduced storage costs and greater operational flexibility for moving companies. Two of the program benefits identified by DOD—full replacement value coverage and expanded counseling support through a Web-based information system—are intended to directly benefit servicemembers and promote quality service when moving their personal belongings. DOD developed a phased approach to implement Families First and has taken some steps to accomplish the first and second phases. The first phase, which began in March 2004, has two main parts: (1) electronic billing and payment systems and (2) a customer satisfaction survey. The electronic billing system, known as the Central Web Application, is a government Web-based system for reviewing and approving services online, as well as for pricing shipments. The electronic payment system, U.S. Bank’s PowerTrack, is an online payment and transaction tracking system. This system is expected to reduce the payment cycle for DOD’s personal property moves. While DOD and all services other than the Air Force have made some progress in implementing the electronic billing and payment systems, the Air Force is not processing its own bills and payments using these systems because it is reengineering its payment process and cannot currently support these systems. DOD is working to fully interface and integrate electronic billing and payment systems, respectively, with DPS but continues to experience operational problems, such as invoices being delayed or lost when being processed. In addition, as part of the first phase, DOD began data collection for a customer satisfaction survey, which is intended to support the Families First goal of improving moving company performance through evaluation of past performance. Under Families First, servicemembers are expected to fill out a customer satisfaction survey about their moves, the results of which will be combined with other data to generate an overall moving company quality score. The moving companies with the best scores will be awarded more shipments. This process contributes to the best-value distribution of shipments. Under DOD’s current household goods program, DOD awards shipments to the company that bids the lowest price for a move. To generate data for ranking moving companies when Families First is implemented, DOD has instituted an interim customer satisfaction survey under the current program. However, interim customer satisfaction survey response rates have been about 16 percent within the past year, which has resulted in less than one-third of moving companies’ scores being usable. To compensate for the low response rate, DOD has developed a methodology upon program implementation to make moving companies’ scores statistically valid so the scores can be used when allocating shipments. However, the moving companies are concerned about how the low survey response rate will affect how DOD awards business to them. In addition to developing the methodology to ensure that moving companies’ scores are statistically valid, DOD has taken several steps it says will increase the customer satisfaction survey response rate. For example, it has released a commercial to increase awareness about the survey and added information in its It’s Your Move pamphlet. It also included the customer satisfaction survey requirement in the Defense Transportation Regulation. DOD also expects that the survey response rate will improve once DOD implements DPS and servicemembers can file their surveys electronically within DPS. Both of these components—the electronic billing and payment systems and the customer satisfaction survey—are necessary to support Families First. The second phase of Families First includes the development and implementation of DPS, which DOD has been working on for more than 2 years. DOD plans to use DPS to implement many key improvements for the Families First program. For example, Families First implementation documents state that with DPS, DOD will be able to use best-value distribution when awarding performance-based service provide Web-based counseling to help servicemembers with their moves, use a commercial-based tariff for domestic moves rather than the antiquated government tariff currently being used, provide direct claims settlement with the transportation service provider, use a “rate reasonableness” strategy that will help DOD manage the costs of the moving program. DOD also plans to use DPS to provide the electronic customer satisfaction survey to servicemembers and to help DOD monitor the rates moving companies charge it for moving services. The third, and final, phase of the Families First program includes adding functionality to DPS so that it can handle more types of moves, including nontemporary storage (about 16 percent of all moves) and direct procurement moves (about 8 percent of all moves). DOD continues to face delays and missed milestones in developing and implementing DPS. DPS development and implementation has been pushed back for more than 2 years from the original estimated release date. DOD began DPS development in May 2004 and DPS was originally scheduled to be available by October 2005. In October 2005, the Surface Deployment and Distribution Command initiated a review of the program. DOD then entered into an 11-month strategic pause for further program review and software testing after it encountered significant software validation and systems problems, which resulted in the system not working. DOD subsequently developed two more implementation timelines, the first in October 2006 and the second in March 2007. See table 2 for a comparison of DPS implementation timelines. During the October 2005 internal review of DPS, DOD’s review group recommended improvements in areas such as management, the type of contract used for DPS, and the DPS development process. The strategic pause following this review ended in September 2006, but the next schedule for DPS implementation was not developed until after a new DPS program office was created in October 2006. This schedule incorporated a phased rollout approach for DPS. Under this schedule, DPS software acceptance testing was to occur in winter 2007, followed by increasing use of DPS through summer and fall 2007. DOD expected DPS to be fully operational in spring 2008. DPS program managers developed what they described as an aggressive implementation schedule for two reasons. First, they planned to use DPS to meet the mandate to provide full replacement value by March 1, 2008. Second, DPS implementation was needed because the legacy system used with the current personal property system is not fully supportable and does not meet DOD information technology security standards. Program and service officials said that the legacy system has problems interfacing with DOD’s networks. In addition, the legacy system’s hardware has been breaking down. Surface Deployment and Distribution Command officials said that the number of sites not functioning at any one time varies. To keep the legacy system working, the Surface Deployment and Distribution Command provided the services with legacy system “survival kits.” These kits included motherboards and other hardware components that are difficult to find and are no longer supported commercially. DOD estimates that these survival kits will keep the legacy systems viable for 4 to 5 years, but some service personal property officials have expressed concerns that the legacy systems might not last that long. DOD delayed the DPS implementation schedule again in February 2007, after stakeholders from the services and the moving industry participated in DPS software acceptance testing and found a significant number of problems with the software. This testing generated more than 1,400 problem reports, almost 200 of which were collectively expected to result in significant changes to the software. For example, for a shipment awarded to one moving company, DPS sent the work order for the shipment to a different moving company. Thus, the moving company that was awarded the shipment did not know the shipment was awarded to it. In addition, according to a U.S. Transportation Command official, some test reports indicated that business rules still needed to be clarified, such as whether moving companies will have one or two opportunities per year to file the rates they will charge DOD to move servicemembers’ household goods. In March 2007, because of the number of test problem reports and overall concern about DPS functionality, DPS program management officials significantly altered the timeline for rolling out DPS to address concerns expressed by military service and moving industry stakeholders regarding DPS functionality and its implementation schedule. Stakeholders were also concerned that the implementation schedule called for switching to DPS during the peak summer season, when both the services and industry would have to learn a new system while also moving shipments using the current system. The revised DPS implementation schedule calls for fixing the issues identified in the test problem reports, continued testing of DPS through the summer, and adding high-priority changes requested by the services. Program managers said that DPS should be available for some shipping offices to use by fall 2007 on a test basis, with all offices using DPS beginning in spring 2008 for all moves except those using nontemporary storage and the direct procurement method. Once DPS is functional for domestic and international household goods moves, program managers will begin developing the functionality for the third phase of Families First, which includes moves using nontemporary storage and the direct procurement method. Because of the delays implementing DPS, DOD has developed a backup plan to provide servicemembers with the full replacement value coverage benefit, but its plan to implement the other goals and benefit of Families First still relies on DPS. When the backup plan was published in December 2006, it called for the next version of the current program’s domestic tariff and international rate solicitation to include language that made it mandatory for moving companies to include full replacement value coverage in the rates submitted to DOD. Using this backup plan in the current program, the majority of shipments will receive full replacement value protection by March 1, 2008. The schedule for implementing the backup plan follows the current program’s winter 2007 rate filing schedules for the domestic intra- and interstate programs and the international programs. The Surface Deployment and Distribution Command plans to begin accepting rates under the backup plan beginning in May 2007, and the rates will be effective from October 1, 2007, through April 1, 2008. Risk factors associated with DOD’s backup plan challenge DOD’s ability to implement the plan. First, the backup plan relies on a legacy system that is no longer fully supportable. For example, the system still does not meet security standards. DOD estimates that the survival kits it has sent to the services can keep the legacy system running for 4 to 5 years. However, some service officials had concerns that the system would not last this long. Without the legacy system, staff at the personal property offices have to work manually to accomplish administrative tasks. Furthermore, some service officials expressed concern that providing full replacement value without DPS would give the moving industry an opportunity to increase prices with no control to limit the cost and may create some increase in workloads for the claims offices because of the lack of automation for claims filing. Moreover, most services expressed concern about the lack of guidance for implementing full replacement value under the current system instead of within DPS. Some service and Surface Deployment and Distribution Command officials expressed concerns about possible increases in their workload because of the magnitude of the procedural changes as they work to implement full replacement value without DPS. Another risk is that thousands of moves may not be covered before the March 1, 2008, deadline. DOD’s contracts for moves within a theater of operation, those using nontemporary storage, and those using the direct procurement method do not include full replacement value and may expire after the March 2008 mandate. DOD stated that it is initiating various levels of action to ensure full replacement value is implemented by March 2008. According to DOD, as these contracts expire, the new contract will include full replacement value. The Surface Deployment and Distribution Command directed that all eligible contracts be modified not later than March 2008. However, it is still uncertain whether all contracts in place on March 1, 2008, will cover full replacement value. According to DOD estimates, in fiscal year 2006, moves that included servicemembers transferring within a theater of operation accounted for about 7,800 personal property moves, or about 1 percent of the more than 680,000 shipments that occurred. DOD officials also stated that in fiscal year 2006 direct procurement method moves represented almost 8 percent of all moves. About 16 percent of moves included nontemporary storage. In a broader sense, DOD’s backup plan does not address the other goals or counseling benefit of Families First; it is designed only to allow DOD to meet its mandate to provide full replacement value coverage. DOD officials said that they did not have a requirement to produce a backup plan for the other goals or counseling benefit and they did not invest resources to do so. Instead, DOD continues to rely on DPS to achieve the goals and counseling benefit of Families First. The reason Surface Deployment and Distribution Command officials said they created a backup plan for full replacement value is because they were required by statute to implement it by March 1, 2008, whether DPS was ready or not. For example, the backup plan does not address how to provide streamlined claims or improved quality of service from moving companies without DPS, nor does it include a way to provide the other servicemember benefit of expanded Web counseling services to help servicemembers with their moves without DPS. Until DPS is operational, some service officials have said that DOD has at least one other option for providing expanded counseling services because the Navy has a program, known as SmartWebMove, which can be used by members from other services. However, this program is connected to the legacy system, and deterioration of the legacy system may limit the feasibility of this option. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. According to these officials, this will include nontemporary storage and direct procurement method moves. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. The Families First program could increase costs to DOD by about $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since our last assessment. DOD’s Families First program has not yet been implemented, so we could not assess the actual growth in costs of the program, although DOD continues to estimate that the Families First program will increase the cost to the services for their household goods budgets by an estimated 13 percent, or as much as $1.2 billion through fiscal year 2011. In addition, the DPS program office has significantly increased the estimated cost of DPS and maintaining the DPS program office, which it now expects to cost $180 million through fiscal year 2011. We could not assess the actual growth in costs of Families First because the program has not been implemented; however, DOD continues to estimate that the costs to the services of the Families First program will be 13 percent higher than costs under the current program. In fiscal year 2006, the services’ total household goods budget was about $1.8 billion, which would mean the services would have an increase of $240 million annually above the existing budget in order to move servicemembers’ household goods under Families First in 2007, if the program were fully implemented. DOD will incorporate a cost-control mechanism into DPS, similar to the one employed in the current program, in an attempt to keep the costs within the expected increase. However, until DPS is implemented the impact of the use of this mechanism on the Families First program will not be known. Based on DOD’s total household goods budget, Families First could cost DOD about $1.2 billion more than the current program over the next 5 years. DOD continues to inform the services that the Families First program, when fully implemented, will cost them an additional 13 percent over their existing household goods budgets, which is a subset of the services’ permanent change of station budgets. According to U.S. Transportation Command and some personal property officials, this cost increase is in part because of an expectation by DOD that moving companies will increase the rates they charge as a result of their additional responsibilities under the Families First business rules, such as providing full replacement value. The actual cost of Families First will not be known until moving companies file the rates they will charge DOD to move servicemembers, which is expected to take place in March 2008. DOD is relying on features built into DPS to ensure that the costs remain at or below the expected cost increase of 13 percent. DPS will incorporate a cost-control mechanism known as rate reasonableness, which will establish an acceptable range of rates for each combination of pickup and destination locations. The program delays in implementing Families First decrease the certainty of the cost estimate because the methodology is based on certain assumptions and data that may change with time. For example, the cost methodology used to estimate the 13 percent increase was adjusted to account for fewer small businesses participating DOD-wide than participated in the pilot programs. However, according to DOD officials, the percentage of small business participation in Families First will be similar to the current DOD participation rate of 70 percent, which is significantly larger than the 30 percent assumed in the 2002 cost estimate. DOD’s evaluation of the pilot programs demonstrated that small businesses were 14 to 74 percent more expensive per shipment compared to the current program. As a result, DOD may have underestimated the cost of having small businesses participate in Families First. DOD’s estimated costs for an integrated information management system, known as DPS, have significantly increased since our last assessment in 2003. The estimates for developing an information management system to support Families First have increased from $4 million to $6 million to $86.0 million, and the total cost is expected to be about $180 million through fiscal year 2011 once annual operating costs are added. In a 2002 report, DOD estimated that implementing the information technology improvements to enhance its data management capabilities for Families First would cost $4 million to $6 million. This estimate was based on expanding the use of an upgraded, Web-based version of the existing legacy system that was implemented on a small scale during one of DOD’s pilot programs. In our April 2003 review of that estimate, we questioned whether DOD would be able to implement its new personal property program, including the technology improvements, within the estimated range. In addition, we noted that although DOD had developed a plan of action for designing the new system, the plan did not include monitoring the costs and benefits during its implementation or the extent to which system changes were being achieved within an acceptable cost range, such as the $4 million to $6 million estimate. According to DOD officials and documents, in January 2004, DOD decided to implement the technology improvements to support Families First by developing an entirely new information management system, which came to be known as DPS. In a January 2004 report, the Surface Deployment and Distribution Command said that the legacy system evaluated under the previous cost estimate was expensive to operate and maintain and could not be modified to become compliant with DOD technology standards or to support the objectives of the Families First program. At that time, DOD estimated that DPS could be developed for about $16.5 million, with an average annual cost of about $4.6 million after the initial investment. This estimate assumed that DPS could be developed using commercial-off-the-shelf or government-off-the-shelf software to account for about 75 percent of the new system. The use of existing commercial and government software was expected to keep the cost of the system low, because using ready-made software reduces the need to develop original software. For example, the Navy developed a counseling program, known as SmartWebMove, which was originally planned to be incorporated into DPS as its counseling module so that DOD would not need to develop original software as part of DPS to provide this Families First benefit. However, the Navy’s counseling module was not incorporated into DPS. The Navy, however, is still using SmartWebMove while DPS is being developed. Since the 2004 estimate, the cost of DPS has continued to increase. As of February 2007, DOD reports that it spent $51.5 million developing DPS, which is significantly higher than any previous DOD estimate. This cost includes about $8.2 million for capital hardware, $24.9 million for capital software, and $18.5 million in operating costs. According to DOD Families First officials, after the DPS contract was awarded, software developers determined that DPS would require a much larger percentage of new software development than expected because of the unique needs of the DOD personal property stakeholders, which has caused the cost to rise significantly. In addition, the costs for developing, testing, and making DPS available for use now include the cost of the Joint Program Management Office for Household Goods Systems, which was established on October 1, 2006. The original estimates did not account for a separate program office to manage the development and operation of DPS, sustain the legacy system, or evaluate future options for DOD’s household goods program. Based on our analysis of program office budget planning documents from February 2007, the DPS program office estimated that the costs for maintaining a program office, sustaining the legacy system through retirement, developing and sustaining DPS, and implementing a future household goods program through fiscal year 2011will be $180 million if all of the requirements are funded. Additional delays in the schedule are likely to further increase the costs associated with the program. However, when the legacy system is no longer needed, DOD expects that it will not have to budget for this additional cost, which is about $21 million annually. Summary information on DPS cost estimates appears in table 3. DOD faces management challenges for the Families First program, and it has not employed comprehensive planning that incorporates many sound management principles and practices. Families First offices, including the DPS program office, continue to experience organizational challenges and staffing shortfalls. Moreover, Families First does not have stakeholders’ agreement on some elements of the program, such as business rules and essential DPS functions. Additionally, the Families First program faces uncertain funding. Sound management practices require employing comprehensive planning to manage program implementation. Comprehensive planning should include many things, such as integrated approaches to manage training and workforce redeployment issues; a qualified, trained, and well-led team to reengineer the program; stakeholder agreement about key elements of a program, including the program’s business rules and its priorities; and full cost information and funding resources. However, DOD’s planning for Families First has not incorporated some of these sound management practices. Instead, DOD has developed several nonintegrated plans to cover individual portions of the Families First program. For example, DOD has a draft transition plan for organizational changes and the DPS program office has a plan for DPS development. However, DOD does not have a comprehensive plan with timelines for implementing Families First that manages all of its efforts simultaneously. Without an integrated, comprehensive plan, the program’s implementation is at risk. The offices supporting Families First, including the program office now overseeing the development and implementation of DPS, are undergoing organizational changes and experiencing staffing shortfalls that affect DOD’s ability to support Families First at a critical time in its implementation. When the first phase of Families First implementation and DPS development began in 2004, the Surface Deployment and Distribution Command, which is under the U.S. Transportation Command, managed all elements of the program. In December 2005, almost 2 years after DPS development started, the Surface Deployment and Distribution Command established a DPS program management office based on a recommendation made by a DOD review group. The review group suggested that the Surface Deployment and Distribution Command establish a clear management structure for DPS because there was no single point of authority and there was no acquisition-certified program manager. On October 1, 2006, the U.S. Transportation Command transferred this office from the Surface Deployment and Distribution Command to the U.S. Transportation Command. The new office, named the Joint Program Management Office for Household Goods Systems, is under the leadership of the U.S. Transportation Command’s Program Executive Office for Distribution Services. The DPS program office and the program executive office are now led by officials with acquisition experience. The DPS program office has several tasks: mature the program office structure and processes; sustain the legacy system currently being used through the development of its replacement, DPS; quickly implement DPS in phases; and evaluate alternatives for the future of DOD household goods services, including options for outsourcing. Although DOD’s establishment of the DPS program office addresses some of the concerns about DPS program management raised in DOD’s review, the Joint Program Management Office for Household Goods Systems was not established until a few months prior to a critical phase of DPS development and continues to organize while also facing staffing challenges. The DPS program office had a draft organization chart as of March 2007, but filling staff positions has been complicated by a base realignment and closure move to Scott Air Force Base in Illinois from the office’s current location in Alexandria, Virginia. This move is scheduled to take place in the fourth quarter of fiscal year 2007. The program office’s draft transition plan transfers several positions from the Surface Deployment and Distribution Command to the DPS program office. However, this has created human capital challenges, as many of the staff are choosing to retire or leave rather than move. These workforce planning issues are significantly affecting the DPS program office. According to DPS program management officials, as of April 2007, only 1 of 27 civilians in the program office planned to transfer to Scott Air Force Base. Thus, while Families First and DPS are at a critical stage of development, both the Surface Deployment and Distribution Command and the DPS program office are losing many of their senior leaders who possess technical and program knowledge. The DPS program office is working to mitigate these human capital planning challenges by seeking authority to hire over current staffing limits, seeking temporary functional support from other Surface Deployment and Distribution Command and U.S. Transportation Command offices, and continuing to seek support from the services and industry as software testers. As of April 2007, hiring actions had been accelerated and some job announcements had been made. The program office is also using contractor support but is facing challenges with this as well. For example, in March 2007 several contractors were not able to complete tasks for the program office because of paperwork processing issues. In addition, in March 2007, the DPS program office asked each of the services to provide two or three full-time servicemembers to continue conducting DPS software testing at the Surface Deployment and Distribution Command headquarters in Alexandria, Virginia. While the services plan to provide some human capital support, current service plans indicate that they cannot provide the servicemember support DPS management officials originally sought because each service will need its staff during the busy, peak moving season that coincides with DPS testing. For example, the Navy is planning to provide five part-time testers at Navy bases. The Army is planning to provide five part-time testers at Army bases. The Marine Corps plans to provide one full-time person to test at program headquarters as well as one support staff member at its testing site at Camp Lejeune in North Carolina. The Air Force is also providing full-time support from its joint personal property shipping office in Colorado Springs, Colorado. Overall, it is not clear how successful these temporary mitigation efforts will be in providing staff with the skills these offices need to implement both DPS and Families First. However, DOD stated that its joint stakeholder advisory team of testers will be sufficient to fulfill the mission required by the DPS program office. Surface Deployment and Distribution Command officials, who will manage and provide oversight of the current DOD personal property program and implementation of the Families First program, said that they are also facing additional workload and workforce challenges as they administer the electronic billing and payment systems as well as the customer satisfaction survey. These officials are administering these processes without the automation they expect DPS will provide while also experiencing staff reductions and changes as a result of a base realignment and closure move. As of April 2007, the U.S. Transportation Command has made some progress to staff the DPS program office, but it is not clear how successful its measures will be. Until the U.S. Transportation Command is able to ensure that the DPS program office has adequate and capable human capital resources, it may be unable to successfully implement DPS. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. When the U.S. Transportation Command established the DPS program office, it included an evaluation of materiel alternatives for the future of household goods services as part of the office’s mission. The mandate did not specify a date for DOD to provide this information to the congressional defense committees. The U.S. Transportation Command is responsible for leading, with the assistance of the DPS program office, the evaluation of alternatives. The DPS program office is responsible for evaluating how to implement the chosen alternative. It is unclear when the DPS program office will be able to evaluate materiel alternatives for the program because (1) U.S. Transportation Command officials told us they were focusing on developing and implementing DPS and (2) the DPS program office has not yet been resourced to evaluate the materiel alternatives. DOD does not have stakeholders’ agreement on some elements of Families First, which puts the implementation of the program at risk. DOD does not have stakeholders’ agreement in two interrelated areas: (1) business rules issues, including whether existing and proposed rules will actually enable accomplishment of a key program goal, and (2) the essential functions needed for DPS. Stakeholders, including the military services, have not all agreed to some elements of Families First business rules and have not taken action to implement all of the business rules because it is unclear to them if the rules are final. At the end of our audit work, the U.S. Transportation Command was still evaluating whether the business rules would have to be published again for comment by stakeholders. However, in commenting on a draft of this report in May 2007, DOD stated that the business rules are now considered final. Business rules help define how policies are to be implemented. DPS requirements and functions are derived from these business rules. For example, in late March 2007, several months into DPS testing, DOD was still evaluating a business rule as to whether moving companies should have the opportunity to file the rates they charge DOD to move servicemembers’ household goods once or twice per year. In the current program, rates are filed twice per year. Under Families First business rules, moving companies would file rates only once per year. In April 2007, DOD decided to continue with its Families First business rule where moving companies only file rates once per year. Within DOD, debate continues about whether Families First business rules will allow DOD to accomplish its goal of improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts. Some DOD officials (and industry representatives) question DOD’s proposed practice of allocating business to moving companies using a system where companies that receive less than the best performance score are still allocated business. For example, under Families First rules, moving companies will be ranked into four groups based on their performance scores. Those companies with the best scores will be placed into the first group and receive the most DOD business. However, DOD officials said that even those companies that are in the fourth group, with the lowest performance scores, are expected to receive some business from DOD. According to DOD officials and industry representatives, one reason DOD will do this is to keep providing business to those companies that may not otherwise be able to stay open during the nonpeak moving season. These stakeholders said that this helps ensure that there will be enough capacity during peak moving season. However, some servicemembers’ household goods may be moved by companies that did not receive high performance scores, and therefore they may not receive quality moves. If this is not resolved, DOD may be challenged to meet the program’s goal of improving the quality of service from moving companies. Additionally, during the course of our work, stakeholders indicated that they did not consider the business rules final. However, DOD, in commenting on a draft of this report, stated that the business rules are now considered final. Stakeholders indicated that they do not yet know what will be expected of them under Families First or what DPS must include to fully support the program. Stakeholders said that the business rules are not considered final until they have been published in the Defense Transportation Regulation. The U.S. Transportation Command published business rules for phase one of the program in the Defense Transportation Regulation on February 20, 2007. However, it has not published business rules for the second and third phases of Families First in the Defense Transportation Regulation. The business rules have only been published on the Surface Deployment and Distribution Command’s Web site and once in the Federal Register so that stakeholders could comment on them. During our review, U.S. Transportation Command officials indicated that DOD planned to publish the business rules again in the Federal Register in June 2007 so that stakeholders could comment on them again and said that DOD would finalize the business rules in July 2007. It is unclear whether DOD still plans to publish the rules again in the Federal Register. Along with the uncertainty surrounding the business rules, stakeholders do not have procedural guidance and do not yet know what is expected of them under Families First. For example, an Air Force personal property official told us the Air Force needs the finalized Families First business rules so that it can train its staff on these new rules, which the personal property official described as being vastly different from the current program’s business rules. However, the Air Force personal property official said the Air Force is hesitant to develop a training curriculum on business rules that are not finalized. Additionally, without final business rules, the services cannot set up internal regulations to support the business rules. Moreover, representatives from the services and the moving industry are concerned that without a formal set of business rules on which to develop DPS, they cannot evaluate whether the computer system fully supports the Families First business rules. Service officials and industry representatives continue to have questions about Families First business rules and DPS implementation. Finally, the moving companies have concerns about the Families First business rules that define how DOD generates the performance scores used to rank them in the first, second, third, or fourth groups. The majority of a moving company’s performance score comes from a customer satisfaction survey. However, servicemember response rates for the survey have been low (about 16 percent within the past year) and, because of this, most moving companies’ scores are not statistically valid for generating a performance score. Although DOD has, as part of its business rules, devised a methodology to make moving company performance scores valid until survey response rates improve, industry representatives are still concerned that moving companies will be negatively affected by low response rates. In commenting on a draft of this report, DOD stated that while it values the opinion of the moving industry, its personal property program does not require consensus by industry. DOD stated that the main focus of the department is to provide a quality personal property program for servicemembers while being good stewards of taxpayer dollars. Another fundamental challenge facing DOD in implementing DPS is that stakeholders, such as the military services and the moving industry, have not agreed to all of the essential functions of DPS and how they should operate when DPS is made available to servicemembers to use. Service officials told us that prior to the development of the DPS program office, the Surface Deployment and Distribution Command held many meetings to understand what the services wanted DPS to provide servicemembers and personal property officials. However, service officials said that officials overseeing DPS development at that time did not include all of those requirements when first developing DPS. A Surface Deployment and Distribution Command official said that the contract for DPS was written from a requirements list generated by military service and moving industry stakeholder participation. For example, there was a General Officer Steering Committee, Council of Colonels and Captains, and moving industry stakeholder groups, which met to discuss DPS requirements. In early 2007, after the U.S. Transportation Command took over DPS, stakeholders had their first opportunity to test DPS. During these tests, stakeholders identified functions that they expected within DPS but that did not work the way they expected. This resulted in DPS not providing the functionality service officials expected, and this, in turn, could affect the services’ workloads. A U.S. Transportation Command official said that it is possible that there was miscommunication during earlier meetings to define requirements and that it was not until stakeholders were able to test DPS functionality that these issues were identified. For example, DPS users wanted to obtain the status of a moved shipment. When DPS was programmed, it only displayed whether the shipment was in the system. However, users wanted more detail in terms of where the shipment was at a certain point in time. DPS program management is still in the process of identifying and prioritizing the requirements for DPS, but currently lacks stakeholders’ agreement about all of those requirements and their priority. For example, some stakeholders disagree with the categories assigned to some of the test problem reports, because none of the reports were placed in categories 1 or 2, which are used for the most severe types of problems. Further, the moving industry expected that DPS would interface with their computer systems, but this is not yet part of DPS. DPS program officials said that earlier phases of DPS development lacked a mechanism for systematically reviewing DPS problems and requirements and identifying how to fix them. The U.S. Transportation Command and the Surface Deployment and Distribution Command formed a Functional Requirements Board to review and prioritize the problems identified during testing that must be fixed and to address other proposed changes to DPS. The Functional Requirements Board is composed of representatives from the services, the Surface Deployment and Distribution Command, and the U.S. Transportation Command and meets monthly to discuss which testing problems should be the highest priority for correcting. The prioritized list of test problems is then reviewed by a Configuration Control Board, which is composed of DPS program managers, service representatives, DPS development contractors, and software engineers who decide which of the DPS problems can be corrected after considering the resources available. As of March 2007, according to DOD, the Functional Requirements Board had developed initial DPS functional requirements, reviewed many proposed system enhancements, and prioritized the services’ top five needs in each DPS module. In addition to stakeholders’ requirements, additional priorities for DPS may also come from the business rules. This, too, could affect the DPS implementation timeline, as well as implementation of Families First. Another challenge is that without stakeholders’ agreement, DPS requirements continue to change. DPS development is being administered using a firm-fixed-price contract. With a firm-fixed-price contract all major modifications to DPS require negotiation with the contractor, which may lead to additional administrative costs. Even though Families First is projected to cost the services about $1.2 billion over the next 5 years, and DPS is expected to cost about $180 million through fiscal year 2011, the department has not set aside funding to fully cover these costs. The services have taken different approaches in budgeting for the increased costs expected to implement the Families First program, ranging from the Army requesting the entire estimated 13 percent increase to the Navy not requesting any increase at all, in part because they have not received clear guidance from DOD about how to calculate the estimated increase to their budgets. Moreover, the growing cost of DPS has led to funding shortfalls in the DPS program office that are affecting both staffing needs and software development. The services vary in the extent to which they have budgeted for the increased costs expected to implement the Families First program. As previously discussed, DOD estimates that the Families First program will increase the services’ moving budgets by 13 percent above the current budgets needed to move household goods, and DOD has informed the services to budget based on this estimate. However, some personal property officials expressed concerns about DOD’s ability to implement the Families First program within the expected increase of 13 percent; these officials expect that the cost increase will be significantly more. As a result, the services vary in the degree to which they have budgeted for Families First. According to service officials, the services have taken the following actions to budget for Families First: The Army has submitted a budget request for the entire 13 percent increase to the household goods portion of its budget in fiscal years 2008 and 2009. The Coast Guard requested the 13 percent increase based on its entire permanent change of station budget, of which household goods is just a portion. The Air Force submitted a budget that included the 13 percent cost increase for Families First in fiscal year 2008, but the Office of the Secretary of Defense did not agree with the Air Force’s budget submission and reduced its funding for permanent change of station moves. The Marine Corps has requested funding in fiscal years 2007, 2008, and 2009 only for its estimated full replacement value cost. The Navy has not requested any of the expected 13 percent cost increase. In addition, some personal property officials stated that they are having difficulty budgeting because they have not received clear guidance about how to calculate the increase. As a result, the services also vary in how they interpret the effect of the 13 percent cost estimate on their household goods budgets. For example, the Air Force estimated its typical annual expected increase in the current household goods program and then added 13 percent. Army officials told us they were unclear whether the household goods program would be increasing by 13 percent every year or just the first year of Families First. A Coast Guard budget official interpreted the 13 percent increase as an increase to just those portions of the budget that apply to the rates charged by moving companies. Neither the Surface Deployment and Distribution Command nor the Office of the Secretary of Defense Comptroller have provided clear guidance on how the services are supposed to apply the 13 percent estimate to their household goods budgets. As a result, the services may continue to apply the 13 percent in different ways, which could result in the program not being fully funded. According to some service officials, if the expected increase in Families First cost is not included in their budgets and program costs begin to rise as Families First is implemented, then the services may have to consider measures to reduce their household goods budgets. This could affect the number of moves the services can make and could ultimately impact the services’ flexibility in meeting force management needs. Surface Deployment and Distribution Command officials said they plan to monitor the cost of Families First in two ways. First, these officials will use the rate reasonableness methodology to keep the cost at the estimated 13 percent increase. Further, they plan to use reporting functions in DPS to monitor program costs. However, it is unclear how officials will monitor the costs of the program without a fully functioning DPS. Additionally, although the services plan to monitor the actual cost of the program as part of their normal budget processes, there is no plan to provide updated estimates to the services about the cost of the program prior to the services actually incurring the cost. Further, without clear guidance to the services about how to apply the 13 percent cost increase to their permanent change of station budgets, it is unclear whether the services will budget appropriately for the projected Families First cost increase. Without updated information about whether the estimated increase remains accurate as Families First is implemented, the services may not budget for Families First or may budget inaccurately for the program. As a result of the growing costs of DPS, the DPS program office is experiencing funding shortfalls that are affecting both staffing needs and software development. As of April 2007, the U.S. Transportation Command had not identified how it would fully fund its projected costs of DPS, which it estimated in February 2007 to be about $180 million through fiscal year 2011. Without these funds, the U.S. Transportation Command will be challenged to staff the DPS program office and complete DPS software development. The U.S. Transportation Command has been trying to fund DPS and the DPS program office from its transportation working capital fund. In fiscal year 2007, the U.S. Transportation Command reallocated about $7.5 million from its transportation working capital fund to support DPS. According to a U.S. Transportation Command budget planning document, this resulted in other U.S. Transportation Command information technology program delays or affected their ability to provide some services. Even with the reallocation, the U.S. Transportation Command had to defer about $9.7 million needed for high-priority software changes and development essential for DPS to fiscal year 2008. The DPS program office has an anticipated shortfall for fiscal year 2008 of $21 million, which includes staff training, contractor support, and funds for staff travel. Travel funds are important since the DPS contractor will be in Virginia and the program staff will be located at Scott Air Force Base in Illinois. However, the U.S. Transportation Command has not yet developed a detailed budget plan to resource DPS or the DPS program office. The information technology portion of the U.S. Transportation Command’s transportation working capital fund has an annual budget of about $400 million. The DPS program office estimates that it will cost from $28 million to $43 million annually to support DPS and the program office for fiscal years 2008 through 2012. This is from 7 to about 11 percent of the U.S. Transportation Command’s information technology portion of the transportation working capital budget. The U.S. Transportation Command has asked the Office of the Secretary of Defense for $5 million during fiscal year 2008, but the request has not yet been approved. Additionally, U.S. Transportation Command officials said that they have informed the services that they expect them to provide funds for some additional DPS requirements. DPS program office officials based their current cost estimates for DPS and the program office on the aggressive timeline for implementing DPS before it changed in February 2007. Additional delays in the schedule because of problems developing the software will likely increase the costs associated with the program. At the time of our review, it was too early in the DPS implementation process to determine if the oversight provided by the program office will be effective in keeping DPS costs under control given the ongoing changes to the DPS implementation schedule and the significant number of software changes identified during software testing. Despite DOD’s recent focus on its personal property program, long- standing problems persist. The department has invested millions of dollars trying to improve the program since the mid-1990s with little real progress. DOD’s Families First program is intended to address many of these long- standing problems but has faced a myriad of management problems and is now at a critical juncture in its implementation. The underlying problem is that DOD has not developed a comprehensive plan to organize, staff, and fund Families First. Until DOD develops a detailed plan to adequately recruit and retain qualified personnel, gain stakeholder agreement about essential requirements for DPS, and set aside resources such as funding and staff, it will be unable to effectively address the challenges to the program. Relying on DPS to achieve program goals—without analyzing alternatives as required by Congress—puts Families First at risk. Moreover, at a time when our nation faces increasing financial constraints and it is increasingly important for DOD to maximize the return on its investment in new systems, DPS costs are continuing to increase while DOD has little to show for its 11 years of reengineering efforts and millions of dollars of investment. Without a reexamination of the program as required by the mandate and urgent attention commensurate with the program’s importance to millions of servicemembers and their families, these problems are likely to continue to negatively affect servicemembers’ quality of life when they are required to move. We are making the following two recommendations to the Secretary of Defense. To address long-standing problems in DOD’s personal property program we recommend that the Secretary of Defense direct the Commander, U.S. Transportation Command, to expedite the evaluation of the Families First program the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. This act mandates that the report contain the certifications of the Secretary of Defense on the following matters with respect to the Families First program: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. We also recommend that DOD employ comprehensive planning to implement the Families First program and its associated system. At a minimum, this planning should address specific steps to hire and train personnel so that the Surface Deployment and Distribution Command personal property division and the DPS program office have the human capital needed to develop and implement DPS and reach agreement with stakeholders on the essential requirements for DPS and their priority to facilitate the development of DPS. In addition, this comprehensive plan should include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. In written comments on a draft of this report, DOD concurred with both of our recommendations and cited specific actions it has taken and will take for each recommendation. We believe DOD’s planned actions, if implemented, have the potential to improve the outcome of the Families First program. However, we also believe it is critical that DOD sustain focus on the program, especially given the delays the program has experienced and the challenges it still faces. DOD concurred with our recommendation to expedite the evaluation of the Families First program that the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. In its comments, DOD said that it plans to provide this evaluation of its household goods program to Congress in August 2007. We modified our recommendation to include the details of what the act requires. DOD also concurred with our recommendation that it should employ comprehensive planning to implement the Families First program. In addition, DOD provided technical comments suggesting that we include the Surface Deployment and Distribution Command personal property division as part of this recommendation. We agree, and have modified this recommendation accordingly. Our recommendation now indicates that at a minimum, this planning should include specific steps to hire and train personnel for the Surface Deployment and Distribution Command personal property division and the DPS program office, address specific steps to reach agreement with stakeholders on the essential requirements for DPS and their priority, and include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. DOD cited specific actions it has taken or will take to implement this recommendation. For example, DOD said that hiring actions are in progress to staff the DPS program office after its relocation to Scott Air Force Base and that other actions are being implemented to staff the Surface Deployment and Distribution Command. In addition, DOD stated that it has implemented a process to reach agreement with stakeholders on the essential requirements for DPS and their priority by establishing the Functional Requirements Board and the Configuration Control Board. DOD stated that this structure has helped to stabilize the functional requirements for DPS. Finally, DOD stated that the U.S. Transportation Command will provide almost $91 million for DPS development, testing, fielding, and maintenance and that there is a DPS line item in the U.S. Transportation Command’s transportation working capital fund budget. The U.S. Transportation Command is also working with the Office of the Secretary of Defense to provide almost $2.8 million of operating/maintenance dollars from transformation funding. DOD’s comments also state that the U.S. Transportation Command will provide funds internally, if required, to fund DPS and the DPS program office. However, DOD’s comments did not address how the department intends to develop an investment strategy to cover the over $1 billion in increased costs associated with implementing Families First. Developing such a plan for Families First will be critical for the program’s future success. DOD also provided technical and editorial comments, which we have incorporated as appropriate. DOD’s comments are reprinted in appendix II. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commander, U.S. Transportation Command; the Office of the Assistant Deputy Under Secretary of Defense (Transportation Policy); and the Director, 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 staff have any questions about this report, please contact me at (404) 679-1816 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. To evaluate the Department of Defense’s (DOD) Families First program, we obtained documentation from and met with DOD officials and stakeholders in the Washington, D.C., area from the Military Surface Deployment and Distribution Command; the Joint Program Management Office for Household Goods Systems; Transportation and personal property offices of the Army, Navy, Air Force, Marine Corps, and Coast Guard; three moving industry associations, including the American Moving and Storage Association, the Household Goods Forwarders Association of America, and the Military Mobility Coalition; and the Offices of the Secretary of Defense, including Transportation Policy and the Comptroller. We also met with DOD officials at Scott Air Force Base, Illinois, from the U.S. Transportation Command’s Program Executive Office for Distribution U.S. Transportation Command’s Strategy, Policy, Programs and Logistics U.S. Transportation Command’s Program Analysis and Financial Management Directorate. To assess the steps DOD has taken to achieve the goals and benefits of the Families First program with or without a new information management system, we identified the goals and benefits of the Families First program by analyzing Families First planning documents and related studies, such as briefings to the U.S. Transportation Command, and verified these goals with personal property officials from the Surface Deployment and Distribution Command. We compared the status of the Families First program to its stated goals by examining Families First implementation timelines provided by program officials and by interviewing officials and stakeholders from the offices listed. We limited our evaluation of the benefits of the Families First program to those benefits that pertain to the servicemembers, specifically full replacement value coverage and expanded counseling services. We determined DOD’s ability to achieve the goals and benefits of Families First with or without a new information management system by monitoring the status of the Defense Personal Property System (DPS) throughout the course of our review. This included observing demonstrations of DPS as it was presented to representatives from the services and moving industry, reviewing test problem reports generated during DPS software acceptance testing, and examining briefings in which DPS program management and stakeholders reevaluated the DPS implementation schedule. We also reviewed a Federal Register notice provided by Surface Deployment and Distribution Command officials, which described its plans for implementing the full replacement value benefit of Families First without DPS. We analyzed the current program business rules and requirements and compared them to the goals and benefits of Families First to determine if alternatives existed in the current program to implement them without DPS. We also interviewed the officials and stakeholders listed. We asked these officials and stakeholders to provide alternatives for achieving the Families First goals and benefits without DPS. When an alternative was identified, we questioned officials and stakeholders about the feasibility and possible challenges of implementing Families First goals and benefits without DPS. To evaluate the growth in the cost of the program since our previous assessment, we determined that we could not evaluate the actual growth in costs because data were unavailable as the program has not yet been implemented. However, we determined that DOD was still advising the services to budget for the previously estimated 13 percent cost increase for Families First. To understand this estimated increase, we reviewed the estimated cost of the Families First program from our two previous reports related to the cost of the Families First program. We analyzed the size of the services’ current permanent change of station budgets and assessed how the cost of the Families First program would increase those budgets using information provided by the Office of the Secretary of Defense Comptroller. Families First program management officials stated that DOD would use a cost-control mechanism known as rate reasonableness to ensure that program costs do not exceed the estimated increase. We analyzed Families First business rules and planning documents, such as its concept of operations, to determine the feasibility and limitations of the rate reasonableness approach. We interviewed officials from the Military Surface Deployment and Distribution Command and the U.S. Transportation Command Office for Transportation Policy to determine whether their estimate of the cost of Families First has changed since our previous assessment and what their plans were to keep the cost of the Families First program within the estimate. We also asked officials from the Military Surface Deployment and Distribution Command if they had plans to monitor the costs during implementation of the program. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or independently verify the analysis used to generate cost estimates, we determined the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the growth in the estimated cost of DPS, we reviewed our previous report, which contained DOD’s estimate of the cost of improving its information technology system. We compared this estimate to estimates contained in the U.S. Transportation Command budget planning documents and the DPS economic analysis completed in 2003, which also documented how DOD’s concept for information technology system improvements changed since our last review. To obtain updated information about the current costs of developing and fielding DPS, we analyzed budget documents provided by the Joint Program Management Office for Household Goods Systems as of February 2007. To understand the U.S. Transportation Command’s transportation working capital fund Chief Information Officer Program Review Process, we reviewed related documents, such as the Chief Information Office Program Review Process business flow and interviewed budget officials at the U.S. Transportation Command’s Program Analysis and Financial Management directorate. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or the analysis used to generate cost estimates, we determined that the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the extent to which DOD faces management challenges in implementing the Families First program, we analyzed documents, such as Families First program meeting minutes and management briefings to the General Officer Steering Committee, the Council of Colonels and Captains, and the U.S. Transportation Command, which identified difficulties in implementing the Families First program. We also identified best practices for business reengineering and transformation, which we used to compare the process by which DOD is implementing the Families First program. These best practices were found in prior GAO reports. We also reviewed documents pertaining to the Joint Program Management Office for Household Goods Systems, including the draft organization chart, the draft transition plan for the office’s move to Scott Air Force Base as part of a base realignment and closure move, and draft budget documents for developing and implementing DPS. We also interviewed officials and stakeholders. We did not evaluate DOD’s decision to implement the Families First program or develop DPS, nor did we evaluate the solicitation process for awarding the DPS contract. We conducted this performance audit from September 2006 through May 2007 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, Lawson Gist, Jr., Assistant Director; Krislin Bolling; Renee S. Brown; Michelle Cooper; Arthur L. James, Jr.; Tina M. Kirschbaum; Lonnie McAllister; Maewanda Michael- Jackson; Charles W. Perdue; and Bethann Ritter made key contributions to this report. Defense Transportation: DOD Has Adequately Addressed Congressional Concerns Regarding the Cost of Implementing the New Personal Property Program Initiatives. GAO-05-715R. Washington, D.C.: June 9, 2005. Defense Transportation: Monitoring Costs and Benefits Needed While Implementing a New Program for Moving Household Goods. GAO-03-367. Washington, D.C.: April 18, 2003. Defense Transportation: Final Evaluation Plan Is Needed to Assess Alternatives to the Current Personal Property Program. GAO/NSIAD-00- 217R. Washington, D.C.: September 27, 2000. Defense Transportation: The Army’s Hunter Pilot Project Is Inconclusive but Provides Lessons Learned. GAO/NSIAD-99-129. Washington, D.C.: June 23, 1999. Defense Transportation: Plan Needed for Evaluating the Navy Personal Property Pilot. GAO/NSIAD-99-138. Washington, D.C.: June 23, 1999. Defense Transportation: Efforts to Improve DOD’s Personal Property Program. GAO/T-NSIAD-99-106. Washington, D.C.: March 18, 1999. Defense Transportation: The Army’s Hunter Pilot Project to Outsource Relocation Services. GAO/NSIAD-98-149. Washington, D.C.: June 10, 1998. Defense Transportation: Reengineering the DOD Personal Property Program. GAO/NSIAD-97-49. Washington, D.C.: November 27, 1996.

The Department of Defense (DOD) has been working to improve its personal property program since the mid-1990s to fix long-standing problems, such as excessive loss or damage to servicemembers' property and poor quality of service from moving companies. DOD plans to replace its current program with Families First, a program that promises to offer servicemembers an improved claims process and quality of service. GAO was mandated to (1) assess the steps DOD has taken to achieve the goals and benefits of the Families First program; (2) evaluate the growth in costs of the program, including the costs for a new information management system, since GAO's last assessment in 2003; and (3) assess the extent to which DOD faces management challenges--such as staffing--in implementing Families First. To address these objectives, GAO analyzed DOD's program, funding and staffing data, and interviewed personal property officials and stakeholders. DOD has taken some initial steps to achieve the goals and benefits of Families First, but delays in developing a new information management system have put the overall goals of improving the quality of service from moving companies and streamlining the claims process at risk. The information management system, the Defense Personal Property System (DPS), is now more than 2 years behind schedule. DOD has missed DPS milestones because of software development issues and is now working to address issues identified in recent software testing. Since DPS has been delayed, DOD is in the process of implementing a backup plan to meet a statutory mandate to provide servicemembers with the full replacement value of goods lost or damaged during a move by March 1, 2008. However, there are risks and costs associated with DOD's backup plan because it relies on an increasingly unreliable legacy computer system; also, DOD's plan may not cover all moves by March 1, 2008. The Families First program could increase costs to DOD by $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services' household goods budgets by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since GAO's last assessment. While DOD's estimate that the Families First program will increase costs by 13 percent has not changed since 2005, all of the services have not yet fully budgeted for this cost increase, which GAO analysis shows could be about $1.2 billion. Additionally, DOD has increased its estimate for an information management system for Families First because it decided to develop DPS rather than upgrade the legacy system. DOD estimated that the upgrade would cost $4 million to $6 million, and the program office estimated that DPS will cost about $180 million through fiscal year 2011. DOD's personal property program faces many management challenges--especially staffing, in addition to program requirements and funding problems--because it has not employed comprehensive planning. Sound management practices require a comprehensive approach that includes plans to assemble a qualified, trained, and well-led team; gain stakeholders' agreement about key program elements, such as business rules to define how the moving industry will serve military members; and estimate and plan for adequate resources. DOD has developed several draft plans to address individual portions of Families First and DPS, such as the draft transition plan for moving the DPS program office as part of a base realignment and closure move from Virginia to Illinois, but there is no overall plan that addresses how DOD will (1) fill significant staffing shortfalls in the newly formed DPS program office, (2) gain agreement from stakeholders, and (3) fund the significant and growing costs associated with the program. For example, DOD has not identified sources to fully fund DPS development and operations. Without a comprehensive plan, achieving the goals of the Families First program will likely remain difficult.

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Tobacco is a high-value, pesticide-intensive crop. That is, tobacco is the nation’s ninth highest valued crop, and in terms of the amount of pesticide applied per acre, tobacco ranks sixth—behind potatoes, tomatoes, citrus, grapes, and apples. In the United States, tobacco is grown in 16 states, 2 of which—Kentucky and North Carolina—produce about two-thirds of all domestic tobacco. Further, it is grown in over 100 countries. Until recently, the United States was the world’s leading exporter of unmanufactured tobacco; however, in 2001, it ranked third, behind Brazil and Zimbabwe. The tobacco industry in the United States both exports tobacco to Japan and Western Europe—principally Germany, the Netherlands, Denmark, the United Kingdom, Belgium, Italy, and Spain— and imports tobacco in increasing amounts from countries such as Brazil, Argentina, Malawi, and Thailand. Furthermore, the United States is the second largest producer of cigarettes in the world, following China. More than 90 percent of the tobacco grown in the United States is used to manufacture cigarettes, as is most tobacco produced in the world. The remainder is used for chewing tobacco, snuff, cigars, and pipe tobacco. Tobacco types are often defined by such characteristics as how the tobacco is cured (flue-, air-, or sun-cured), as well as the color, size, and thickness of the leaves. Different types of tobacco are used in the various tobacco products. The tobacco component of cigarettes made in the United States usually consists of flue-cured and burley tobacco blended with imported oriental tobacco and small amounts of specialty tobaccos grown in Maryland and Pennsylvania. Although pesticides play a significant role in increasing production of tobacco, food, and other crops by reducing the number of crop-destroying pests, exposure to pesticides can harm humans. The potential for harm is related to both the amount of a substance a person is exposed to—the dose—and the toxicity of the chemical. For example, small doses of aspirin can be beneficial to people, but at very high doses, this common medicine can be deadly. Furthermore, in some individuals, even at very low doses, aspirin may be lethal. The age and health status of an individual can also affect the potential for harm. Children may be more susceptible to harm because, for example, they eat more food, drink more water, and breathe more air than adults per pound of body weight, resulting in greater exposure. Generally, assessments of dose and response involve considering the dose levels at which adverse effects are observed in test animals and using these dose levels to calculate an equivalent dose in humans. In many cases, exposure to pesticides is through residues that remain on crops following use of the pesticides. The amount of pesticide residue that remains reflects, among other things, the amount of pesticide applied, the time lapsed since application, and the speed with which the pesticide dissipates in the environment. Residue levels remaining on crops are also affected by where the pesticides are applied, such as in the soil or on the plant, and when they are used in the life cycle of the plant, such as when the plant is a seedling or shortly before the plant is harvested. Typically, residues on tobacco decline as the plant moves from field to finished consumer product. The primary federal requirements pertaining to the registration, sale, and use of pesticides are in the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and the Federal Food, Drug, and Cosmetic Act (FFDCA), both as amended by the Food Quality Protection Act (FQPA). Pesticides must generally be registered with EPA in order to be sold or distributed. EPA will register a pesticide if it determines, among other things, that the pesticide will not generally cause unreasonable adverse effects on human health or the environment when used in accordance with conditions specified on the label. Throughout this report we will focus on EPA’s analysis of potentially harmful effects to human health, rather than the environment. In 1988 FIFRA was amended to require that EPA review pesticides initially registered prior to November 1984—when less toxicity data were available—to consider their health effects and to determine whether and how they might continue to be registered. These reviews are designed to ensure that older pesticides meet contemporary health and safety standards and that their risks are mitigated. Essentially, manufacturers of the older pesticides must provide EPA with substantially the same toxicity, chemistry, and other data as are now required to register a new pesticide. EPA reviews of the older pesticides are called reregistrations. Most of the pesticides used on tobacco during the 1990s were initially approved before 1984 and therefore are subject to reregistration. In addition, the FQPA amendments to FIFRA passed in 1996 require EPA to reevaluate the amounts of pesticide residues allowed on or in food— known as tolerances. EPA must ensure that there is a reasonable certainty that no harm will result from all pesticide exposures from food and nonfood uses for which there is reliable information. In doing so, unless another safety factor is determined to be appropriate, EPA is required to apply an additional 10-fold safety factor in setting tolerances to ensure the safety of foods for children. EPA is also required to ensure that there is reasonable certainty that no harm will result to children specifically from “aggregate” exposure to a single pesticide—that is, from all sources, such as lawn treatments, household uses, drinking water, and food. EPA must also consider available information concerning the cumulative effects on children of pesticides that act in a similar harmful way (known as a common mechanism of toxicity). To accomplish this requirement, EPA has recently developed a method to evaluate the cumulative exposure of one class of highly toxic pesticides—the organophosphates—from residues in food and drinking water and from residential uses. EPA uses risk assessment—the systematic, scientific description of potential adverse effects from exposure to hazardous substances—to evaluate the potential health impacts of a pesticide on humans and determine what measures are needed to mitigate identified risks. The product of a risk assessment is an identification of the various health risks, along with quantitative and/or qualitative statements regarding the probability that an exposed population will be harmed and to what degree. For example, EPA qualitatively classifies pesticides and other toxic substances according to their potential to cause cancer using descriptors such as “likely” or “suggestive evidence but not sufficient to assess human carcinogenic potential.” In addition, for many carcinogens, EPA develops a quantitative dose/response health risk assessment that estimates the health risks at varying exposures. For health effects other than cancer, EPA may calculate what it terms a “reference dose” or, in the case of exposure by inhalation, a “reference concentration,” which represents a daily level of exposure that is unlikely to result in harm over a lifetime. Alternatively, EPA may calculate a “margin of exposure,” which is a ratio that shows how far the actual (or estimated) human exposure to a substance is from levels that are harmful. In essence, evaluating and managing the risk of exposure to a pesticide involves determining the maximum safe level of exposure to the pesticide and assessing whether expected actual exposure is below this maximum level. If expected actual exposure levels exceed the maximum safe amount, EPA must determine the best ways to reduce exposure. According to federally sponsored surveys, during the 1990s tobacco producers in the United States commonly used 37 of the pesticides approved by EPA for such use. As shown in table 1, most of the pesticides used on tobacco were insecticides and herbicides, which control insect and plant pests; others were fungicides, which combat fungal diseases, or plant growth regulators; and a few had more than one use. Most of these pesticides were also widely used on food crops. The actual number and amount of pesticides used on tobacco or other crops in any given year vary depending on factors such as the weather and the specific pests that become problematic. For example, the incidence of many plant diseases is closely correlated to the amount of rainfall, resulting in greater use of fungicides in years with high rainfall. In addition, pesticide use tends to change over time as pests develop resistance to the pesticides and as use on tobacco is approved for new pesticides and cancelled for older pesticides. As table 2 shows, 10 pesticides identified in the 1997 survey as commonly used on tobacco were not identified in the earlier survey. Two of these pesticides, dimethomorph and mancozeb, began to be used in response to the appearance of a disease resistant to metalaxyl, which declined in usage during the 1990s. In addition, during the years included in the 1997 survey, tobacco use for 5 of the 7 pesticides no longer reported as being used—diazinon, diphenamid, isopropalin, methidathion, and trichlorfon—was being cancelled. In some cases, pesticide cancellations resulted in the increased use of other pesticides. For example, by 1997 clomazone had replaced diphenamid and isopropalin as the pesticide of choice for controlling unwanted weeds, and imidacloprid was most commonly used to control insect pests, leading to reduced use of acephate, aldicarb, chlorpyrifos, ethoprop, and carbofuran. Manufacturers may initiate cancellation of some or all uses of a pesticide, often for economic reasons, or EPA may cancel uses when the agency determines that one or more uses pose unreasonable risks to human health or the environment. For example, as required under the Clean Air Act, EPA has been phasing out the use of methyl bromide on tobacco and a wide range of other crops because it depletes the earth’s protective layer of ozone. Methyl bromide use on tobacco decreased from about 5.4 million pounds in 1992 to about 0.7 million pounds in 1997 because of EPA’s efforts and changes in how tobacco producers raise seedlings. Specifically, producers have begun to grow tobacco seedlings in greenhouses, where methyl bromide is not generally used. EPA determines the amounts and conditions under which a pesticide may be used so that it will not pose unreasonable risks to workers or the general population. Failure to comply with the conditions set by EPA could result in a range of harmful effects. For example, 17 of the 37 pesticides commonly used on tobacco in the 1990s belong to three chemical classes that, at high doses, are known to cause adverse human health effects up to and including death (see table 3). Although they do not all produce their toxic effects in the same way, pesticides in these three classes—organochlorines, organophosphates, and carbamates—act on the nervous system to prevent the normal flow of nerve impulses to muscles that control both voluntary movement, such as walking, and involuntary movement, such as breathing and heart beat. Pesticides in all three classes are absorbed to varying degrees through inhalation, ingestion, and skin contact. Exposure to amounts of these pesticides that exceed levels set by EPA could result in immediate and life- threatening effects, such as respiratory failure, or conditions that do not appear immediately, such as cancer. While EPA has concluded that most of these 17 pesticides do not cause birth defects, the agency has also concluded that 5 of them and a by-product of another may cause cancer. Since the 1970s, EPA has severely restricted its approvals of organochlorine pesticides, which include DDT, aldrin, and chlordane, because of their potential to harm humans and the environment. Organochlorine pesticides persist in the environment—some have remained in soil for over 50 years—and accumulate in body tissue, particularly fat. Organochlorine pesticides are associated with a range of adverse health effects, including cancer and damage to the neurological and reproductive systems. The one organochlorine pesticide still approved for use on tobacco, endosulfan, is highly toxic when ingested or inhaled and slightly toxic through contact with the skin. While EPA has determined that it is unlikely to cause cancer as other members of this class do, endosulfan, like all organochlorine pesticides, primarily affects the nervous system. EPA has requested additional data from the manufacturer to address its concerns that exposure to endosulfan could harm the nervous system of developing fetuses. Organophosphate and carbamate pesticides have largely replaced the organochlorine pesticides in the United States. While they break down quickly in the environment and do not accumulate in body tissues, organophosphate pesticides are much more acutely toxic to humans and animals than the persistent organochlorine pesticides they have largely replaced. The primary cause of death from organophosphate poisoning is respiratory failure, although cardiovascular symptoms, such as decreased heart rate that progresses to cardiac arrest, usually occur as well. In humans, additional symptoms from exposure to organophosphate pesticides, which can develop during use or within minutes to hours after exposure, include headache, nausea, dizziness, sweating, muscle twitching, anxiety, and depression. Exposure by inhalation causes the most rapid appearance of toxic symptoms. As a result, to minimize the potential for harmful exposure of workers, EPA requires those who mix, use, or apply the pesticides to have special training, use respirators, and wear chemical-resistant clothing. Regarding the potential to cause cancer, EPA has determined that 4 of the 10 organophosphate pesticides used on tobacco—acephate, ethoprop, methidathion, and trichlorfon—may cause cancer. In addition, EPA has concluded that 7 of the 8 organophosphate pesticides it evaluated for their potential to cause birth defects would not cause them but that the eighth—chlorpyrifos—may do so at very high levels that may also harm the pregnant female. Carbamates, which also affect the central nervous system, produce symptoms similar to those of organophosphate pesticides, although the effects of carbamate poisoning tend to be of shorter duration and somewhat easier to treat. The primary cause of death from carbamate poisoning is respiratory failure. Of the six carbamate pesticides used on tobacco, EPA has determined that one and a by-product always associated with another may cause cancer; two are unlikely to cause cancer; data are insufficient to determine the cancer-causing potential of one; and one will be evaluated in fiscal year 2003. EPA has evaluated four of the carbamates for their potential to cause birth defects: three do not and only minimal evidence exists for the potential of the fourth to cause birth defects. EPA has requested, but not yet received, data from the manufacturer on the potential of one of the two remaining carbamate pesticides to produce birth defects, and the agency will evaluate the health effects of the other in fiscal year 2003. The potential acute adverse health effects from the remaining 20 pesticides used on tobacco—representing 12 different chemical classes— range from mild to severe. For example, EPA found no known health effects on mammals from exposure to Bacillus thuringiensis as it is currently manufactured. Similarly, EPA has found that both maleic hydrazide, a plant growth regulator and herbicide, and metalaxyl, a fungicide, have low acute toxicity, and neither is thought to cause cancer or birth defects. However, EPA has found that serious adverse health effects could occur with high exposures to insecticides, such as chloropicrin, 1,3-dichloropropene (1,3-D), and methyl bromide, which are applied as fumigants and can be severely irritating to the eyes, skin, and lungs. EPA has also found that poisoning from exposure to methyl bromide may result in persistent neurological impairment. In general, because most of the pesticides used on tobacco are widely used on food and other crops, as well as in residential and other settings, the exposure resulting from residues on tobacco represents a small portion of total exposure to these pesticides. Specifically, 1997 survey data estimate that about 27 million pounds of the 37 pesticides were used on tobacco, while the estimated use of these pesticides nationally on all crops was 175 million pounds. Therefore, most of the exposure to these pesticides stems from their use on other crops and in other products, such as household insecticides. However, for some pesticides—dimethomorph, fenamiphos, flumetralin, maleic hydrazide, mefenoxam, and sulfentrazone—more than 50 percent of their use in 1994 through 1998 was on tobacco. Further, more than 80 percent of maleic hydrazide used and 100 percent of flumetralin and sulfentrazone used were applied to tobacco. Appendix II provides information on the amounts of the 37 pesticides used on (1) tobacco and (2) domestic crops, as estimated in the 1992 and 1997 surveys. To determine whether the use of individual pesticides can reasonably be expected not to harm human health, EPA conducts health risk assessments under its pesticide registration program. These risk assessments are based on EPA’s evaluations of the results of numerous scientific studies and tests that the agency requires pesticide manufacturers to carry out. EPA also assesses the health risks to smokers from exposure to pesticides used on tobacco by analyzing data on their toxicity and the residue levels that remain on tobacco and in tobacco smoke. Because pesticides are used extensively on crops, including tobacco, and in home pesticide products, the risk assessments focus on exposures of (1) workers who handle the pesticides and (2) the general public, which is exposed to pesticides via residues on food or in drinking water or from pesticide products used in and around the home and in public places. EPA’s health risk assessments often identify risks to workers that must be mitigated before EPA will approve the pesticide. The assessments also identify risks to the general population that may also require special limitations on how or where the pesticides may be used. EPA has generally concluded that the low levels of residues measured in tobacco smoke do not pose health concerns that require mitigation. While EPA officials were generally able to provide us with copies of the studies and evaluations we requested during our review, documentation of the agency’s evaluation of the validity and reliability of the residue studies was inconsistently available. Under its pesticide registration program, EPA routinely assesses the health risks of exposure to pesticides from residues in drinking water and food and from pesticide use in the home, in public places, and at work. The Health Effects Division of the Office of Pesticide Programs in EPA develops its health risk assessments on the basis of a substantial body of data, including toxicity, residue chemistry, and other data provided by pesticide manufacturers, as well as other relevant information, such as human and animal studies from the general scientific literature and poisoning incident databases. The risk assessments focus on the potential cancer and noncancer health risks associated with short-term (acute), intermediate-, and long-term (chronic) exposures to pesticides from the primary exposure routes—oral, inhalation, and contact with skin (dermal). Noncancer health risks that EPA assesses include risk of birth defects, reproductive impairments, damage to genetic material, and interference with the body’s endocrine system. EPA’s health risk assessments are subject to numerous reviews by a variety of committees, including the agency’s Hazard Identification Science Assessment Review Committee, Cancer Science Assessment Review Committee, and Reproductive and Developmental Toxicity Science Assessment Review Committee. The health risk assessments provide critical information to the pesticide registration divisions on the human health component of risk management decisions—such as whether to approve pesticides for use; what amounts may be used; and what special restrictions, if any, may be needed. To evaluate the levels of pesticides to which cigarette smokers might be exposed from residues on tobacco, EPA reviews plant metabolism and residue studies provided by manufacturers that identify the residues of pesticides, and any harmful by-products they may produce, that remain on the crop after it has been treated. The plant metabolism studies reveal how plants process a pesticide once it is applied and the relative amounts of the pesticide and its by-products that remain after treatment—the total toxic residue (TTR). The residue studies, called field trials, quantify the levels of pesticide and by-product residues that remain on plants grown under actual agricultural conditions that approximate the expected “real life” environment. Such field trial data, which are required for all pesticides that will be used on food, may not always be required for pesticides used on tobacco because EPA uses a “tiered” approach to evaluate residues on tobacco. That is, for tobacco, the agency requires additional residue data after the metabolism study only if it has shown that the combined residue levels of the pesticide itself and any harmful by-products exceed 0.1 parts per million (ppm)—the agency’s “threshold of concern” for residues on tobacco. Thus, as figure 1 shows, EPA generally requires plant metabolism studies for green tobacco and may require data from field trials for both green and cured (aged) tobacco, depending upon the amount of residues that are identified. In addition, EPA may require pyrolysis studies that measure the residues in smoke when tobacco treated with a pesticide is burned. Finally, EPA may require additional residue studies to estimate potential exposure, even if the residues are below 0.1 ppm, if it has concerns about the toxicity of a pesticide. The tiered approach to analyzing residues on tobacco reflects the fact that, typically, pesticide residues on tobacco decline over time, as the tobacco is stored, cured, manufactured into cigarettes, and burned during smoking. EPA uses the tiered approach for tobacco, in part, because the agency has concluded that the potential for harm to human health from pesticide residues on tobacco at or below the 0.1-ppm level is extremely low and unlikely to result in a risk of concern to smokers. According to EPA officials in the Health Effects Division, since August 1999, EPA’s policy for assessing the health risks from using pesticides on tobacco has been to evaluate the risks of short-term exposure to residues on tobacco and to quantify the estimated health risks using a consistent method and set of assumptions. This policy is applied to all newly registered pesticides, as well as to currently registered pesticides as they are periodically reviewed to ensure they meet current human health and environmental safety standards in accordance with the requirements of the 1988 amendments to FIFRA. EPA officials attribute the more structured approach to advances in the science of risk assessment and the 1996 enactment of FQPA, which has spurred the agency to more systematically quantify the exposure to pesticide residues in food and drinking water and from residential uses. EPA selected the margin of exposure method to quantify the health risks associated with exposure to pesticide residues in smoke. As discussed earlier, a margin of exposure shows how far the actual (or estimated) human exposure to a substance is from levels that have been shown to cause no harm in animal studies. To estimate exposure, EPA typically uses (1) the residue levels identified in tobacco field trials or pyrolysis studies and (2) standard assumptions for key variables that affect exposure. Specifically, EPA assumes that people smoke 15 cigarettes a day and that they weigh about 150 pounds, if male, and 130 pounds, if female. Moreover, EPA assumes 100 percent of the pesticide residue on the tobacco is inhaled and absorbed. In practice, some residues will be trapped in cigarette butts, and the amount of smoke inhaled varies widely among people. EPA officials said the assumptions are conservative—that is, they are protective of public health—because they tend to overstate, rather than understate, the extent to which smokers are exposed to the potentially toxic effects of the pesticides. Also according to EPA officials, the agency does not include exposure to the residues in tobacco smoke in its aggregate health risk assessments of individual pesticides, which are required by FQPA, because the added exposure from residues in smoke is minimal. In addition, EPA has chosen not to assess the risk of either intermediate- or long-term exposure to pesticide residues in smoke because of the severity and quantity of health effects associated with the use of tobacco products themselves. Specifically, exposure to tobacco products—particularly cigarettes—is the single major preventable cause of cancer and heart and lung disease in the United States. Finally, although experts and public health officials are concerned about the potential for harm, particularly to children, from exposure to pesticides, little is known directly about the chronic effects of pesticide use in general in the United States—for example, in agriculture and in schools. Moreover, studies linking adverse human health effects to exposure to pesticide residues on tobacco are rare, according to public health officials and experts we spoke to. And while a number of federally sponsored studies of the effects of exposure to pesticides are underway, it will be years, if not decades, before conclusive results are known. Officials and experts we spoke with about possible harm from pesticide residues on tobacco generally agreed that such residues could incrementally add to the risk, and some also believed the known harm from using tobacco products dwarfs any potential effect from exposure to pesticide residues in the smoke. EPA’s health risk assessments have identified a number of potential adverse health effects associated with the pesticides used on tobacco and other crops that, in some cases, have led the agency to impose special limitations on the uses of these pesticides. The risks that required mitigation stemmed from (1) potential exposure of workers who apply pesticides or harvest crops and (2) potential exposure of the general population to pesticide residues in food or drinking water or from pesticides used in the home or in public. None of the risks requiring mitigation were associated with exposure to residues on tobacco or in tobacco smoke. Our review of studies and other documentation related to EPA’s completed reregistration reviews of 13 of the 37 pesticides commonly used on tobacco identified the health risks associated with them and the related mitigation measures the agency required. The following cases illustrate some of the health risks that have required mitigation. EPA has classified 1,3-D, a widely used fumigant that controls soil-borne pests and diseases, as a probable carcinogen—that is, evidence from human and animal studies suggests that 1,3-D, once ingested or inhaled, is likely to cause cancer. In its risk assessment, EPA determined that 1,3-D could make its way to groundwater and pose a risk of cancer for residents who obtained their drinking water from wells near treated fields. To mitigate the potential cancer risks and as a condition for reregistration, EPA required that wells used for drinking water be located 100 or more feet from treated fields and prohibited the use of 1,3-D altogether in 11 states with porous soil. In addition, vapors from 1,3-D—which is injected as a liquid into soil, where it quickly evaporates—can move into the air. Consequently, EPA also required (1) a 300-foot buffer between occupied buildings and fields treated with the pesticide and (2) workers who apply the pesticide to wear respirators and protective clothing, among other things. Further, because of 1,3-D’s volatility and potential to harm humans, EPA classified it as a “restricted use” pesticide, which means it can only be applied by, or under the supervision of, individuals trained to handle particularly toxic or harmful pesticides. Currently, 1,3-D is registered for use on soils in which all food and feed crops may be planted. Moreover, according to the 1997 survey, an estimated 13 million pounds of 1,3-D were applied to tobacco annually during the survey period—almost twice the amount of chloropicrin, the second most commonly used pesticide on tobacco. Despite the health risks posed by injecting 1,3-D into soil, EPA identified no risks associated with residues on tobacco leaves or in tobacco smoke because 1,3-D metabolizes to nontoxic by-products and is subsequently absorbed by the plant. Similarly, EPA determined that residues on tobacco of chlorpyrifos— another pesticide frequently used on tobacco and food crops and one of the most widely used organophosphate insecticides in the United States— were below the agency’s threshold of concern. But the agency determined that chlorpyrifos presented potential health risks unrelated to its use on tobacco that required strict mitigation measures. Specifically, the agency identified health risks to children from exposure to chlorpyrifos. Before 2000, chlorpyrifos was one of the insecticides used most often in residential and commercial settings—for example, on carpets and in schools, daycare centers, hotels, and restaurants—and on food crops. EPA identified significant risks to children from these many uses and required stringent measures to address them. Between 1997 and 2000, EPA cancelled nearly all indoor and outdoor residential uses and prohibited the use of chlorpyrifos in schools and public parks. In addition, manufacturers agreed to eliminate the use of chlorpyrifos on tomatoes and restrict its use on apples. EPA also identified concerns for some workers who mix, load, and apply chlorpyrifos in agricultural and other nonresidential settings. As a result, EPA required that workers wear a respirator and a double layer of clothing, including chemical-resistant gloves, shoes, and headgear. Workers must also use water-soluble packages to mix powdered forms of chlorpyrifos and remain in an enclosed cockpit when aerially spraying a field. EPA also set a time interval between applications of the pesticide and when workers can reenter treated areas, ranging from 24 hours for most crops to 5 days for others. EPA did not, however, identify risks associated with chlorpyrifos used on tobacco because residue levels on green tobacco were below 0.1 ppm. EPA also identified a range of potential harmful effects from other exposures to the other pesticides we reviewed. For 11 pesticides, including 1,3-D and chlorpyrifos, EPA identified a range of concerns, largely for exposures of workers—particularly those engaged in spraying the pesticides—that required at least some mitigation. Most often the mitigation measures included the use of enclosed mixing systems and tractor cabs, additional protective respirators and clothing, reductions in the rate and frequency of application, and increases in the time between application and reentry to the treated areas. In some cases, such as for acephate, disulfoton, and ethoprop—all of which are organophosphate pesticides—certain uses were cancelled, including use on golf courses and lawns and indoor and outdoor residential uses. Three of these 11 pesticides—disulfoton, endosulfan, and ethoprop—also raised concerns about dietary or drinking water exposure for which EPA required such mitigation as canceling use on some foods, reducing the rate and frequency of application on others, and requiring buffer zones between treated fields and water bodies. EPA placed a number of additional restrictions on the use of endosulfan, a highly toxic and persistent organochlorine pesticide, including restricting use on cotton and tobacco to certain states; eliminating or reducing aerial spray applications on crops such as strawberries, nuts, and tobacco; and requiring buffer zones between treated areas and bodies of water. In addition, EPA required that all products containing endosulfan be labeled as restricted use pesticides, which can only be used by, or under the supervision of, specially trained applicators. EPA also noted that it may require further restrictions on acephate once the agency completes its assessment of the cumulative exposure to organophosphate pesticides because this organophosphate pesticide degrades in plants to another organophosphate pesticide. EPA found that 2 of the 13 pesticides we reviewed presented no concerns that needed changes in existing conditions on how to use and apply the pesticides. The pesticides we reviewed, including ones no longer approved for use in the United States, are used in many other tobacco-producing countries, according to experts. Researchers and advocacy groups have raised concerns about adverse health effects on tobacco workers in other countries from exposure to pesticides, citing such factors as the absence of cautionary labels on some pesticides and the limited use of protective clothing by agricultural workers. For example, researchers found elevated rates of depression and suicide rates that were twice the national average among tobacco producers in Brazil, a leading tobacco exporter. And although many factors, such as poverty and stress, may play a role in suicide, one group of researchers noted tobacco producers in Brazil routinely used organophosphate pesticides, which have been shown to cause depression. Moreover, these researchers reported that suicides are more likely to occur during planting and harvesting seasons, when organophosphate pesticides are used intensively. To some extent, such harmful exposure may occur because pesticide regulations in other countries may be less stringent than those in the United States or because other countries’ enforcement of regulations may be more limited, according to advocacy groups. Regarding pesticide residues on domestic tobacco, overall, EPA officials did not find associated health risks that required mitigation. Further, the data we reviewed on 13 pesticides were consistent with statements from EPA officials that the residues on tobacco were below the agency’s identified level of concern in 11 cases. EPA did not evaluate the remaining 2 pesticides—diazinon and pendimethalin—for use on tobacco. In the case of diazinon, evaluating residue data was not relevant because the pesticide was no longer approved for use on tobacco at the time EPA conducted its evaluation. In the case of pendimethalin, at the time we conducted this work, EPA had not yet reviewed the relevant data received from the manufacturer. EPA approved the reregistration for this pesticide, but its use on tobacco is subject to the agency’s evaluation of this data. Of the 11 pesticides that EPA evaluated for use on tobacco, 3 left residues on green or cured tobacco that were less than 0.1 ppm—and one left no residues at all. Specifically, the maximum residues of ethoprop on green tobacco were 0.01 ppm, the residues of chlorpyrifos were 0.09 ppm, the residues of pebulate on both green and cured tobacco were less than 0.02 ppm, and the plant metabolism study for 1,3-D showed no residues remaining on the plant. Manufacturers provided pyrolysis studies in two of the four cases in which the residue levels on green tobacco were 0.1 ppm or less. The pyrolysis study for ethoprop identified residues in the smoke that were below the agency’s level of concern. The pyrolysis study for a by-product of chlorpyrifos that was initially of concern to the agency identified the by-product in the smoke. However, EPA subsequently concluded that the by-product, which accounted for more than 10 percent of the residue in the smoke, was not of toxicological concern because, unlike its parent compound, it does not act toxically on the nervous system. Of the seven pesticides that progressed through EPA’s tiered risk assessment approach because residues on cured tobacco were greater than 0.1 ppm, pyrolysis studies were conducted on five. No residues were found in the smoke of four of these five pesticides; the residues of the fifth were not of sufficient magnitude to require further study or evaluation. One of the remaining two pesticides with residue levels greater than 0.1 ppm was evaluated using a study of the health effects on rats exposed to residues in smoke, and one was approved subject to EPA’s review of requested additional residue data, including a pyrolysis study, to confirm EPA’s assessment that residues on tobacco do not pose a risk to human health. The reregistration decisions for 7 of the 13 pesticides we reviewed were issued after EPA implemented guidance in 1999 requiring quantification of the risks of short-term exposure to pesticide residues in tobacco smoke. However, none of the human health risk assessments or other documentation we reviewed contained this information—that is, the margin of exposure estimate—because the health risk assessments supporting these decisions were completed before the policy was implemented. For pesticides with many uses and much data, several years may elapse between the initial scientific assessment of the tobacco use and the issuance of the reregistration decision. Not including the 13 pesticides mentioned above, we reviewed five additional health risk assessments EPA prepared after it developed the policy requiring the quantification of the risks of short-term exposure to pesticide residues in tobacco smoke that did include estimates of margin of exposure. EPA generally does not have concerns about adverse health effects when a margin of exposure is greater than 100—that is, when the pesticide causes no adverse effects at levels 100 or more times greater than the expected actual exposure to the pesticide. Consequently, a margin of exposure greater than 100 is considered to reflect risk that is below EPA’s level of concern. As table 4 shows, EPA’s recent health risk assessments of five pesticides approved for use on tobacco—four of which were newly registered and one reregistered—generally indicated that the margins of exposure were substantially greater than 100. Although one margin of exposure was below 100, EPA officials told us that because they used very conservative assumptions to estimate exposure, resulting in an extreme overstatement of actual exposure, EPA was not concerned about the potential for adverse health effects. For these five pesticides, EPA concluded that no mitigation related to the use on tobacco was required. Overall, EPA officials said that potential risks from exposure to residues on tobacco had never been high enough to require mitigation. EPA requires that pesticide manufacturers provide most of the studies it considers in assessing the health risks of pesticides, and the agency’s evaluations of these studies are critical to the assessment process. EPA officials were generally able to provide us with copies of the studies and evaluations we requested, but documentation of the agency’s evaluation of the quality of the residue studies and other data upon which it relied to evaluate the potential for adverse health effects was inconsistent. Specifically, for eight of the pesticides, EPA officials were unable to provide their evaluations of the validity and reliability of residue data used in their assessments of potential health risks. In addition, for chlorpyrifos, EPA officials were unable to provide the residue studies and agency evaluations of them from the early 1980s. As a result, we examined subsequent EPA evaluations that referred to the results of these early studies and the agency’s conclusion that the residues were below the level of concern. According to EPA officials, they were unable to locate the documents, in part, because not all records from this time have yet been converted to electronic format, and the paper copies could not be located among the substantial backlog of paper documents. EPA officials noted that each pesticide registration could consist of 100 or more studies from pesticide manufacturers, each of which requires one or more agency evaluations. The officials reported that, as resources permit, contract and agency staff are converting documents to electronic format to make them more readily available for review. While EPA is required to regulate residues of pesticides approved for use on human food and animal feed crops, no such requirement applies to pesticides approved for use on tobacco. However, primarily as a matter of trade equity, USDA does (1) regulate residues of selected pesticides that are prohibited in the United States but that may be used on imported tobacco and (2) test certain types of imported and domestic tobacco to ensure they do not exceed residue limits. USDA has not reevaluated the pesticides it regulates since 1989, although changes in the pesticides used on tobacco have occurred since then. Through its testing programs, USDA has found that a small fraction of imported and domestic tobacco exceeds the residue limits. As discussed previously, EPA regulates pesticides in the United States by granting registrations, which permit the distribution, sale, and use of the pesticides according to directions identified on the label. EPA also regulates the residues of pesticides that are approved for use on human food and animal feed crops by setting tolerances—maximum concentrations of residues that may remain on crops. FDA and USDA test food and feed crops to ensure that residue levels do not exceed the tolerances EPA has set. Because tobacco is not used as food or feed, however, EPA does not set tolerances for residues of pesticides approved for use on tobacco, and FDA and USDA do not test tobacco for maximum concentrations of residues of approved pesticides. Consequently, residues of pesticides approved for use on tobacco in the United States are not federally regulated. Instead, federal regulation of pesticide residues on tobacco focuses exclusively on pesticides not approved for use on tobacco. The Dairy and Tobacco Adjustment Act of 1983, as amended, requires USDA to (1) establish maximum allowable concentrations for residues of selected pesticides that are not approved for use on tobacco in the United States but that are likely used on tobacco in some other countries and (2) test imported and domestic flue-cured and burley tobacco to ensure the residue levels do not exceed the maximum levels allowed. In selecting which pesticide residues to regulate, USDA is to consider pesticides whose use on tobacco has been cancelled, suspended, revoked, or otherwise prohibited under FIFRA. The regulation helps ensure that domestic tobacco producers are not placed at an unfair disadvantage in the market because they are not allowed to use certain pesticides that may be used in other countries; it also helps protect the public from exposure to the residues of highly toxic pesticides not approved for use on tobacco in the United States. While the focus of U.S. regulation of pesticide residues on tobacco is on those pesticides not approved for use on tobacco, some other countries have set limits on residues of pesticides that are used on tobacco. Further, as in the United States, some countries limit the concentration of residues as measured on tobacco leaf. However, at least one country—Germany— limits the pesticide residues as measured in cigarettes and other tobacco products. Appendix III provides information on the limits established by Germany, Italy, and Spain. USDA has implemented the Dairy and Tobacco Adjustment Act, in part, by setting 15 residue limits (maximum allowable concentrations) covering 20 pesticides currently not approved for use on tobacco in the United States that the agency believed were used in other countries. Most of the pesticides USDA regulates, such as DDT and toxaphene, are organochlorine pesticides. As discussed earlier, organochlorine pesticides persist in the environment and accumulate in the bodies of humans and animals, and many are highly toxic—a number of them have been banned for these reasons. Eleven of the 15 residue limits apply to individual pesticides and 4 apply to 2 or more pesticides in combination. For example, aldrin and dieldrin are summed because dieldrin is the primary degradation product of aldrin. Table 5 lists the residue limits included in USDA’s testing program, with the 12 organochlorine pesticides highlighted. As indicated in the table, methoxychlor is the only organochlorine pesticide included in USDA’s testing program that is currently approved for other uses in the United States, such as on food crops. USDA’s Agricultural Marketing Service (AMS) initially established maximum allowable concentrations of pesticides in August 1986 after determining the countries from which the United States imports tobacco, the pesticides that might reasonably be expected to be used on tobacco in those countries, and the pesticides not approved for use in the United States. In 1989, AMS revised the number of pesticides to its current total of 20 residues. Although in 1986 USDA stated its intent to periodically reevaluate the pesticides it regulates, the department has not done so since 1989. According to officials at USDA, reevaluating the regulated pesticide residues has not been a priority of the department. However, since USDA selected the pesticides it would test in 1989, tobacco uses have been cancelled for more than 30 pesticides that had been approved for use on tobacco. For example, by 2000, EPA had cancelled all tobacco uses of lindane—a highly persistent, organochlorine pesticide that may cause cancer and harm the environment. USDA does not currently regulate pesticide residues of lindane because it was still approved for tobacco when USDA last reevaluated the regulated pesticides. Other pesticides, such as trichlorfon and diazinon, are also candidates for regulation—that is, pesticides no longer approved for use on tobacco in the United States but likely to be used in some other countries. As appendix III shows, some countries that set limits for pesticides used on tobacco have established them for trichlorfon and diazinon—one of the leading causes of acute insecticide poisoning for humans. However, because USDA has not revised the regulated pesticide residues it tests for, the department’s testing program may not include some pesticides with characteristics similar to those of pesticides currently included in the testing program and that may still be used in other countries. Tobacco and pesticide experts with whom we spoke agreed that periodic reevaluations of the regulated pesticides would be appropriate. Furthermore, two of these experts—a toxicologist who has measured residues on tobacco for many years and a former government official who now represents tobacco producers—told us that many of the pesticides USDA currently regulates, particularly the organochlorine pesticides, warrant continued inclusion in the testing program because they are persistent in the environment, accumulate in the body, and continue to be used on crops overseas. Also as required by the Dairy and Tobacco Adjustment Act, USDA tests certain imported and domestic tobacco to ensure that residues do not exceed the maximum allowable concentrations the agency established. USDA is required to test samples of two types of tobacco—flue-cured and burley—that are commonly imported from other countries and also produced in the United States to determine whether they conform to the pesticide residue limits. These two types of tobacco are the major components of cigarettes, and imports of them have continued to increase over time. For example, USDA reported that imports of flue-cured tobacco represented about 12 percent of the flue-cured tobacco used in the United States in 1980 and about 36 percent in 2001. USDA is not required to test other types of imported tobacco, such as oriental tobacco, which is added to cigarettes for purposes of flavor and aroma but which is not grown in the United States. Tobacco is imported into the United States in large, sealed shipping containers that hold approximately 40,000 pounds of tobacco in 90 to 96 boxes weighing about 440 pounds each. In 1986, AMS began testing imported flue-cured and burley tobacco, which represented about 60 percent of the tobacco imported into the United States in 2001. Random samples of imported flue-cured and burley tobacco are tested for residues of the 20 regulated pesticides. AMS inspectors use a computer program to randomly select one box of tobacco from each shipping container. The domestic testing program began in 1989 and is administered by the USDA Farm Service Agency (FSA) under a cooperative agreement with AMS. Similar to the AMS program for tobacco imports, FSA tests randomly selected samples of domestic flue-cured and burley tobacco for the 20 regulated pesticides not approved for use in the United States. FSA tests the portion of domestically grown flue-cured and burley tobacco that becomes loan stock (surplus tobacco) under USDA’s tobacco price support program. The proportion of domestic tobacco that becomes loan stock varies each year, depending on tobacco quality and demand from manufacturers, and has declined in recent years. Additional information about the domestic loan stock program is provided in appendix IV. For 1999 through 2001, USDA’s testing programs found less than 1 percent of domestically produced or imported flue-cured and burley tobacco with residue levels above the allowable levels. According to agency officials, those results are consistent with results obtained since testing began in 1986. More specifically, for 1999 through 2001, the FSA domestic testing program found a small fraction of a percentage of domestically produced tobacco in excess of the limits. FSA found 4 samples of flue-cured tobacco and 24 samples of burley tobacco—representing more than 12,000 pounds of tobacco—that exceeded the maximum allowable concentrations of 2 of the regulated pesticides—methoxychlor and permethrin. AMS found residues of DDT/TDE/DDE, cypermethrin, and ethylene dibromide in excess of the limits on less than 1 percent of the imported tobacco entering the United States during this time. If imported tobacco exceeds any of the limits, the importer is notified of the violation and may choose to appeal the result or reexport the tobacco to another country. When an importer appeals, AMS inspectors randomly select three additional samples for testing, and the residue levels for the four samples are averaged. If the average result is below the limits, the tobacco is cleared for entry into the United States. However, if the average exceeds the limits, the container of tobacco is denied entry and is typically reexported. Under the Dairy and Tobacco Adjustment Act, domestically produced flue-cured or burley tobacco not meeting the residue requirements must be destroyed. According to USDA officials, because of restrictions on the disposition of products contaminated by pesticides, boxes of domestic tobacco are typically disposed of in an approved landfill with a permit from EPA. To ensure that pesticides can be used without posing an unreasonable risk to human health, EPA conducts risk assessments of exposures to the pesticides it evaluates for use in the United States, including exposure to pesticide residues on tobacco. EPA’s decision to limit its quantitative assessment of the risks associated with pesticides on tobacco to the effects of short-term exposure, and not include the long-term exposure of smokers, recognizes that the pesticides are used on a crop that itself poses very significant health risks to humans through use in various consumer products—primarily cigarettes. Overall, EPA’s health risk assessments show that the pesticides used on tobacco and other crops are probably a greater hazard for those who handle them than for those who inhale tobacco smoke. Nonetheless, while the risks of some exposures, such as acute poisoning, are clear, less is known with certainty about the effects of long-term exposure to small amounts of pesticides, such as residues in food and water, on tobacco, or in the environment. While historically EPA has required pesticide manufacturers to provide data on the residues remaining on tobacco, its assessments of the health effects associated with exposure to the residues were not identified in risk assessment documents and generally were not quantified. Mirroring the improvements in risk assessment methods in recent years, EPA has adopted a more formal and consistent approach to evaluating the health risks associated with pesticides used on tobacco and has started to document, in its risk assessment documents, its conclusions on the potential for short-term risks from pesticide residues that may remain in tobacco smoke. As a result, interested parties are better informed about the potential risks, and EPA is appropriately more accountable for its assessments. When used as intended—most commonly in cigarettes—tobacco is generally inhaled into the body. However, because it is not a food, tobacco is regulated as a nonfood crop with regard to pesticide residues. That is, no residue limits are established or monitored for pesticides approved for use on tobacco, as is done for foods. While the regulation of pesticide residues on tobacco is limited because it does not include pesticides approved for use on this crop, USDA tests tobacco for residues of 20 pesticides not approved for domestic use on tobacco, primarily for purposes of trade equity. Because many of the tested pesticides are known to harm humans and the environment, the USDA testing program helps minimize the public’s exposure to some highly toxic pesticides. The universe of pesticides not approved for use on tobacco has grown since USDA selected the pesticides it tests, but USDA has not reevaluated the program’s coverage in 14 years. The USDA testing program would be improved by assessing the current universe of pesticides not approved for use on tobacco and determining whether an update to its program is warranted. To better protect the public from exposures to residues of pesticides not approved for use on tobacco in the United States and ensure that domestic tobacco producers are not placed at an unfair disadvantage relative to producers in other countries, we recommend that the Secretary of the Department of Agriculture direct the Administrators of the Agricultural Marketing Service and the Farm Service Agency to periodically review and update the pesticides for which they set residue limits and test imported and domestic tobacco. We provided copies of our draft report to EPA and USDA for review and comment. In commenting on the draft, EPA officials said we accurately characterized the agency’s risk assessment process for pesticides used on tobacco, and USDA officials agreed with our recommendation to periodically review and update the pesticides for which the department sets residue limits and tests tobacco. USDA officials said they plan to annually review and update the testing program for tobacco. We conducted our review from May 2002 through March 2003 in accordance with generally accepted government auditing standards. Our scope and methodology are discussed in appendix I. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies of this report to the Administrator, EPA; the Secretary of Agriculture; and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix V. This report provides information on (1) the pesticides commonly used on tobacco and the potential health risks associated with them; (2) how the Environmental Protection Agency (EPA) assesses and mitigates health risks associated with pesticides used on tobacco; and (3) how, and the extent to which, EPA, U.S. Department of Agriculture (USDA), and other federal agencies regulate and monitor pesticide residues on tobacco. In addition, this report provides information on the regulatory residue limits adopted by three countries that are significant importers of tobacco grown in the United States. To identify the chemicals commonly used on tobacco, we reviewed pesticide-use databases developed by the National Center for Food and Agricultural Policy (NCFAP), a nonprofit research organization, under a cooperative agreement with USDA. These databases summarized national use of 235 pesticides on 87 food and nonfood crops for the period 1990 though 1998. These databases, compiled from more than 130 federal and state surveys and reports, include pesticide use on cropland in the coterminous 48 states and do not include new pesticides approved by EPA since 1997. We also reviewed data from national surveys conducted in the 1990s by the U.S. Geological Survey and USDA and from several tobacco- producing states—Kentucky, North Carolina, Tennessee, and Virginia. In total, 53 pesticides were identified as being used on tobacco in one or more of the surveys. Of these, 37 were identified in one or more of the surveys that included national data, and we refer to this latter group as the pesticides that were commonly used on tobacco in the United States during the 1990s. To identify the adverse health effects associated with these 37 pesticides, we collected and reviewed relevant human health risk assessments prepared by EPA’s Office of Pesticide Programs. Where such assessments were not available, we reviewed documents from academic experts who maintain a database on pesticides and other toxic chemicals for USDA, and other programs within EPA. In addition we interviewed, and reviewed reports prepared or recommended by, experts on the human health effects of exposure to pesticides and other toxins at the National Cancer Institute, the National Institute of Environmental Health Sciences, the National Center for Environmental Health, Johns Hopkins Bloomberg School of Public Health, and the Institute for Cancer Prevention (formerly the American Health Foundation). To determine how EPA assesses and mitigates potential health risks from pesticide residues on tobacco, we reviewed agency policies and procedures on identifying the levels of pesticide residues on tobacco and the related health risks, and we interviewed EPA officials in the Office of Pesticide Programs who perform these tasks. In addition, we examined in detail how EPA implemented its policies and procedures for 13 of the 37 pesticides commonly used on tobacco. That is, we reviewed pesticide residue studies submitted to EPA and EPA’s evaluations of pesticide residues and their potential health effects conducted as part of the pesticide registration process under the Federal Insecticide, Fungicide, and Rodenticide Act for 1,3-D, acephate, chlorpyrifos, diazinon, disulfoton, endosulfan, ethoprop, ethephon, maleic hydrazide, metalaxyl, methidathion, pebulate, and pendimethalin. We focused primarily on those pesticides for which EPA had completed registrations between 1994 and 2002. We did not independently evaluate the validity or scientific merit of the studies that EPA relied upon to reach its conclusions. To determine the extent to which EPA, USDA, and other federal agencies regulate and monitor pesticide residues on tobacco, we met with cognizant officials and reviewed authorizing legislation, regulations, and documentation on how programs related to pesticide residues on tobacco are implemented. In addition, we analyzed USDA data on tobacco production, imports, and residue-testing results. We also interviewed academic and tobacco industry experts and reviewed residue data collected by North Carolina State University. To provide information on other countries that have adopted regulatory limits on pesticide residues, we reviewed articles by academic experts on the international regulation of pesticides on tobacco. We provide information on three major importers of U.S. tobacco—Germany, Italy, and Spain—as examples of regulatory approaches in other countries, focusing on the residue limits they set. We did not examine how, or the extent to which, these countries monitor or enforce their pesticide residue limits. We updated and clarified the information on the three countries’ residue limits provided in the articles with information from the Cooperation Centre for Scientific Research Relative to Tobacco (CORESTA), an international tobacco research organization, and officials responsible for oversight of pesticides and tobacco in Germany and Spain. To identify countries that import U.S. tobacco, we extracted data from the United States International Trade Commission’s interactive tariff and trade database on the countries that received U.S. flue-cured and burley tobacco from 1996 through 2001. We conducted our review from May 2002 through March 2003 in accordance with generally accepted government auditing standards. Most of the pesticides used on tobacco are widely used on food and other crops. As shown in table 6, tobacco use of most pesticides represents a small portion of the total use. However, for some pesticides— dimethomorph, fenamiphos, flumetralin, maleic hydrazide, mefenoxam, and sulfentrazone—most of the use in 1994 through 1998 was on tobacco. Several countries that are major importers of U.S. tobacco have adopted regulations for specific pesticide residues on various forms of tobacco. For example, Germany’s residue limits (maximum residue levels) apply to finished products, such as cigarettes, whereas limits in Italy and Spain generally apply to tobacco leaf. Although they have somewhat different regulatory approaches to pesticides on tobacco, Germany, Italy, and Spain differ from the United States in that they regulate residues of pesticides approved for use on tobacco in addition to regulating some residues of pesticides not approved for use on tobacco. According to 2003 data from CORESTA—the Cooperation Centre for Scientific Research Relative to Tobacco—Germany, Italy, and Spain have residue limits on tobacco for 79, 100, and 58 pesticides, respectively. Of the 37 pesticides commonly used on tobacco in the United States during the 1990s, Germany has limits for 20, Italy for 24, and Spain for 21 (see table 7). None of these countries have adopted limits for 7 of the pesticides commonly used on U.S. tobacco during the 1990s. In addition to residue limits for approved pesticides, Germany and Italy collectively have residue limits on tobacco that apply to 15 of the 20 pesticides not approved for use in the United States that USDA monitors in its tobacco testing programs. The 15 pesticides are aldrin, dieldrin, chlordane, cypermethrin, DDT, DDE, endrin, ethylene dibromide, formothion, heptachlor, heptachlor epoxide, hexachlorobenzene, methoxychlor, permethrin, and TDE. Further, where no specific pesticide limits are set for tobacco products in Germany, residues of pesticides not approved for use on tobacco in Germany may be present in amounts that are not likely to pose a risk to human health. In Italy and Spain, residues of pesticides not approved for use on tobacco in those countries must not exceed the limit of detection, generally between 0.01 ppm and 0.05 ppm. We did not examine how, or the extent to which, these countries monitor or enforce their pesticide residue limits. From 1971 to 2000, researchers at the North Carolina State University (NCSU) collected limited data on the residues of various pesticides on some domestically grown tobacco. NCSU data for the 1990s included six pesticides for which Germany, Italy, or Spain have residue limits. The domestic tobacco tested by NCSU identified residue levels that were (1) consistently below the lowest limit for endosulfan, flumetralin, and metalaxyl; (2) generally above the limit for maleic hydrazide; and (3) more varied for fenamiphos and the dithiocarbamates—a class of fungicides that includes mancozeb. For example, in 1995 residue levels on flue-cured tobacco were below the lowest limit for fenamiphos—0.02 ppm adopted by Spain—but exceeded this limit in 1992 and 1994. Also, in 1991 and 1997 residue levels of dithiocarbamates were generally lower on burley tobacco than limits in Germany and Italy—50 ppm and 10 ppm, respectively—but exceeded Spain’s limit of 0.05 ppm. The USDA Farm Service Agency (FSA) tests the portion of domestically grown flue-cured and burley tobacco that becomes loan stock (surplus tobacco) under USDA’s tobacco price support program for the 20 regulated pesticides. To receive price supports, tobacco must be sold in USDA-approved auction warehouses and inspected by USDA graders. At the auction warehouse, each individual lot of tobacco is sold to the highest bidder. If the highest bid is below the government’s loan (support) price, or no bid is received, the stabilization cooperative makes loans to growers whose tobacco does not bring the minimum price at auction with funds borrowed from USDA’s Commodity Credit Corporation. The growers’ tobacco, which is consigned to the cooperative as loan stock, is pledged as collateral to the credit corporation for the money borrowed. The cooperative receives, processes, stores, and later sells the loan stock tobacco when demand increases, with the proceeds used to repay the credit corporation loan, plus interest. An alternative to traditional auction marketing—growers contracting to sell their tobacco directly to manufacturers—also reduces the amount of tobacco going to auction and thus potentially to loan stock. For the most recently completed marketing season—growing year 2001—20 percent of domestic tobacco was sold at auction, and 2.4 percent became loan stock. After auction, the tobacco is processed in distinct “runs” of approximately 100,000 pounds, when the tobacco is stemmed, redried, finely chopped, and placed into boxes holding approximately 440 pounds. The tobacco cooperative randomly selects one box from each run and draws a one-pound sample of tobacco for pesticide testing at USDA’s laboratory. If the sample exceeds any of the residue limits, the box of tobacco from which it came is destroyed. The adjacent boxes, processed before and after the original box, are also sampled. The testing continues with adjacent boxes of tobacco until the samples are found to be below the residue limits. Because the samples are drawn by the tobacco cooperatives, FSA resamples 5 percent of the tested inventory (or 25 samples, whichever is less) for oversight purposes each year. Historically a substantial portion of domestic tobacco was sold at auctions in conjunction with the tobacco price support program, but in recent years most domestic tobacco has been sold under contract directly to cigarette manufacturers—approximately 80 percent in 2001. Officials from USDA and tobacco associations told us the market has changed because manufacturers asserted that auction markets were not providing quality tobacco with the characteristics they required. The recent, dramatic shift in the way tobacco is marketed—with a 60 to 80 percent reduction in the amount of tobacco at auction—has decreased the amount of domestic tobacco that potentially becomes loan stock and thus is tested. Although the amount of domestically produced tobacco that becomes loan stock has varied greatly, an average of 13 percent became loan stock over the past decade. In 2001, only about 2 percent of domestically produced tobacco has become loan stock, reducing the amount of domestic tobacco subjected to pesticide testing. The officials with whom we spoke said that this change is not likely to be reversed. In addition to those named above, Nancy Crothers, Laura Gatz, Terrance Horner, Richard Johnson, Ilga Semeiks, Tina Smith, and Cheryl Williams made key contributions to this report.

Pesticides play a significant role in increasing production of tobacco, food, and other crops by reducing the number of crop-destroying pests. However, if used improperly, pesticides can have significant adverse health effects. GAO was asked to (1) identify the pesticides commonly used on tobacco crops and the potential health risks associated with them, (2) determine how the Environmental Protection Agency (EPA) assesses and mitigates health risks associated with pesticides used on tobacco, and (3) assess the extent to which federal agencies regulate and test for pesticide residues on tobacco. In the 1990s, domestic growers commonly used 37 pesticides approved for use on tobacco by EPA. Most of these pesticides were also used on food crops. When used in ways that deviate from conditions set by EPA, many of these pesticides can cause moderate to severe respiratory and neurological damage--and may result in death. Moreover, animal studies suggest that some of these pesticides may cause birth defects or cancer. Under its pesticide registration program, EPA evaluates toxicity and other data to assess health risks to workers and the public from exposure to pesticides--and risks to smokers from exposure to residues in smoke. These assessments have identified a range of risks that required such mitigation as limiting where and how the pesticide may be used, prohibiting use in certain states, and requiring workers to wear respirators and chemical-resistant clothing. On the other hand, EPA has concluded that low levels of residues in tobacco smoke do not pose short-term health concerns requiring mitigation. EPA does not assess intermediate or long-term risks to smokers because of the severity of health effects linked to use of tobacco products themselves. While EPA regulates the specific pesticides that may be used on tobacco and other crops and specifies how the pesticides may be used, it does not otherwise regulate residues of pesticides approved for use on tobacco. The U.S. Department of Agriculture (USDA), however, is required by the Dairy and Tobacco Adjustment Act to test imported and domestic tobacco for residues of pesticides not approved by EPA for use on tobacco that federal officials believe are used in other countries. By helping ensure that other countries do not use highly toxic pesticides that U.S. tobacco growers may not use, federal regulation of pesticide residues on tobacco addresses trade equity as well as health and environmental issues. However, USDA has not reevaluated the list of pesticides for which it tests since 1989, even though EPA has cancelled tobacco use for over 30 pesticides since then.

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User financing—in the form of user fees, user charges, or excise taxes on certain products—is one approach to financing federal programs or activities. User fees assign part or all of the costs of these programs and activities—the cost of providing a benefit that is above and beyond what is normally available to the general public—to readily identifiable users of those programs and activities. Because user fees represent a charge for a service or benefit received from a government program, payers may expect a tight link between their payments and the cost of providing services and have expectations about the quality of the related service. For the purposes of this guide we use the term user fees to include user fees as well as excise taxes with a “user pays” element. Examples include those imposed on motor fuels, tires, and heavy vehicles that accrue to the Highway Trust Fund, from which Congress appropriates funds for federal highway and transit programs. Similarly, Federal Aviation Administration (FAA) activities are funded in part by excise taxes assessed on airline tickets, aviation fuel, and certain cargo. A highway toll may also be considered a user fee because it is related to the specific use of a particular section of highway. The boundaries between fees and taxes are not always clear and the tradeoffs among design elements presented in this guide can be relevant to both. In general, a user fee is related to some voluntary transaction or request for government goods or services above and beyond what is normally available to the public, such as a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. Taxes, on the other hand, arise from the government’s sovereign power to raise revenue and need not be related to any specific benefit, and payment is not optional; when Congress imposes taxes, it need not consider benefits bestowed by the government on an individual but may base taxation solely on an individual’s ability to pay. The Supreme Court has ruled that a tax is “an enforced contribution to provide for the support of government.” The legal distinction between a “fee” and a “tax” can be complicated and depends largely on the context of the particular assessment. Whether a particular assessment is statutorily referred to as a tax or a fee is never legally determinative. Instead, federal courts will examine the structure and the context of the assessment’s application. Fees vary in the degree to which they can be considered truly voluntary because the availability of reasonable substitutes varies. For example, to enter certain national parks, one must pay an entrance fee. The fee is voluntary to the extent that there are alternatives to national parks for outdoor recreation, for example, state, county, or private parks and recreation facilities. In contrast, people who want to operate radio stations have no similarly close alternative and must obtain a license from the Federal Communications Commission and pay a fee for that license. Agencies derive their authority to charge fees either from the Independent Offices Appropriation Act of 1952 (IOAA) or from specific statutory authority. IOAA provides broad authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. User fees assessed under IOAA authority must be (1) fair and (2) based on costs to the government, the value of the service or thing to the recipient, public policy or interest serviced, and other relevant facts. Fees collected under this authority are deposited in the general fund of the U.S. Treasury and are generally not available to the agency or the activity generating the fees. Unless otherwise authorized by law, IOAA requires that agency regulations establishing a user fee are subject to policies prescribed by the President. OMB provides such guidance to executive branch agencies under this authority through Circular No. A-25. The Circular establishes federal guidelines regarding user fees assessed under the authority of IOAA and other statutes, including the scope and types of activities subject to user fees and the basis upon which the fees are set. It also provides guidance for executive branch agency implementation of fees and the disposition of collections. In many instances, Congress has provided specific authority to federal agencies to assess user fees—in agency authorizing or appropriations legislation, for example. Legislation authorizing a user fee may enact a specified rate or amount to be assessed or may stipulate how the fee is to be calculated, such as a formula; the method and timing of collection; and the authorized uses of the fee collections, which may be broadly or narrowly defined. The amount of a fee may be set to partially or fully recover costs or may be set according to some other basis (e.g., market value). Specific authorizing statutes may even grant the agency broad discretion to set and revise fee rates without Congressional approval—that is, solely through the regulatory process—based on various factors. Specific user fee statutes should be construed consistent with IOAA and OMB Circular No. A-25 to the extent possible as part of an overall statutory scheme. Of the four components of implementing a user fee, setting the rate of the fee is perhaps the most challenging because determining the cost of the service is often quite complex and requires consideration of a range of issues (see fig. 1). In theory, the extent to which a program is funded by user fees should generally be guided by who primarily benefits from the program, though, as we discuss later, the extent to which a program benefits users or the general public is not usually clear cut. This is known as the beneficiary- pays principle. Under this principle, if a program primarily benefits the general public (e.g., national defense), it should be supported by general revenue, not user fees; if a program primarily benefits identifiable users, such as customers of the U.S. Postal Service, it should be funded by fees; and if a program benefits both the general public and users, it should be funded in part by fees and in part by general revenues. As shown in figure 2, the beneficiary-pays principle can promote equity by assigning costs to those who both use and benefit from the services. First, as shown on the left side of figure 2, the extent to which a program provides benefits to the general public versus users should guide the proportion of total program costs that are paid for by general revenues versus user fees. Second, as shown on the right side of the illustration, the cost of providing the benefits to each user should be determined and assigned through user fees. Figure 3 depicts selected federal programs funded according to this principle. Secondary beneficiaries of a program generally are not considered in this examination. For example, consumers of new prescription drugs are secondary beneficiaries of prescription drug reviews, which provide a primary benefit to the drug sponsors. Similarly, fees should be charged to the direct user, even if that payer then passes the cost of the fee on to others. The entities that bear the burden of a fee—what economists call the incidence of the fee—are not necessarily those who legally must pay the fee. Fees may be passed along to others through price changes, as the fee may change the price of one good relative to another and therefore affect the allocation of resources. How prices change—and therefore the incidence of the fee—depends on (1) how responsive market supply and demand are to price changes (price elasticity) and (2) market conditions that affect an entity’s ability to control prices. The ability of payers to pass along the fee does not necessarily change the economic efficiency effects of the fee but can affect its perceived equity and the transparency of the fee. User fees set under the beneficiary-pays principle can also enhance economic efficiency by ensuring that resources are allocated to the most highly valued use, as users make adjustments to their consumption of the service based on their costs and benefits. For example, setting a Food and Drug Administration (FDA) fee for new prescription drug applications too high could discourage the development of new drugs. On the other hand, setting the fee too low induces overuse of agency resources and services. To the extent a fee is voluntary, user fees based on a program or service’s total costs may also act as a market test and can help ensure that the benefits of the program are at least as great as its costs. Under the beneficiary-pays principle, the government may wish to charge some users a lower fee or no fee to encourage certain behaviors that provide a public benefit, such as advancing a public policy goal (e.g., promoting free trade). For example: Potential profits from the development of “orphan” drugs—those that treat rare diseases—are limited by the small size of their market, and therefore drug companies may be reluctant to invest in them; such drugs are exempt from the FDA prescription drug application fee to encourage their development. Imports from certain least developed countries are exempt from CBP’s Merchandise Processing Fee (MPF), which both addresses their ability to pay and may help promote their economic development. DHS officials noted that in other cases MPF exemptions have been used as a tool to negotiate free trade agreements; an exemption may be extended as a concession for the reduction of import tariffs on certain U.S. goods. Low-income taxpayers are exempt from the $150 application fee for the Internal Revenue Service’s Offer in Compromise (OIC) program—a program for taxpayers unable to fully pay their tax liabilities—to make the program more accessible and encourage participation. Although user fees can promote one facet of equity—the beneficiary-pays principle—they may run contrary to another facet—the ability-to-pay principle. To the extent that user fees are a substitute for funding through general tax revenues, they may be less progressive than taxes and therefore shift additional burden on those less able to pay. Fees (or taxes) that are proportionally more burdensome for low-income than high- income individuals are said to be regressive. To address this concern, the design of a fee may consider the ability of a user to pay, for example, by exempting low-income users or scaling fees by some measure of ability to pay. In certain cases user fees may not be the most equitable, efficient option for funding a program. Examples include fees for government programs intended to provide a benefit based on need or merit, such as the Department of Housing and Urban Development’s Section 8 housing voucher program (which assists low-income families, including the elderly and the disabled); competing sectors within an industry (e.g., modes of transportation) if the other sectors are not subject to similar fees; and new industries that face high initial costs and may need government support until they can become self-sustaining. Abrupt imposition of new or substantially increased user fees could have unintended consequences. For example, in May 2007, U.S. Citizenship and Immigration Services (USCIS) published a new fee schedule that raised fees effective July 2007 for immigrant and naturalization benefit applications by an average of 88 percent. Large numbers of applicants filed for benefits before the increase took effect, which contributed to a surge that exacerbated USCIS’s backlog of applications. In cases like this, transitional measures such as grandfather clauses or phasing in increases might help address concerns about the adverse effects of the abrupt imposition of a fee, while implementing the beneficiary-pays principle gradually. However, as is the case with exemptions, the benefits of transitional measures must be balanced with the likelihood of reduced efficiency and equity gains and increased administrative costs. Furthermore, delaying a fee increase may also have adverse effects on an agency’s operations. In some cases, new or increased user fees may also cause decreases in the value of privately owned assets. We have previously reported on how user fees can result in such capital losses, as well as ways of determining when, how much, and to whom compensation for these losses should be paid. Although the beneficiary-pays principle is a useful guideline for assigning costs, determining a program’s beneficiaries and the extent to which a program benefits users, the general public, or both is not usually clear cut. For example, in prior work we found that National Park Service (NPS) staff reported that they did not want to raise federal grazing fees assessed on ranchers, even though these fees were lower than fees charged by other government agencies and private landowners, in part because grazing not only benefits ranchers but also benefits parks—for example, by controlling vegetation. In another example, USDA food safety inspections benefit the meat and poultry industries as well as the general public: inspections improve consumer confidence in the safety of those food products and the companies can advertise their products as USDA inspected, which may enhance the perceived quality. The inspections also benefit the general public by preventing the spread of communicable diseases carried by meat and poultry products, but it is difficult to quantify that public health benefit and consequently the extent to which the program should be covered by user fees versus general revenues. Fees can be practical, equitable, and efficient only when the users can be identified and charged for the service or program. Sometimes, however, it may be difficult to identify specific users or to collect fees from them, making it difficult to follow the beneficiary-pays principle. NPS, which can identify and verify some users, also collects fees from air tour operators that fly over certain national park units. However, in prior work we found that because NPS could not verify air tour activity over the parks, it relied on operators to voluntarily report their air tours and pay the required fees. Some tour operators paid and some did not, resulting in inequities and less-than-owed fee collections. Fee collections should be sufficient to cover the intended portion of program costs over time. Although the costs of any particular program may rise or fall, there is a general concern that fees may not keep pace with increases in costs because of factors such as inflation. For example, in recent testimony we noted that revenues to support federal highway and transit funding are eroding in part because the federal motor fuel tax, which is set at the fixed amount of 18.4 cents per gallon, has not been increased since 1993. Therefore, the purchasing power of fuel tax revenues has eroded. To address these concerns, OMB Circular No. A-25 directs agencies to set fees as percentages of some appropriate base rather than fixed dollar amounts whenever possible. However, fees set at a percentage rate of some value (the basis) will not remain aligned with program costs if the value of the basis does not rise and fall in line with changes in the program costs. For example, in recent years the Harbor Maintenance Fee (HMF), which is assessed at a rate of 0.125 percent of the value of commercial cargo, has resulted in substantially higher collections than spending because the growth in the volume and value of commercial cargo has exceeded increases in harbor maintenance spending. As a result, HMF collections exceeded expenditures by over $506 million in fiscal year 2007. Thus, regardless of whether a fee is set at a flat dollar amount or a percentage rate, regular reviews and updates of the fee are necessary to ensure that the fee remains aligned with program costs (see final section of this guide, “Reviewing User Fees: Providing Information on Costs and Program Activities and Facilitating Stakeholder Support”). On the other hand, fee payers and other stakeholders may be concerned that, over time, the portion of program costs covered by general revenues will decline. This concern may be well founded; in prior work on fee- reliant agencies, we found that increased user fee collections sometimes appeared to have replaced appropriated funds. This substitution can be a particular concern when new or increased fees are assessed to augment total funding for a service or program. For example, part of the rationale for FDA’s Prescription Drug User Fee Act (PDUFA) fees was to increase FDA resources for—thereby decreasing the processing time of—new drug applications. To assuage fee payers’ concerns that fees might not be used to increase the level of an existing service—but instead simply be used as a substitute for funding from general revenues—a fee statute may provide a kind of maintenance of effort (MOE) requirement in terms of general revenues funding. For example, in any year, FDA may only collect and spend PDUFA fees when Congress has appropriated from general revenues a certain amount specifically for FDA new drug application reviews. Such provisions, however, can have unintended consequences. In prior work we reported that according to FDA officials the spending baseline for the drug review program reduced available resources for other activities, such as reviewing over-the-counter and generic products and inspecting medical product manufacturing facilities. Increased reliance on fees as a source of funding may lead to a misalignment between the beneficiaries of a program and the sources of funding for the program and can have significant implications for agencies. Assigning costs requires (1) determining how much a program costs and (2) determining how to assign program costs among different users. As the beneficiary-pays principle is useful in guiding decisions about how program costs are divided between the general public and users, it can also guide how program costs are assigned among users. Basing fees on the cost of providing the program or service from which a user benefits enhances equity, as measured by the beneficiary-pays principle, as each user pays for the cost of services actually used. As discussed above, fees set following the beneficiary-pays principle also generally promote economic efficiency, as users take into account the “price” of a service when deciding how much of the service to consume. To set fees so that total collections cover the intended share of program costs, a reliable accounting of total program cost is important. To obtain such an accounting, it is necessary to determine which activities and costs should be included and which should not. Unless the authorizing legislation specifies costs that should be included or excluded, agencies should follow OMB guidance. OMB Circulars No. A-25 and No. A-11 instruct agencies to include all direct and indirect costs when determining full cost, including but not limited to personnel costs, including salaries and benefits such as medical insurance and retirement; physical overhead; consulting; material and supply costs; utilities; insurance; travel; rents or imputed rents on land, buildings, and equipment; management and supervisory costs; costs of collecting and enforcing fees; research; establishment of standards and regulation; and imputed costs. In prior work we found inconsistent implementation of this guidance. Some fees designed to cover the full cost of a program include all direct and indirect costs, but others do not. The power marketing administrations, for example, include all direct and indirect costs—including the cost of employee retirement benefits paid by the Office of Personnel Management—when setting their electricity rates. On the other hand, in recent work, we found that USDA’s Animal and Plant Health Inspection Service (APHIS) did not include certain indirect and imputed costs when calculating the Agricultural Quarantine Inspection (AQI) fee rate. Fees should also be set and adjusted to cover the intended share of costs over time, which means agencies must project and consider future program costs. For example, in 2006 USDA’s Food Safety and Inspection Service set fee rates through fiscal year 2008 for its meat, poultry, and egg products overtime inspection services. The fee rates for each year included adjustments for inflation and employee pay raises, so that future fee collections were projected to grow with program costs. When more than one agency implements—and therefore incurs costs related to—a fee program, those agencies should work together to agree on a method for estimating future costs and collections. APHIS and CBP, for example, used different forecasting assumptions related to the AQI fees. In response to our recent work, the agencies now use common assumptions. Whether fee rates will be set using average cost or marginal cost is also an important consideration when setting fees. Setting fees at a rate equal to the marginal cost of providing the service or product to the user maximizes economic efficiency. In part because it is often difficult to measure marginal cost, fee rates are sometimes set based on average cost. The AQI fees are intended to cover total program costs; to set these fees, APHIS projects program costs for different inspection types (e.g., air passenger, commercial aircraft, and commercial vessels) and divides each by the total projected number of each type of payer. That is, each airline pays the same fee per arrival to cover the costs related to inspecting aircraft. When marginal costs are measurable but are low relative to the fixed costs of the program, setting the fee at marginal cost will lead to collections less than total costs. In these cases, users may be charged more than marginal costs or the program may be funded in part through general revenues. One option is to create a two-part fee consisting of (1) a flat fee to cover fixed costs and (2) a usage-based fee to cover marginal costs. For example, the marginal cost of providing electricity (i.e., operating power plants and maintaining transmission lines) is small compared with the costs of building power plants and transmission lines; thus, electricity consumers could be charged a flat monthly charge plus a charge that would vary based on their consumption. If a fee is to recover the costs associated with an agency program or service or some portion thereof, it is critical that agencies record, accumulate, and analyze timely and reliable data relating to those costs, consistent with applicable accounting standards. Many agencies, however, lack reliable cost data. For example, we previously reported that DHS’s U.S. Immigrations and Customs Enforcement lacked adequate cost data to determine the portion of costs related to international air passenger immigration inspections, a fee-funded activity. Because generating and maintaining reliable cost data can be expensive, agencies must consider the costs of implementing, maintaining, and using financial management systems when determining the level of cost detail they need. Recognizing this, OMB Circular No. A-25 notes that program cost should be determined or estimated from the best available records of the agency and that new cost accounting systems need not be established solely for this purpose. Still, unreliable cost information can skew fee-setting decisions, so management needs reliable cost information to ensure that user fees recover the intended share of costs. As such, each agency should determine the appropriate level of detail for its cost accounting processes and procedures. If the cost of providing a service varies for different types of users, the fee may vary (a user-specific fee) or be set at an average rate (a systemwide fee). All other things being equal, user-specific fees promote equity and economic efficiency because the amount of the fee is closely aligned with the cost of the service. Systemwide fees may be higher or lower than the actual cost of providing a service to certain types of users. As a result there may be cross-subsidies across users. For example, we recently reported that FAA’s current funding structure raises concerns about equity and efficiency because users pay more or less than the costs of the air traffic control services they receive and therefore may lack incentives to use the national airspace system as efficiently as possible. Because user- specific fees require agencies to track the costs of providing service to different users, these fees are often more costly to administer than systemwide fees. Fees charged to vessel operators for overtime immigration inspections are user specific. The fee is only assessed when the vessel operator or its agent requests an overtime inspection. The amount of the fee varies depending on the number and pay grade of the inspectors and the amount of time spent on the inspection. We recently reported that this structure increases the fee’s administrative costs. According to CBP estimates, the cost of processing and billing the fee was 26 percent of related collections in fiscal year 2007. In contrast, the commercial vessel AQI fee is a systemwide fee. Vessel owners/operators pay the $492 fee regardless of whether or not the ship is actually inspected by an agricultural specialist and regardless of the agricultural risk posed by the vessel. In managing these types of trade-offs between the benefits and drawbacks of user-specific versus systemwide fees, several factors may be important to consider. 1. The purpose of a program: Systemwide fees may promote a policy goal such as helping to support national systems. For example, despite variation in the amount of maintenance dredging needed at different ports, the HMF is imposed uniformly at all ports at which shipments are subject to the fee in order to support a national port system. This means that users of naturally deep draft ports that require little dredging (e.g., Seattle) in effect subsidize users of shallower and river ports (e.g., New Orleans). A user-specific fee may be more desirable if the fee is seen as a way to support individual entities or locations or when maximizing economic efficiency outweighs the desire to support a national system through the imposition of a uniform fee. 2. The amount of the fee: If the fee is small relative to other costs that a user faces, it may be less important to have a user-specific fee with different rates. For example, several ships’ agents we spoke with noted that carriers rarely question federal vessel inspection fees, in part because the fees are such a small part of a commercial vessel’s overall expenses that they do not affect business decisions. 3. The amount of cost variation among users: If there are numerous different groups of users and a small cost variation among them, the efficiency gains of a user-specific fee may be overwhelmed by the added administrative costs. Conversely, if a program has a relatively small number of user groups and the cost of providing the service to those groups differs significantly, then user-specific fees might be both beneficial and feasible. Some fees include provisions for exemptions, waivers, and caps to promote certain policy goals and these provisions affect how program costs are allocated among users. As discussed previously, exemptions can promote one kind of equity by factoring the users’ ability to pay into the fee rate formula. However, as with systemwide fees, such provisions may also increase cross-subsidies between users. Exemptions and caps may also raise equity and efficiency concerns. For example, shipments into certain ports are not subject to the HMF, which may make these ports less costly to use than ports that are subject to the HMF. Shippers may have an incentive to use a port that might otherwise not be the most cost-efficient port to use, so the HMF as designed may create competitive advantages and disadvantages among ports. Stakeholders at HMF ports argued that the exemption is inequitable and can diminish a port’s ability to compete. For example, officials at the port of Boston told us that they believe that one importer moved its operations from Boston to the port of Quonset/Davisville in Rhode Island where shipments are not subject to the HMF to avoid paying the fee. Similarly, officials from ports located near international borders reported that the HMF disadvantages them relative to nearby foreign ports. Seattle port authority officials consider the HMF to be a “punitive assessment” because they said it decreases Seattle’s competitiveness against nearby Canadian ports (which do not charge the fee). The officials noted that the port of Vancouver actively promotes itself as not charging the HMF and said this partly explains why the port of Vancouver is growing faster than the Seattle port. Reliably accounting for the costs and benefits associated with such provisions is important in order to ensure that these provisions are achieving the intended results. In fully-fee-funded programs, if some users are exempt from paying fees, total fee collections cannot cover total program costs unless other users pay a higher fee to cover the costs of the exempted users. For example, commercial and private vessels are both subject to agricultural quarantine inspections, but private vessels are exempt from the AQI fees. In prior work we found that the costs of these private vessel inspections are included in the AQI fee charged to commercial vessels. Thus commercial vessels are paying for the cost of inspecting private vessels. An alternative to cross-subsidization would be to pay for the costs of providing services to exempt entities through general revenues. In this way the policy goal is attained and the general public, rather than other users, make up the cost of exempt users or discounted fees. Finally, like user-specific fees, fee exemptions and caps can increase administrative costs to the agency because the agency must carefully track when fees are due and from whom rather than simply charging everyone. Commercial vessel operators are generally assessed a $437 customs inspection fee when they arrive at port, but the fee is capped at $5,955 per calendar year. This is approximately 13.6 payments. This means that CBP has to calculate the point at which the vessel has reached the cap and is no longer subject to the fee. We recently reported that the cap increases CBP’s administrative costs and the potential for errors. This issue was particularly problematic in 2007 because a fee increase took effect on April 1, 2007, so vessels arriving before and after that date paid two different rates. Since the fee cap applies to payments received within a calendar year, it was even more difficult for CBP to calculate the total amount paid and determine if a vessel had reached the cap. The primary challenge in determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs (see fig. 4). Fees can be collected (1) at the point of sale before the service is provided, as airline passenger fees are paid when a ticket is purchased; (2) at the point of service, as when visitors enter a national park; or (3) after the service has been provided, for example when the agency bills the user for a service, as with overtime vessel inspections. Collecting the fee at the point of sale or point of service may decrease administrative costs since billing becomes unnecessary. However, point-of-sale/point-of- service collections do not always ensure low administrative costs since other practices can considerably complicate a point-of-sale/service collections system. For example, commercial vessel customs inspection fees are collected by inspectors at the time of inspection, usually in the form of a check. We recently reported that because these collections are not automated, they are administratively costly. When an agency collects fees on the spot rather than billing for services (e.g., the national parks system), the agency may have less work to do in tracking who has paid and who has not, thus reducing administrative tasks associated with ensuring compliance. However, internal controls for fee collections are still necessary. In some cases, collecting the fee at the point of service would present challenges that make doing so impractical. For example, if CBP collected fees from international air passengers at the airport, as is the practice in some other countries, inspection wait times for passengers would likely increase. For some fees, users are billed for services. This may create additional administrative costs since agency billings for services provided can add an extra step to the process. In some instances agencies are able to reduce their cost of collecting fees by using electronic payments or lockboxes or enabling users to prepay their fees, thus reducing payments from many to perhaps one time per year. Commercial trucks entering the United States, for example, are subject to a $5.25 AQI fee, payable upon arrival. However, the owner or operator of the truck can prepay the AQI fee annually and receive a truck transponder that covers all entries for the calendar year, which enables CBP to inspect the truck and then wave the driver through, rather than taking the time to collect the fee at each crossing. This prepayment reduces the administrative costs for both the agency, which may collect an annual payment instead of payments for every inspection, and the payer, who can make one payment per year rather than paying at each crossing. In some cases, it makes sense for the agency to coordinate the collection or audit function with a third party. Specifically, when an entity or industry (e.g., shippers) is assessed multiple user fees there may be opportunities for one agency to collect on behalf of others. For example, HMF collections are used by the Corps for harbor operations and maintenance costs, but the fee is collected by CBP because CBP has the administrative structures in place to collect other fees and duties assessed on the value of imported goods. It is less costly for the government and payers of the fee for CBP to collect the fee as part of the formal entry process than it would be for the Corps or another entity to establish a new collections process. This cost saving occurs because CBP already values cargo for the assessment of duties so there is no duplication of effort. We recently reported that customs brokers with whom we spoke said that this system for collecting the HMF assessed on imported goods works well, is efficient, and imposes minimal administrative costs. It may also make sense for agencies to coordinate fee collections when multiple federal agencies administer similar programs. For example, the Bureau of Land Management (BLM) manages grazing programs operated on both BLM and Department of Energy lands. Similarly, consolidating the audit function of related fees within one agency or department can lessen the administrative costs of auditing them. For example, the audit function for the customs, immigration, and AQI user fee remittances by air carriers was consolidated under a memorandum of understanding between APHIS, the former U.S. Customs Service, and the former Immigration and Naturalization Service before the three related inspection functions were consolidated under CBP. In some instances, as when CBP collects the HMF on behalf of the Corps, the agency is compensated for its cost of collecting the fee. In some cases, a nonfederal entity such as a state government or private sector enterprise has an existing infrastructure that can collect the fees. Passenger inspection fees, for example, are collected by airlines and cruise lines along with ticket fares; the collections are then remitted to CBP. However, when a private party takes over the collection function, ensuring compliance may become more complicated, contributing to administrative costs. Agencies may use audits to monitor and enforce compliance with the requirement to remit fees. CBP audits airlines and cruise lines to ensure that they are collecting and remitting the inspection fees as required. There are a range of other tools that can encourage compliance in these situations, for example, bond requirements and rewards and penalties. However, we have previously reported that to be effective, rewards and penalties must meet specific criteria, that is, they must provide optimal incentives and must correspond with performance. Congress determines to what extent an agency may access (obligate and spend) fee collections. On the one hand, when the use of fee collections is not dedicated to the related program or agency, Congress has greater flexibility to make decisions about allocating resources and play an active oversight role. While some maintain that the merits of a program, rather than its ability to generate fees, should influence federal funding decisions, dedicating fee collections to the program that generated the fee and giving the agency authority to obligate and expend the fees readily and decide how the collections will be used enhance the agency’s flexibility and ability to respond quickly to changing conditions. Some have suggested that agencies will have less motivation to collect and users to pay if the fees are not credited to the activity that generated the fee. The extent to which this is the case is unclear. Further, this may be dealt with by engaging stakeholders—both in and out of government—to help improve their understanding of the purpose and design of the fee. In designing a fee, Congress has various mechanisms it can use to strike a balance between flexibility and oversight (see fig. 5). Agency use of fee collections is determined by Congress. If fee collections must be annually appropriated to an agency before the agency may obligate and expend such collections, an agency has less independence in using them than fees that are permanently appropriated. Requiring an appropriation increases opportunities for Congressional oversight on a regular basis. Expenditures from the Harbor Maintenance Trust Fund (HMTF), for example, are subject to annual appropriation, enabling Congress to annually determine the level of federal spending on harbor maintenance rather than automatically equating spending with total fee collections. Although the HMTF had a balance of almost $4 billion at the end of fiscal year 2007, the Corps obligated $798 million and $910 million from the fund in fiscal years 2006 and 2007, respectively. The level of spending from the HMTF reflects Congressional priorities, possibly including reduction of the overall federal budget deficit. Some stakeholders said, however, that there is a backlog of harbor maintenance needs and that the misalignment between the amount of fee collections and expenditures undermines the credibility of the fee. Conversely, a fee may be designed to give the agency authority to use collections without additional Congressional action; this design may enable the agency to respond more quickly to customers or to changing conditions. For example, the authorizing statute makes USDA Agricultural Marketing Services (AMS) fees directly available to the agency without further Congressional action. A 1999 USDA report on user fees noted that because AMS’s services are voluntary and because the agency is financed largely through user fees, AMS has a strong incentive to develop services for which the industry is willing to pay. The report also asserts that if AMS did not retain these fees, innovations in service delivery would generate no financial return for the agency. Further, the report stated that expanded agency discretion for the use of fee collections will have the greatest effect in agencies with substantial discretion for adjusting the types and amounts of services they provide. Creating a structure for oversight becomes even more important when agency discretion to use fee collections is expanded. Permanent authority for fee collections also increases agency flexibility. With permanent authority, funds are available until expended, which enables agencies to carry forward unexpended collections to subsequent years and match fee collections to average program costs over more than 1 year. Such carryovers are one way agencies can establish reserve accounts, that is, revenue to sustain operations in the event of a sharp downturn in collections. For programs in which fees are expected to cover program costs and program costs do not necessarily decline with a drop in fee collections, a reserve is important. For example, the AQI fee statute gives APHIS permanent authority to use the collected fees and APHIS maintains a reserve in case of emergency. According to APHIS, the reserve is necessary because the AQI program is funded solely through user fee collections. However, with permanent spending authority, agencies may have less incentive to limit total collections to total costs. Whether a fee program is designated as mandatory or discretionary within the budget context may affect the federal budget process more broadly. Mandatory programs are subject to “pay-as-you-go” (PAYGO) rules if they are in effect. Under such budget rules, increases in mandatory spending or decreases in revenue must be deficit neutral, that is, they must be offset by a decrease in mandatory spending or an increase in revenue. For example, if the rate of the HMF, which is classified as a mandatory governmental receipt, were reduced and total collections decreased, Congress would have to offset the lost revenues to comply with PAYGO rules. This requirement has in the past led to situations in which extensions of expiring fees are used to offset increases in unrelated programs. Programs that are classified as discretionary are affected by applicable discretionary spending limits under the Concurrent Budget Resolution. Because some fees are classified as discretionary spending, they must be considered in discretionary spending calculations. Whether fees are designed so that collections are received directly or on a reimbursement basis also affects agency flexibility. The former offers the advantage of making funds immediately available to an agency, increasing its flexibility to plan and respond to changing conditions. The AQI fee collections are shared between CBP and APHIS, but only APHIS has authority to use its portion of the collections directly. According to APHIS, having the funds automatically available is useful because it facilitates the ability to keep pace with workload demands and respond quickly to unplanned needs. CBP’s portion of the AQI fee collections—as well as its portion of the Immigration User Fee—is set up as a “reimbursable account,” wherein the agency must spend other appropriations and apply for reimbursement. This design means it takes longer for CBP to get fee collections than for APHIS. According to CBP, this “reimbursable” arrangement results in less flexibility and a greater administrative burden. Similarly, issues may occur when a program has large up-front costs (e.g., to develop an information technology system or purchase a capital asset). Fees collected over subsequent years to cover those costs would need to be either transferred to the U.S. Treasury’s general fund or “saved” for future capital expenditures, depending on the statutory authority, because they cannot be used to reimburse appropriations made in a prior fiscal year. How broadly or narrowly Congress defines the authorized uses for the fee affects agency flexibility. For example, the AQI fee statute makes the fee collections available to cover the costs of providing agricultural quarantine inspection services and administrative costs related to the fee. The customs inspection fees, however, are only available to reimburse appropriations for a limited, prioritized set of activities. Congress may also limit agency flexibility in the use of the fees by directing the agency to use the fees at the location where the fees were collected. NPS had a now- expired pilot program under which 80 percent of fee collections were retained and used by the park where they were collected. Statutes that narrowly limit how fees may be used could reduce Congress’s and an agency’s flexibility in making resource decisions and reduce the agency’s ability to adjust to changing priorities or program needs. The previously referenced NPS program is an example. We reported that restricting use of the 80 percent of fee collections from the NPS program to the sites at which they were collected created funding imbalances. This restriction resulted in some high-revenue sites having more revenue than needed to meet priority needs and contributed to a backlog of priority needs at lower-revenue sites. Restrictions on use of fees may fail to keep pace with program needs over time as activities that support the service change. This can result in authorized activities that are misaligned with actual service or program activities. We recently reported, for example, that CBP officials said that since the terrorist attacks of September 11, 2001, the merchandise processing program has a greater focus on security than was the case in previous years. Although the increase is understandable, it has led to a situation in which activities associated with merchandise processing, including screening and inspecting conveyances and inspecting vessels and containers, are not reimbursable by the Merchandise Processing Fee (MPF), even though CBP views these activities as part of the merchandise processing service, the cost of which is offset by MPF collections. Recalling the earlier discussion in this guide about public versus private benefits, if it is determined that a portion of merchandise processing activities primarily relates to national security—benefits that primarily accrue to the general public—a case could also be made that the corresponding costs be funded by general revenues. Finally, although narrowing the authorized uses of a fee in statute may facilitate Congressional oversight, it can also increase agency administrative costs. Ensuring proper use of fee collections may require collecting more detailed cost data at a greater cost to the agency. For example, we recently reported that CBP must track the time CBP officers spend on authorized activities for several of its inspection fees. To help address a concern that timekeeping was taking time away from officers’ inspection duties, CBP implemented a standard process for tracking time in early 2007. The process includes estimating the amount of time officers conducting different functions (e.g., vessel or passenger inspections) spend on different activities, including customs, immigration, and agricultural quarantine inspections. These challenges mean that statutory fee authorities that make fee collections available for obligation and expenditure for limited purposes may require more frequent review and updating for the authorized purposes to remain aligned with program needs. By providing program information to agencies, stakeholders, and Congress, reviews can improve transparency, help ensure that fees remain aligned with program costs and activities, increase awareness of the costs of the federal program, and therefore increase incentives to reduce costs where possible (see fig. 6). Reviews can also provide an opportunity to solicit stakeholder input on the fee and the programs it supports. Fees that are not reviewed and adjusted regularly run the risk of undercharging or overcharging users, raising equity, efficiency, and revenue adequacy concerns. Fee rates may be adjusted by the agency (i.e., by regulation) or by Congress (i.e., by legislation) depending on the statute authorizing a fee. When fees are adjusted by an agency through the regulatory process, fees may be updated more frequently than fees adjusted by legislation and this may improve the ability to keep fee collections aligned with changes in program costs. APHIS, for example, periodically updates the AQI fees through the regulatory process to ensure that collections are aligned with the costs of the program. However, in past reviews stakeholders have expressed distrust and concern about fee rates set by regulation because agencies that retain fee collections may have incentives to artificially inflate the costs of the user fee program. This risk may be reduced, and tools for Congressional and stakeholder oversight enhanced, if the agency clearly reports its methods for setting the fee, including an accounting of program costs and the assumptions it uses to project future program costs and fee collections. On the other hand, when fees are specified and adjusted by legislation, Congress has more tools with which to play an active oversight role, but the fees may not be updated as frequently because of competing legislative priorities and other factors. For example, a fee for registering aircraft with FAA has been an insignificant amount since the 1960s. Fees set by statute can, of course, be regularly adjusted. Such Congressional reviews and updates may be triggered in several ways, including a sunset provision. FDA prescription drug fees, for example, are authorized for 5 years at a time. A sunset provision, however, may not guarantee that a fee will be adjusted to reflect changes in program costs. Although the MPF includes a sunset provision, the maximum and minimum fees, which are set in legislation, have not been adjusted since 1995. Congress may provide strict guidelines within which an agency may set fees through a regulatory process that may depend on further Congressional action. For example, the 2007 prescription drug user fee authorizing legislation set base fee revenue amounts for fiscal years 2008 through 2012. For each year after 2008, the law permits FDA to adjust the base fee revenue amounts to account for inflation and workload, and to set fees annually through the regulatory process so that total projected fee collections will approximate the revenue levels set in statute. To ensure that Congress, stakeholders, and agencies have complete information about changing program costs and whether authorized activities align with program activities, agencies must substantively review and report on their fees on a regular basis. When a fee’s authorizing statute does not specify review and reporting requirements, and for fees that derive their statutory authority from IOAA, the Chief Financial Officers (CFO) Act of 1990 and OMB Circular No. A-25 provide for biennial fee reviews that include recommendations about adjustments to the fees, as appropriate. The regulatory process is also used to provide information on fees to Congress and stakeholders and to solicit stakeholder input. When an agency has authority to adjust a fee through the regulatory process, it should make substantive information about recent and projected program costs and fee collections available to the public through notices in the Federal Register. For example, in 2004 APHIS set the AQI fee rates for fiscal years 2005 through 2010. It published the new fee rates, along with descriptions of the costs of the program, projected program costs and fee collections, and the assumptions it used to make those projections, in the Federal Register. Similarly, USCIS notified the public of proposed fee adjustments in the Federal Register. The notice provided information on the program’s workload and the agency’s methodology for determining program costs, including a list of program activities, how it accounts for the cost of providing services to users exempt from the fees, and its assumptions about inflation. For fees set in regulation, agencies must solicit stakeholder input by requesting comments in the Federal Register. This provides an opportunity for stakeholders to comment on proposed regulatory changes—via written communication, not face-to-face conversations. As the passenger facility charge user fee was implemented, for example, stakeholders provided comments regarding the fee, many of which ultimately were addressed in the final design of the fee. Nevertheless, we previously reported that nonfederal stakeholders have said that relying solely on notice and comment through the Federal Register is insufficient for obtaining stakeholder input. In the past, APHIS solicited stakeholder comments as it adjusted the AQI fee, but it updated the fee using an interim final rule that took effect prior to the end of the comment period. Although an interim final rule does not preclude an agency from making changes to the final rule, stakeholders said that APHIS did not take their comments on the AQI fees into account because comments were not solicited before the change was implemented and because no changes to the fee were made during final rule making. Based on guidance from OMB, APHIS is no longer updating its fees using interim final rules. Whatever the means for disseminating information about the fee, if the review is not comprehensive, it may not provide sufficient information to assess whether a fee needs to be changed. For example, we recently reported that the information on the MPF in CBP’s biennial fee review was insufficient to either project fee collections or to provide assurance that the amount of the fee was aligned with program costs. This was the case because the review lacked projections of future MPF collections, the effects of exemptions, and changes in import demographics. We noted that without this information, CBP is not able to either determine if the amount, structure, or authorized uses of the fee should be changed or comment on the need for any changes to the fee statute. CBP’s review noted that a detailed analysis of the current and estimated future effects of MPF exemptions, changes in import demographics, and a reliable cost estimate for processing merchandise are needed. Transparent processes for reviewing and updating fees help assure payers and other stakeholders that fees are set fairly and accurately and are spent on the programs and activities Congress intended. Also, because user fees represent a charge for a service or benefit received from a specific government program, payers may expect a tight link between payments and the cost of providing services and have expectations about the quality of the related service. Effectively communicating with stakeholders involves sharing relevant analysis and information as well as providing opportunities for stakeholder input. In past user fee reviews, we have reported that agencies that do not communicate with stakeholders miss opportunities for meaningful feedback that could affect the outcome of changes in fees and program implementation. Providing for stakeholder input may affect their support for and acceptance of the fee, and may contribute to improved understanding about how the fees work and what activities they may fund. Payers may also expect to participate in decisions about the provision of the service, including its form or quality. For example, in prior work on a proposed user fee for FAA services, we found that some stakeholders stated that if user fees are adopted, users should have more input into FAA’s operations, citing the “user pays, user says” concept. Soliciting stakeholder input is particularly important because government is often a monopoly supplier—that is, alternatives are limited so some fees are not fully voluntary—users cannot “vote with their dollars” as freely as they can in a competitive private market. Agencies can accommodate payers’ and stakeholders’ input in various ways. The authorizing legislation of some but not all fees stipulates that the agency solicit stakeholder input in certain forms, including an advisory committee. The immigration inspection fees statute, for example, directed the Attorney General to establish an advisory committee, whose membership consists of entities subject to the fees, to advise the agency on the performance of the inspectional services and the level of fees. As we recently reported, the legislation that authorized the HMF did not establish an HMF advisory committee, although it did establish an advisory committee for a similar user-funded program for new work construction and rehabilitation on inland waterways. PDUFA requires FDA to work with stakeholders, including representatives from consumer, patient, and health provider groups and the pharmaceutical and biotechnology industries, to develop performance goals for the FDA prescription drug review program. It is important, however, that actions are taken to ensure that fee programs do not become solely beholden to stakeholder interests. Where Congress and fee payers agree on priorities, there may be no conflict between oversight and accountability to Congress on the one hand and accountability to fee payers on the other. Where Congressional and fee payer priorities differ, however, the agency may be under greater pressure to satisfy the demands of fee payers, particularly when a fee is voluntary. For example, although the FDA performance goals may be consistent with PDUFA’s goal to improve FDA application processing times for new prescription drugs, a Congressional Research Service report on the fees cited some critics as saying that giving the pharmaceutical industry a role in setting program performance goals creates conflicts of interest and gives the industry too much influence over FDA actions. We previously identified several promising practices for forming and managing federal advisory committees that could better ensure that committees are, and are perceived as being, independent and balanced. These practices include (1) obtaining nominations for committees from the public, (2) using clearly defined processes to obtain and review pertinent information on potential members regarding potential conflicts of interest and points of view, and (3) prescreening prospective members using a structured interview. The normative principles outlined in this guide are meant to present a framework for considering user fee design. Any user fee design embodies trade-offs among equity, efficiency, revenue adequacy, and administrative burden. Focusing only on the pros and cons of any single design element could make it difficult to achieve consensus on a fee’s design. Instead, policymakers will ultimately need to balance the relative importance they place on each of these criteria and focus on the overall fee design. There are always exceptions to any rule, however; as such, there will undoubtedly be cases in which policy considerations outweigh normative design principles. Nevertheless, the criteria, questions, and illustrative examples presented in this guide present real issues that policymakers must face when designing or redesigning user fees. See appendix I for a summary of key questions to consider. We provided a draft of this guide to the Director of the Office of Management and Budget and the Secretaries of Homeland Security, Defense, and Agriculture for review. We received technical comments from each agency, which we incorporated as appropriate. We are sending copies of this guide to interested Congressional committees as well as the Director of the Office of Management and Budget and the Secretaries of Homeland Security, Defense, and Agriculture. In addition, this guide 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 guide, please contact me at (202) 512-9142 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this guide. GAO staff who made major contributions to this guide are listed in appendix II. (We note that some of these questions may overlap.) 1. To what extent does the program benefit the general public and identifiable users? a. Does use of the program by certain users, or for certain types of uses, provide a public benefit, for example, by advancing a public policy goal? b. What is the users’ ability to pay? c. To the extent that the fees are used to replace funding by general revenues, what is the impact on the distribution of the burden of financing the program? d. What would be the impact of a fee on users’ competitiveness with others that would not be subject to the fee? e. Is a similar service provided by the private sector? If so: Will private producers be subject to unfair competition if the fee is not set to recover the full costs of the service? Should their charges be a reference point in setting fees? f. For programs that have not been paid for by fees in the past, has the value of the program been capitalized into private assets? If so: Could transitional measures be used to address these concerns? 2. How will the fee be linked to the cost? a. Does the agency have timely and reliable cost data to link the fee to program costs? b. Will the fee recover full or partial costs? c. Will the fee structure include exemptions or reduced fees? d. Will the fee be set as a percentage rate or as a fixed dollar amount? e. If the fee varies, will fee minimum amount, maximum amount, or both be set? f. Will the fee structure be user-specific or systemwide? Is the amount of the fee small or large relative to other costs that the user faces? Are there numerous different groups of users? Is the cost variation among the different groups of users large or small? g. Does the program have high fixed costs? Is a two-part fee structure, with a flat rate plus a fee based on usage, appropriate? 3. How will the fee be structured to cover the intended share of program costs over time? a. Are fee collections projected to change over time in relation to the cost of the program due, for example, to inflation? b. To what degree will short-term fluctuations in economic activity and other factors affect the level of fee collections? c. Will the fee design include a maintenance of effort requirement? 1. What mechanisms are available to ensure payment and compliance with requirements while minimizing administrative costs? a. To what extent do payment and compliance mechanisms impose administrative costs on the agency, the payers, or both? b. Do rewards and penalties for compliance correspond to performance? 2. Is there an agency or other entity that already collects or audits fees from the users? a. How will compatible policies and procedures and regular communication be established? b. How does coordination affect the administrative costs of fee collection for the agency and payers? c. Will collection by another entity affect compliance with fees? 1. What degree of access will the agency have to collected fees? a. Will the fees directly support the related program or agency or be deposited to the general fund of the U.S. Treasury? b. Will agency access to fees be subject to Congressional appropriation? c. Will the budget execution of fee collections be through reimbursement, or will the agency receive fee collections directly? d. Will the amount of spending be tied to the amount of collections? e. Will the fee be categorized as mandatory or discretionary? 2. How broadly or narrowly will the activities for which fee collections can be used be defined? 1. Will the fee be updated through legislation or by agency regulation? 2. How frequently will fees be reviewed and updated? a. Will legislation include a sunset provision to trigger fee updates? b. Will legislation direct the agency to submit regular fee reviews to Congress, different from the biennial fee review required by the Chief Financial Officers Act of 1990? 3. What mechanisms will be used to gather stakeholder input? a. Will the agency establish an advisory committee? b. Will proposed changes to the fees be published for comment in the Federal Register? c. What safeguards will be used to prevent the agency from becoming beholden to fee payers/stakeholders? Jacqueline M. Nowicki (Assistant Director) and Susan E.M. Etzel managed this assignment. Jessica Nierenberg, Kathleen Padulchick, and Amy Rosewarne made key contributions to this guide. Jay Cherlow, Denise Fantone, Chelsa Gurkin, Terrance N. Horner, Susan Offutt, Alessandra Rivera, and Jack Warner also provided assistance. In addition, Pedro Briones, Carlos Diz, and Sheila Rajabiun provided legal support, and Donna Miller developed the guide’s graphics.

The federal government will need to make the most of its resources to meet the emerging challenges of the 21st century. As new priorities emerge, policymakers have demonstrated interest in user fees as a means of financing new and existing services. User fees can be designed to reduce the burden on taxpayers to finance the portions of activities that provide benefits to identifiable users above and beyond what is normally provided to the public. By charging the costs of those programs or activities to beneficiaries, user fees can also promote economic efficiency and equity. However, to achieve these goals, user fees must be well designed. GAO was asked to study how user fee design characteristics may influence the effectiveness of user fees. Specifically, GAO examined how the four key design and implementation characteristics of user fees--how fees are set, collected, used, and reviewed--may affect the economic efficiency, equity, revenue adequacy, and administrative burden of cost-based fees. GAO reviewed economic and policy literature on federal and nonfederal user fees, including prior GAO work, and used relevant case examples to illustrate different types of design elements and the impacts they may have. Setting user fees according to the beneficiary-pays principle can promote equity and economic efficiency. For cost-based fees, the extent to which a program provides benefits to the general public versus users and the cost of providing those benefits should, theoretically, guide how much of total program costs are paid for by user fees and the amount each user pays (see figure). Although this principle provides a useful guideline for setting fees, strictly following the principle is not always desirable or practical. The primary challenge of determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs. In some cases, the collection systems of another agency or a nonfederal entity, such as a private sector enterprise, may be leveraged, as when the airlines collect passenger inspection fees. Determining how fees will be used is a balancing act between Congressional oversight and agency flexibility. Congress gives agencies various degrees of access to collected fees. For example, fees may be dedicated to the related program or may instead be deposited to the general fund of the U.S. Treasury and not used specifically for the related program or agency. In addition, fee collections may be subject to appropriation or obligation limits, which increase opportunity for oversight but may limit agencies' ability to quickly respond to changing conditions. Agencies must substantively review their fees on a regular basis to ensure that they, Congress, and stakeholders have complete information. Reviews provide information on whether the fee rates and authorized activities are aligned with actual program costs and activities, may provide opportunities for stakeholder input, and can help promote understanding and acceptance of the fee.

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In school year 2009-2010, the District’s school system enrolled more than 72,300 students and was comprised of 58 local educational agencies (LEA). These included DCPS, the largest LEA with 129 schools, and 57 public charter schools. D.C.’s public charter schools act in most respects as independent and autonomous LEAs, some of which consist of more than one school location. The number of children attending public charter schools in the District has increased in recent years, with about 38 percent of the District’s children attending these schools in the 2009-2010 school year. D.C. charter schools are independent of traditional public schools and are authorized by the Public Charter School Board (PCSB), whose members are appointed by the District Mayor. The PCSB evaluates the schools’ academic performance and fiscal management, as well as their adherence to local and federal education laws, and has the authority to grant and revoke a school’s charter. D.C. public charter schools must independently lease or purchase school buildings for their use and, as previously reported by GAO, have consistently encountered problems obtaining cost effective and appropriate facilities. The D.C. Council passed the Public Education Reform Amendment Act of 2007 (Reform Act) in response to persistent challenges facing the school system. This act significantly altered the governance of the D.C. public schools by transferring the day-to-day management of the public schools from the Board of Education to the Mayor. It also created OSSE to serve in the same capacity as a state education agency (SEA). Effective October 1, 2007, DCPS transitioned its responsibilities for all SEA functions to OSSE. OSSE now fulfills the functions of an SEA under federal law, including grant-making, oversight, and maintaining standards, assessments, and federal accountability requirements for elementary and secondary education. OSSE performs these functions for both traditional public and public charter schools throughout D.C. (see figure 1). Both the President and Congress may propose financial assistance to the District in the form of special federal payments in support of specific activities or priorities. Upon being appropriated by Congress, federal payments are provided directly to D.C. agencies from the federal government and are subject to the requirements of the statutory appropriations language. Congress appropriated federal payments for school improvement in the District every fiscal year from 2004 to 2009 to the state education office (now OSSE) to expand D.C. public charter schools and to DCPS to improve public education in the District. During these years, about $190 million in federal payments were provided for these purposes (see table 1). With the exception of 2005, Congress has generally not included statutory language that offers additional specificity on the use of funds. Occasionally, committee reports accompanying the D.C. appropriations acts have stated the committee’s instructions as to the purpose and manner in which the funds should be used. These reports generally list projects and designate amounts for the expansion and improvement of public charter schools; committee reports have not consistently done this for payments to DCPS. The statutory language generally has not specified how or whether these offices should report on the use of the funds. The District’s Office of the Chief Financial Officer (OCFO) uses SOAR t budget and disburse federal payment funds in accordance with annual spending plans created by OSSE and DCPS. These spending plans outline how the agencies will use the funds, including the amounts to be available for specific initiatives or program offices. The agencies’ financial officers report to the District’s OCFO and monitor the financial activities of thei respective agencies. Within OSSE, the Office of Public Charter Schoo Financing and Support (OPCSFS), created in 2003, manages several federally funded programs that provide funding to charter schools for facility financing and grant programs to improve public charter school quality, including federal payments for these purposes. It also provides est technical assistance for grants and supports the dissemination of b practices and innovation at D.C. public charter schools. At DCPS, priorities regarding the use of federal payments are established and managed through the Chancellor’s office, which allocates funds to applicable program offices that implement various academic initiativ For those payments that fund contracts, program offices coordinate procurement activities with the contracting office which has the authori to enter into, administer, and terminate contracts. The program office monitor an awarded. es. d document contractor performance once the contract is According to annual independent audits, OSSE and DCPS have consistently had problems managing grants and contracts. These audits have identified, among other things, internal control deficiencies related to federal grants management at OSSE and procurement practices at DCPS. For example, the District’s fiscal year 2008 Single Audit found that OS SE had a total of 24 material weaknesses regarding internal control over compliance with federal grant program requirements and cash management. Also, an independent review by BDO Seidman, LLP, of DCPS’s internal controls during that time reported weaknesses related to insufficient procurement documentation and grants management. According to D.C.’s independent auditor, because its reviews likely included federal payment expenditures, their findings could also be relevant to these payments. Because of these and other findings, the U.S. Department of Education designated OSSE as a “high risk” grantee in 2007, when OSSE took over responsibility for the District’s education programs. While OSSE reports having taken corrective actions to address many of the longstanding financial, grants management, and program compliance issues that have plagued the D.C. public school system, the U.S. Department of Education has maintained a high risk designation for OSSE. Of the nearly $85 million in federal payment funds designated by Congress for the District’s public charter schools, OSSE has used approximately 77 percent—about $65 million—of these payments to help finance charter school facilities (see figure 2). OSSE has allocated approximately $17 million for other initiatives to improve the quality of public charter school education, such as supplemental education (e.g. a college preparatory program that included summer enrichment programs and standardized test preparation), and for other activities to address public charter school needs. OSSE also used nearly $1.5 million for administrative purposes and the remaining funds on other activities that included a truancy center and data collection efforts. OSSE has used roughly $65 million of federal payments to award more than 80 grants and loans to help public charter schools build, improve, lease, or purchase facilities (see table 2). According to OSSE, public charter schools often face challenges in funding facilities-related projects. Despite receiving an annual per pupil facility allowance to help pay for rent or mortgage and other facilities’ costs, public charter schools often need to supplement this with other sources of funding. Schools frequently need additional financing to purchase, renovate, or build facilities; to explore facility and financing options; and to make facility improvements. OSSE has funded various grants to not only improve school facilities but to also simultaneously meet other District needs such as creating community partnerships, revitalizing neighborhoods, and promoting the use of public facilities. The facilities projects that grantees, such as charter schools and nonprofit organizations, undertook range from building new campuses to conducting overdue maintenance on heating and cooling systems to updating security equipment and technology systems. For example, a public charter school that is a public facilities grantee used funds to help finance renovations and upgrades of a former D.C. public school to expand the number of students the school could serve. Among other things, the grantee updated mechanical, electrical, and plumbing systems; repaired roofing; replaced windows; and constructed a new gymnasium. Another public charter school that is a City Build grantee, received funds from OSSE to help build new classrooms so that it could expand the grade-levels that it serves, build vocational classrooms such as a barber shop, and create staff offices. OSSE allocated almost $17 million to award a range of grants on quality school initiatives or unmet needs (see table 3). These projects cut across several areas focused on supplemental education activities—which are activities that are provided in addition to those that occur during the course of the typical school day—and activities conducted during the school day to enrich students’ instruction. For example, between 2005 and 2008, OSSE awarded 41 incentive award grants to help schools enhance, improve, or implement an innovative program that would improve student learning and achievement or to start or expand their physical education programs. Some of the projects that schools undertook with this grant included the expansion of a reading buddies literacy volunteer program, a string instrument music program, and several physical education initiatives to address obesity. OSSE has also funded grants to help students prepare for and improve their access to college. For example, as directed in the conference report accompanying the District’s 2005 appropriations act, OSSE provided funding to the Educational Advancement Alliance to implement a college preparatory program. This program aimed to assist 9th through 12th graders with course enrollment, precollege advising, financial aid counseling, test preparation, college application completion, and career exploration and leadership development. Between 2004 and 2009, OSSE spent about $2.5 million to administer federal payment programs and undertake other projects. Specifically, OSSE allocated about $1.5 million for administration of federal payment programs, according to data provided by OSSE. OSSE funded several other projects such as a review of Medicaid billing policies and potential practices to help ensure that public charter schools received appropriate Medicaid reimbursement. OSSE also funded a data collection and analysis project to review public charter school data collection systems, coordinate data collection to ensure the systems are compatible with the entities that need to use them (e.g., the LEA, SEA, and charter school authorizers), and develop assessments to track student performance. According to OSSE officials, OSSE employs a range of activities to monitor public charter schools and other entities that receive grants funded by federal payments (federal payment grantees), but has limited written policies and procedures for conducting monitoring activities. OSSE typically outlines the monitoring activities it will employ in the request for grant applications and includes specific time frames for these activities and deliverables in grant agreements. In establishing their approach, OSSE officials stated that they try to balance OSSE’s monitoring functions with those of other organizations, such as PCSB, so they do not overburden schools with reporting requirements. Most often, these activities include reviewing financial and narrative performance reports that grantees must submit, reviewing 100 percent of all expenditures prior to providing money to grantees, conducting site visits, and in some instances auditing the grantee’s financial statements. To inform its monitoring process, OSSE officials told us that it also conducts a risk analysis based on the award amount and other information that the office reviews, such as a grantee’s independent audit results, PCSB reviews, and lender information. OSSE indicated that since 2007, it has implemented several operational improvements to monitor the use of federal payment funds. For example, OSSE also developed a document that outlines questions that staff should ask grantees and acceptable evidence the staff should review as part of their monitoring. However, we found OSSE lacks documented procedures on how staff should carry out and maintain records of these activities, including how to determine the level of risk based on the information from others’ reviews, and relies on more experienced staff to provide guidance and training. According to the Director of OPCSFS, staff generally should maintain documentation of their monitoring activities, such as grantee reports, in a grantee’s file. However, OPCSFS does not have written procedures or guidance on what should be maintained in the grantee files. The Director also stated that he would like to create a standardized file management process. According to the Director of OPCSFS, one of the main components of OSSE’s monitoring process is the review of invoices prior to reimbursing grantees for expenditures. OSSE developed a standardized form that grantees are to submit with invoices for staff to review prior to reimbursement. The files we reviewed included evidence that grantees submitted and staff reviewed the required reimbursement forms and invoices. According to the Director, the reimbursement process provides the opportunity for an extra level of monitoring in that OSSE compares expenditures with the intended purpose of the grant and approves or denies reimbursement based on this assessment. OSSE staff did not consistently document their collection and review of grantee narrative and financial reports. According to an OSSE official, these reports are used to help OSSE monitor grantees’ use of funds and their impact. Less than one-third of the files we reviewed contained all of the reports that were required during the grant award period, and one- third of the files had no reports (see figure 3). In instances in which files did not include all of the reports, the Director indicated that this may be because the grantee did not submit the reports or the staff responsible for monitoring the grantee did not put the report in the file. Of the files that did contain reports, several were submitted late—ranging from a couple of days to more than 3 months. Further, the files did not consistently have evidence that staff followed-up to obtain the reports. When there was evidence of staff follow-up, it was sometimes not until months after a report was due. For example, two files that had no reports included notices to grant recipients requesting that they submit final performance reports since they had been reimbursed for the amount of the grant award. An OSSE official stated that OSSE may withhold further payments on grants when grantees have failed to provide regular reports or other required documentation, but we saw no indication in the files that this happened. The files we reviewed also rarely had evidence that staff conducted site visits. An OPCSFS official told us that while the office conducts site visits “as necessary,” staff generally try to visit a school at least once during the grant award period. During these site visits, OSSE staff may interview school officials, review the school’s accounting practices, and request documentation on a program’s performance, among other things. We only found evidence of four site visits for the 30 files we reviewed. OSSE found that two of the schools visited needed to take corrective actions. Specifically, one school did not have adequate tools to measure the impact of the program as outlined in its grant agreement and the other did not maintain proper contractor records. According to the files, OSSE followed up with both schools to ensure that they were addressing the issues identified during the site visits. According to the expenditure data D.C. provided, DCPS has used its $105 million in federal payments for school improvement since 2004 for a variety of purposes—ranging from summer school programs to staff incentive pay. However, a lack of available information describing programs or initiatives funded with federal payments prior to 2009 precludes a full identification of the use of these funds. DCPS officials provided spending plans and other programmatic information that described program goals, objectives, activities, and outcomes related to DCPS’s use of federal payments since 2009; however, they could not provide similar information for prior years. DCPS officials stated that they searched for documentation that may have been created by the prior administration, including spending plans and guidance for 2007 and 2008, but were unable to recover any documentation that prior administrations may have developed or used. In 2009, under the current administration, DCPS used $40 million in federal payments primarily for supplemental education programs, staff incentive pay, and staff salaries, based on expenditure data (see figure 4). According to DCPS officials, it currently funds activities aligned with DCPS’s 5-year strategic plan and district-wide priorities designed to increase student achievement. Some of these funds were provided directly to schools, while others supported school administration functions within DCPS. These funding priorities are outlined in spending plans that guide the budgeting process and are submitted to Congress. Staff incentive pay. DCPS set aside almost $10 million of federal payments in 2009 to provide merit-based awards to eligible teachers and staff through a new assessment system called “IMPACT” when a contract agreement was reached with the Washington Teachers’ Union. Implemented in the 2009-2010 school year, the IMPACT system rates teachers and noninstructional staff, such as guidance counselors and custodians, on a combination of factors to assess and provide feedback on performance. For example, teachers are assessed on, among other things, the impact they and the school have on students’ learning over the course of the year, classroom observations, and commitment to the school community. Counselors, meanwhile, are assessed on DCPS counseling standards and commitment to the school community. Staff salaries. About $5.9 million was used to pay staff salaries and benefits distributed to schools through DCPS’s Comprehensive Staffing Model. According to DCPS, this model was first instituted in the 2008-2009 school year and is designed to ensure that all schools, regardless of size or location, offer a full complement of programs, including art, music, and physical education classes. It also helps schools provide services, such as social workers and psychologists, to support students’ nonacademic needs. The model distributes resources on a formula basis across the school district, and in 2009, according to DCPS, federal payment funds helped to hire and retain staff at 89 schools. Professional development. DCPS spent $5.7 million on teacher and principal development activities. Funds supported the Master Educator Program, whereby experienced educators traveled from school to school evaluating teachers and providing support as part of the IMPACT performance system. According to DCPS, educators provided targeted professional development to help teachers improve their instruction. Funds were also used for a “Principals’ Academy”—a monthly professional development session. According to DCPS, these meetings were used to train principals on effective parent and community engagement and share best practices on leadership. Finally, funds supported Partnership Schools where staff in low-performing schools received additional resources, expertise, and professional development opportunities from organizations hired to manage the schools. Supplemental education. DCPS used about $5.7 million for summer school activities and $2 million for the Saturday Scholars program. Saturday Scholars is a 12-week program that provides additional help in math and reading to students in grades 3-12. Data reporting. DCPS used about $6 million to fund data reporting activities that could provide parents with information on the performance of their children, classrooms, and schools. These initiatives included the DCPS School Scorecard, an annually released report on each school detailing school safety, culture, student growth, and family involvement in the school; stakeholder surveys; and a student information system to keep parents informed. Supplies. In 2009, DCPS used $3 million of the federal payments to purchase textbooks. Other activities. DCPS spent the remaining payments on other activities in 2009. For example, it provided $1.5 million to the Capital Gains Program, which, in partnership with Harvard University, provided financial literacy education and incentive payments for academic performance, behavior, and attendance to more than 3,000 students in grades six to eight. For the period between 2004 and 2008, D.C. provided expenditure data showing that DCPS used federal payments to fund a variety of programs for early childhood education, supplemental education, professional development activities, and supply purchases. While DCPS worked to provide information on programs funded prior to 2009, it could not locate detailed programmatic information on most expenditures to explain the goals, objectives, activities, and outcomes of these programs and we cannot, therefore, fully describe the use of federal payments for these years (see figure 5). According to DCPS, prior administrations may not have consistently created or maintained documentation on some of the programs they implemented. For example, expenditure data indicate that between 2004 and 2007, DCPS used $37.4 million to fund a literacy improvement program; however, DCPS was unable to provide information to describe the program’s goals, objectives, or outcomes. Additionally, we were unable to characterize approximately 36 percent of the other activities because DCPS could not provide information describing the expenditures beyond what was maintained for accounting purposes. In 2007, for example, 27 schools received “high performance awards.” Current DCPS officials were not able to ascertain why those schools received the funds. The lack of detailed information to fully describe the programs for which funds were expended also precludes us from assessing whether DCPS used funds as directed to do so by appropriations legislation. The 2005 District appropriation act states that DCPS shall use not less than $2 million of that year’s payments on a new incentive fund to reward improved schools and not less than $2 million on a transformation initiative directed to schools in need of improvement. While 20 expenditure data shows DCPS spent $9.8 million on a literacy improvement program, we cannot determine whether these or the remaining funds appropriated in that year were used for the two initia outlined in legislation. Expenditure data did not capture information linked to specific legislated initiatives, and according to agency officials, DCPS does not have records of the plans that would describe the incentive fund or the transformation initiative. DCPS program offices have employed a variety of methods to monitor contractor performance; however, in practice we found evidence of weaknesses in carrying out some monitoring responsibilities possibly attributable to staff turnover and a lack of a formal process to reassign responsibilities when turnover occurs. Specifically, in our revie and 2009 contract files, we found 7 of 14 files with incomplete documentation and evidence of review as well as missing files (see appendix II). DCPS’s Office of Contracts and Acquisitions has policies that specify a program officer’s responsibilities to monitor contractor pe program offices have flexibility on how to carry out these responsibilities. Pursuant to their monitoring responsibilities, program officers are to ensure that technical work is performed in accordance with the terms and conditions of the contract, maintain a contract file, review invoices, perform periodic site visits, and provide periodic written report and a final performance evaluation. Additionally, files maintained at the contracting office should consistently contain the name of the ass igned program officer who is responsible for contract oversight. In our discussions with a number of program offices, we were shown differen strategies they employ to fulfill their monitoring responsibilities. One program officer, who oversees a contract that provides an after school program, showed us a tool designed to track site visits. The document records observations of tutoring sessions to assess the tutor’s subje ct- matter knowledge, presentation style, and classroom management abilities. Another program officer did not conduct site visits because the contractors were often located at the program office and could be t observed on a more regular basis. That office independently a program to track deliverables across contracts it managed. In our review of contracting office files, we saw inconsistent documentation of monitoring activities related to the assignment of program officers and the lack of required evaluations on contractors’ performance. In our review of 14 contract files, we found that som contained notes from the contracting staff that the program officer left before the end of the contract term, and the file had no evidence that anew program officer was assigned. DCPS officials stated that the monitoring function has been impacted by staff turnover, and one offici said it is not uncommon for a contract to be overseen by two or three different program officers over the life of the contract. However, staff turnover alone does explain the lack of adequate monitoring. Program officials we spoke with stated that their respective offices did not have written protocols and procedures for transitioning responsibilities when a program officer leaves, nor did they have written processes for how to notify the contracting office. According to officials, staff generally the contracting office via e-mail when a program officer left, however, we did not see evidence of correspondence in those files. Recognizing that the specific nature and extent of contract administration may contract, one program official told us that it would be helpful for DCPS to develop a list of basic information that should be collected across program offices to ensure continuity in the event of staff turnover. Moreover, 4 of the 14 contract files we reviewed—totaling $2.7 million— were missing performance evaluations, and evaluations of 3 additional contractors were not completed within the required time frames. Performance evaluations are an important tool to help the contracting and program offices determine whether to extend a contract, and these evaluations must be submitted before a contract extension can be awarded. The evaluations are required to be submitted within 30 days of the end of the contract; however, one of the evaluations was submitted more than 1.5 years late. Further, one contract file that lacked a performance evaluation and two files that were submitted late were awarded contract extensions. According to a contracting official, staff from his office should take steps to gather this information from program staff, but we did not find evidence in the files that officials followed up to obtain these documents, or that many of the files had supervisory review. An official with the contracting office stated that it might also be helpful to have more regular formal assessments of contractor performance, and the on a office recently asked program officers to begin evaluating contractors monthly basis. The DCPS contracting office, which is responsible for maintaining all contract documentation, could not locate 3 of the 17 contract files we requested. According to a contracting official, DCPS recently moved and sent its contracts to storage and was having problems locating the files during the period of our review. DCPS could not locate the original file for one of the contracts, was unsure whether one contract was in fact awarded, and told us the other file could not be located because the name of the company had changed. According to D.C. Municipal Regulations, each D.C. office performing contracting functions is responsible for maintaining files containing records of all contractual actions pertinent to that office’s responsibilities, including documents sufficient to constitute a complete history of the transactions. These files are essential in providing a complete background as a basis for informed decisions at each step of the procurement process as well as providing information for reviews and investigations. Over the years, D.C. public schools have wrestled with numerous challenges: deteriorating facilities, low student performance, and lax administrative and management oversight. D.C. has recently taken steps address the long-standing problems with its public school system, and federal payments have contributed to some of these efforts. The statu language appropriating these funds does not generally direct OSSE and DCPS on how to use these monies for school improvements. It appears that OSSE and DCPS have expended federal payments on a range of activities related to “school improvement”—from facility renovation to summer school programs; however, the lack of detailed information on tory some of these payments dating back to 2004 precludes a complete understanding of their use. A lack of information describing how these funds were used highlights the need for stronger internal controls related to information management across administrations. Moreover, the financial management challenges that others, such as the U.S. Department of Education and D.C. Inspector General, have previous identified also persist with OSSE’s and DCPS’s monitoring of grants made with federal payment funds and contracts, respectively. Specifically, the policies OSSE and DCPS have are not consistently followed and sometimes fall short of commonly accepted standards. Because OSSE and DCPS distribute a large portion of federal payment for school improvement funds through grants and contracts, respectively, effective internal controls over grants and contracts are critical to their missions. Without proper documentation on the use of funds and the applicati strong monitoring framework, these funds may more easily be misused. Further, grantees and contractors may not be held accountable for meeting the agreed upon performance outcomes. In addition, OSSE and DCPS may risk implementing initiatives that fall short of reaching the potential to improve the District’s schools. Documenting required and actual monitoring processes may not completely eliminate potential m isuse of funds, but it could help to mitigate this risk. To improve internal controls for managing the use of federal payments and to provide continuity of information across administrations, we recommend that the Mayor of the District of Columbia take the following two actions: 1. Direct the State Superintendent of Education to establish and implement written policies and procedures for monitoring federal payment grantees. These policies and procedures, which can draw from OSSE’s general monitoring practices, should outline OSSE’s ds of practices for how staff should document and maintain recor m monitoring is appropriately and consistently implemented. onitoring activities and identify other measures to ensure that grant 2. Direct the DCPS Chancellor to establish and implement p contract monitoring to ensure that contract monitoring is appropriately and consistently done. Implementing this recommendation would include documenting monitoring activities ce throughout the term of the contract, directing DCPS to better enfor existing policies to ensure performance evaluations are complete, and rocedures for developing protocols and procedures for transitioning contracting officer responsibilities and for notifying the contracting office. Wh implementing this recommendation, DCPS should develop specific guidance on maintaining contract files and other documentation relevant to the use of these funds to ensure that contract records are available for inspection and as a means of retaining institutional knowledge of contracts. We provided a draft of this report to the D.C. Mayor’s Office, OSSE, and DCPS for review and comment. These entities provided written comme on a draft of this report, which are reproduced in appendix III. DCPS and OSSE generally concurred with our recommendations; however, they expressed concern with the way in which we evaluated their use of fed payments for school improvement and the tone of the draft report. Both OSSE and DCPS indicated that federal payment funds are unique and different from other federal funds and do not require the same reporting and monitoring. While these payments are different than funds provided ucation, a fact we state in the report, through the U.S. Department of Ed we maintain that both OSSE and DCPS should have better practices in place to monitor the use of them. OSSE stated that our recommendation is in line with its continued improvement and oversight of recipients of federal grant funded program and highlighted several of the steps it has taken since 2007 to improve its overall operations as well as the management of federal payment funds. OSSE also indicated that it will borrow from existing District and agency - wide protocols for monitoring federal payment funds, when appropriate. In our report, we recognize the processes OSSE has in place to monitor grantees; however, we continue to believe that these processes should b better documented. As indicated in our recommendation, we agree thatdrawing from existing practices that are documented is a good step for OSSE to take in ensuring that federal payment funds are appropriately monitored. OSSE also stated that our on-site review only included hard copy f During the course of our review, OSSE did indicate that it maintains some information electronically. We subsequently requested additional information that OSSE maintains on federal payment grantees, including electronic information that tracks the receipt of grantee reports. As of the time we drafted our report, OSSE had not responded to our repeated requests for this information. Regardless of whether information is maintained in hard copy or electronic form, we continue to believe that iles. OSSE should have in writing its procedures for documenting and monitoring grantees. OSSE agrees that is necessary and indicated that it would take steps to address our recommendation by June 2011. DCPS agreed with our recommendation to improve monitoring acti and maintain contract files and other applicable documents. In its response, DCPS provided information on several procedures it has recently put in place to implement more effective monitoring. These include, among other things, instituting and maintaining documentation on monthly performance evaluations and requiring contracting an officers to sign documentation acknowledging their roles and responsibilities at the beginning of the contract term. DCPS stated that these steps will mitigate the risk of not retaining an appropriate program officer for the duration of the contract. As indicated in our draft repo the time of our review, DCPS did have policies in place that clearly outlined the roles and responsibilities of the program staff. While establishing monthly performance evaluations and reinforcing staffs’ roles and responsibilities are important steps towards more effective monitoring sting practices, we maintain that DCPS needs to better enforce new and exi practices throughout the continuous monitoring. life of the contract to ensure consistent and DCPS’s response also identified areas of the report that they found to be d misleading or incomplete. Specifically, DCPS was concerned that we di not provide a sufficient explanation of the historical context of federal payments, including the use of the term “school improvement payments, which might be confused with other federal school improvement funds provided by the U.S. Department of Education. In our opening paragraph and the report background we state that federal payments are unique and separate from other federal funding, and that our use of the term “federal payments” throughout the report refers to these differentiated fund , we have subsequently not monies from federal agencies; however changed our title to help clarify this point. ” In addition, DCPS was concerned that the report does not adequately address the fact that during the current administration, programmatic initiatives and expenditures against those initiatives were clearly and w s documented. We disagree. On page 15 and again on pages 18-19 of thi report, we state that D.C. provided expenditure data for all years we requested and that the current administration has created spending plan and other programmatic information describing the planned and actual use of funds since 2009. DCPS also commented that we did not adequ explain the steps DCPS took to locate documentation from the prior ately administration that we requested. In response to this, we have provided additional clarification in the report, where appropriate, to explain that current DCPS officials took steps to locate information we requested on federal payment use prior to 2009, but spending plans or programmatic information that they could not locate may not have been created by prior administrations. DCPS also stated that it could have been more responsive in providin missing information for applicable contract files and documents for inspection if it were advised of the specific documentation deficiency referenced in the report. At the time of our file review, we worked with contracting office officials, and did, on several occasions, identify and request from them missing contract files and information. These officials or indicated that the documentation should have been in the contract file that they could not locate the information. Given our findings and the challenges DCPS had in locating information for our report, we continu ld to believe that DCPS can improve its monitoring processes and shou have practices in place to ensure these processes are implemented. We also provided a copy of the draft report to the independent D.C. Office ed technical comments on the of the Chief Financial Officer which provid draft that we incorporated as appropriate. We are sending copies of this report to the D.C. Mayor’s Office, the Office of the State Superintendent of Education, the DCPS Chancellor’s Office, al the D.C. Office of the Chief Financial Officer, appropriate congression committees, and others who are interested. We will also make copies available to others on request. In addition, the report no charge on GAO’s Web site at http://www.gao.gov. will be available at 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 can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To identify the activities that both the Office of the State Superintendent of Education (OSSE) and the District of Columbia Public Schools (DCPS) funded with federal payments, we analyzed allocation and spending data, reviewed documentation provided by the offices, and conducted interviews with officials in these and other knowledgeable offices. We then categorized this information into activities that we identified based on previous GAO work, U.S. Department of Education program descriptions, and categorizations used by DCPS and OSSE when tracking their use of federal payments. Primarily, we analyzed data from the District of Columbia’s (D.C. or the District) financial management system—the System of Accounting and Reporting (SOAR)—and its procurement tracking system—Procurement Automated Support System (PASS). SOAR isolates federal payments from other revenue streams and provides OSSE, DCPS, and the D.C Office of the Chief Financial Officer (OCFO) with real-time information related to revenue and expenditures, among other things. SOAR is interfaced with PASS. We supplemented these data with interviews, spending plans that identify how the offices allocated federal payments, and other documents provided by OSSE and DCPS to describe the purpose and more specific use of funds as well as how they prioritized the use of funds. For example, we used SOAR and PASS data to understand the amount of funds DCPS used for a specific contract or program, but used additional information from DCPS to understand the purpose. For public charter schools, we supplemented the SOAR data with other information received from OSSE, including grant descriptions in the request for applications and summary data on allocations of federal payments. We also reviewed documentation provided by the D.C. Public Charter School Board. Using SOAR data, we identified fields that provided descriptive information on the program or general purpose of funds and the appropriated and expended amount for a given year’s appropriation. These funds were often used across several fiscal years. For example, we used these data to identify public charter schools that received grants and the amount of these grants. We used additional information provided by OSSE to determine the amount of funding in a given appropriation year that was used. We were unable to obtain transaction level data for appropriation year 2004 because, according to an OCFO official, federal payments for charter schools were managed by the Department of Insurance, Securities, and Banking. The department did not respond to our request for this information. We took several steps to assess the reliability of the data provided. We reviewed existing documentation about SOAR and PASS and prior GAO, D.C. Office of the Inspector General (OIG), and Independent Auditor reports that discussed these systems. We also interviewed knowledgeable staff in OCFO, OSSE, and DCPS about how these data were collected, stored, used, and the access controls in place. We interviewed officials within the D.C. OIG and Independent Auditor’s office. We conducted electronic testing on transaction-level data, including checks for missing data elements or out-of-range variables. Given the objectives and scope of our review, we did not conduct transaction testing (e.g., compare data input into the SOAR or PASS systems to invoices or other expenditure documents) to verify the accuracy and classification of data in the SOAR system, nor did we test specific transactions for noncompliance with Antideficiency Act requirements. We did, however, review previous assessments conducted by D.C.’s Independent Auditor that, among other things, included transaction testing. Overall, we found the data to be sufficiently reliable for the purposes of providing an understanding of how federal payments were allocated and expended. To assess OSSE’s monitoring of grantees that received federal payments, we reviewed available information on OSSE’s monitoring practices for federal payment grantees. We also reviewed information on OSSE’s general monitoring practices and reports from the D.C. OIG, U.S. Department of Education, and GAO to understand previously identified weaknesses with grantee monitoring. We also interviewed OSSE officials on their practices. We reviewed 30 of the 34 grantee files for grants that were awarded with fiscal year 2008 and 2009 federal payments to assess OSSE’s monitoring of federal payment grantees that we identified as within our scope. OSSE identified 42 grants that were awarded during this time. However, we eliminated eight from our scope, and OSSE did not respond to our request for four additional files, although OSSE indicated that these files were maintained. Specifically, we eliminated seven grants that, according to data provided by OSSE, were awarded as a “reimbursement” for costs that a school already incurred in developing an application for the use of surplus DCPS facilities. We eliminated these grants because they would not necessitate on-going monitoring given that the deliverable was already completed as a part of the application process. We also eliminated a special education grant, which was for Medicaid Billing and Technical Assistance, because it was an amendment to a November 2007 grant between OSSE and the D.C. Public Charter School Cooperative. We selected 2008 and 2009 grantees because these were the first years that OSSE was responsible for federal payment use and we could capture the most currently available monitoring information. We developed a data collection instrument to record information from the grantee files. We reviewed files for evidence of grantee monitoring, timeliness of grantee reporting, follow-up actions by OSSE staff, submission of required documents by grantees, and other documented actions by OSSE. To ensure that our data collection efforts conformed to GAO’s data quality standards, all files were independently reviewed by two GAO analysts. When the analysts’ views on how the data were recorded differed, they met to reconcile any differences. To assess DCPS’s monitoring of contractors that received federal payments, we reviewed available information on DCPS’s monitoring practices. We obtained this information from the Office of Contracts and Acquisitions, which is responsible for contracts management and oversees purchasing goods and services for DCPS, as well as additional information from four program offices that were responsible for monitoring performance of those contracts funded through federal payments we selected. We also reviewed information on DCPS’s general monitoring practices and reports from the D.C. OIG, BDO Seidman LLP, and GAO to understand previously identified weaknesses with procurement practices and contract monitoring. We originally planned to review all 42 contracts awarded by DCPS for 2008 and 2009; however, based on discussions with DCPS on the challenges of compiling the requested files, we limited our selection to 17 contracts. We were only able to review 14 files because DCPS was unable to provide files for 3 contracts for our review. The 17 contracts we selected represented just under $9.5 million, or 61 percent, of federal payment funds that were distributed through contracts of more than $100,000 in 2008 and 2009. We selected those years to be consistent with our review of grant files from OSSE. We selected our contracts based on the type and size of contracts. Specifically, we selected the highest dollar amount in service contracts that would allow us to assess the monitoring processes throughout the term of the contract as well as the highest dollar amount contracts for goods such as textbooks. Results from this nongeneralizable sample cannot be used to make inferences about all contracts awarded for this time period. To ensure that our data collection efforts conformed to GAO’s data quality standards, all files were independently reviewed by two GAO analysts. When the analysts’ views on how the data were recorded differed, they met and reconciled any differences. While the sample allowed us to learn about many important aspects of DCPS’s monitoring, it was designed to provide an overview of DCPS’s monitoring functions, not findings that would be representative of practices at all program offices within DCPS. We reviewed the purpose of the contract and DCPS offices’ policies and practices for monitoring these contracts. We reviewed files maintained at the Office of Contracts and Acquisitions that included documentation on contractor performance submitted by the program offices, as well as obtained additional information from these program offices. Because none of the DCPS program offices that managed contracts we reviewed maintained contract files, we were unable to fully assess the steps these offices took to monitor the contracts. We did, however, review some of the monitoring tools that individual staff and offices created to track their monitoring. For example, we reviewed project plans, samples of invoices, and other types of information staff maintained to document performance. We did not hold an exit conference with the relevant D.C. agencies because the designated point of contact for the District was unresponsive to our repeated requests to schedule an exit conference. However, at the request of the Mayor’s Office, we met with representatives of the Mayor, OSSE, and DCPS, prior to receiving official comments on the draft report. We conducted this performance audit from October 2009 to November 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. Janet Mascia (Assistant Director), Rachel Beers, Sue Bernstein, Scott McNulty, Jean McSween, James Rebbe, and Nyree M. Ryder Tee all made key contributions to this report.

Between fiscal years 2004 and 2009, Congress appropriated nearly $190 million in federal payments for school improvement to the District of Columbia (D.C.). This includes $85 million to the state education office--currently the Office of the State Superintendent of Education (OSSE)--to expand public charter schools and $105 million to D.C. Public Schools (DCPS) to improve education in public schools. Over the years, GAO and others have identified challenges that DCPS and OSSE face in managing federal monies. This report identifies, on the basis of available information, activities for which OSSE and DCPS used federal payments between 2004 and 2009 and describes how OSSE and DCPS monitored grant and contract recipients, respectively. GAO reviewed expenditure data and interviewed and collected documentation from OSSE and DCPS, among others. GAO reviewed all available grants awarded by OSSE in 2008 and 2009 and 14 of the largest contracts awarded by DCPS during that time. Approximately 77 percent of federal payments for public charter school improvement in D.C. have been awarded for facility costs, including acquiring, renovating, constructing, or leasing facilities. The funding for facilities has mainly been disbursed through direct loans to schools and grants to expand schools in certain neighborhoods as part of a city improvement initiative. OSSE used the remaining funds for initiatives intended to improve the quality of education through efforts such as academic enrichment and supplemental education activities (provided beyond the normal school day), as well as a variety of other charter school expenditures. OSSE officials reported having established some policies and procedures for monitoring its grant recipients, but, with one exception, these were not documented. Furthermore, the procedures as explained to us by OSSE were not consistently followed. OSSE did create a list of information that program staff are to acquire from grantees. However, the grant files we reviewed often lacked evidence that staff collected this information or performed other monitoring activities. Specifically, most of the files did not include all the narrative and financial reports as required by OSSE in many of their grant agreements. Also, few included any record indicating that staff had followed-up to obtain such documents. According to the expenditure data D.C. provided, DCPS has used federal payments for a variety of purposes--ranging from summer school programs to teacher incentive pay--but available information prior to 2009 does not provide enough details for GAO to fully identify specific activities funded with federal payments. In 2009, DCPS used $40 million primarily for teacher incentive pay, salaries for staff such as physical education and art teachers at underserved schools, and supplemental education activities such as summer school. Expenditure data show that between 2004 and 2008, DCPS funded a variety of programs such as supplemental education and professional development; however, DCPS could not locate information that may have been created on specific activities funded with federal payments during this time. For example, about half of these expenditures were for a "literacy improvement program," but DCPS was unable to provide information to describe the program's goals, objectives, activities, or outcomes. DCPS has policies on responsibilities for monitoring contractor performance; however, these policies do not cover how to do the monitoring and they were not consistently followed. According to program office staff, they have some flexibility in how they implement their monitoring responsibilities and have employed a variety of methods to monitor contractor performance. Of the contract files we reviewed, we found that several lacked any evidence of a performance evaluation by a program officer, or any subsequent review. Notes added to several of the files indicated a program officer had left before the end of the contract term; however, we found no indication that these contracts had been reassigned. Furthermore, the contracting office could not locate 3 of the 17 files we requested for our review. To improve internal controls, GAO recommends that the Mayor direct OSSE and DCPS to establish and implement written policies and procedures for monitoring use of federal payments for school improvement, and DCPS to maintain contract files and other expenditure documentation. The District agreed with GAO's recommendations and provided additional information on steps taken to improve internal controls.

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Given the current fiscal environment, agencies need to learn to separate wants from needs to ensure that programs and investments provide the best return within fiscal constraints. My first four observations on systemic acquisition challenges relate to this need. They are that: Agency budgets may not be fully linked to strategic goals and may not adequately consider likely agencywide resource limitations. Agencies too often pursue their individual needs rather than collective needs. Individual program and funding decisions may undercut sound policies. Congressional direction sometimes requires agencies to buy items and provide services that have not been planned for and may not be needed. Our work has shown that agencies sometimes budget and allocate resources incrementally, largely based on historical precedents, rather than conduct bottom-up reviews and allocate resources based on the broader goals and objectives of agency strategic plans. For example, in March we reported that DOD does not allocate resources on a strategic basis and that it could improve its acquisition outcomes by adopting an integrated portfolio management approach for allocating weapon system investments. We found that military service allocations as a percentage of the department’s overall investment budget have remained essentially the same for the last 25 years, despite the dramatic changes that have occurred in the strategic environment and warfighting needs during that time. Similarly, in July 2005 we reported that the Environmental Protection Agency budgeted and allocated resources incrementally, largely based on historical precedents, and that its process did not reflect a bottom-up review of the nature or distribution of its current workload— either based on specific environmental laws or the broader goals and objectives in the agency’s strategic plan. Similarly, in our Information Technology Investment Management Model (ITIM) we point out that information technology (IT) portfolio selection criteria support an agency’s mission, organizational strategies, and business priorities and provide a link to the organization’s strategic plans and budget processes. However, in 2004 we reported that a governmentwide survey of investment management processes found that only 6 of 26 agencies had fully implemented portfolio selection criteria— 16 had partially implemented them and 4 had not implemented them at all. This remains an issue. For example, we reported just this year that the Department of Homeland Security (DHS) is missing key elements of effective investment management, such as procedures for implementing project-specific investment management policies, as well as policies and procedures for portfolio-based investment management. Further, it has yet to fully implement either project- or portfolio-level investment control practices. We noted that all told, this means DHS lacks the complete institutional capability needed to ensure that it is investing in IT projects that best support its strategic mission needs. In contrast, successful commercial companies use portfolio management to adjust their resource allocations across business areas based on changes in the marketplace and the competitive environment. The government’s failure to successfully implement such an approach significantly risks wasting investments on wants versus true needs in a time when resources are limited. We have also seen examples of agencies having fragmented decision- making processes for acquisition investments, failing to consider agencywide needs and resource limitations. Successful commercial companies make investment decisions that benefit the organization as a whole within resource constraints. However, DOD continues to allow individual organizational units to assess needs under separate processes, failing to implement a departmental approach to investment decision- making. Consequently, DOD has less assurance that its investment decisions address the right mix of warfighting needs and it starts more programs than current and likely future resources can support. Operationally, there can be real consequences in agencies’ pursuit of individual over collective interests. For example, in December 2005 we reported that on the basis of its experience with unmanned aircraft systems (UAS) in Persian Gulf Operations, U.S. Central Command believed that communications interoperability and payload commonality problems occurred because the military services’ UAS development programs had been service-specific and insufficiently attentive to joint needs. Some agencies have successfully considered wider needs. For example, in March 2005 we reported that DHS had opened communication among its acquisition organizations through its strategic sourcing and small business programs. With strategic sourcing, DHS’s organizations quickly collaborated to leverage spending for various goods and services—such as office supplies, boats, energy, and weapons—without losing focus on small businesses, thus leveraging its buying power and increasing savings. Individual program and funding decisions may also undercut sound policies. We have noted that at some agencies, individual program units may make investments in capabilities that can undercut agencywide goals. This can occur when a disconnect exists between requirements and resources and can lead to unnecessary duplication of effort and costs. For example, we reported in 2006 that NASA’s Deep Space Network and Ground Network programs made investment decisions that were leading to the development of separate array technologies to support overlapping requirements for the same lunar missions. Additionally, while congressional spending directions to agencies sometimes facilitate accomplishment of agency goals, at other times they may require agencies to buy items and provide services for which they had not planned and which may not be needed. Agency spending actions which otherwise would not be taken based on an objective value and risk assessment with consideration of available resources work against good strategic planning. Such spending can circumvent careful planning and divert resources from more critical needs. This can also serve to exacerbate our serious long-range fiscal imbalance. After differentiating their unlimited wants from their true needs, agencies need to translate their needs into appropriate, executable programs. They need to set and communicate realistic system requirements and better maintain stability in those requirements. They also need to ensure that programs proceed through the acquisition process based on having requisite knowledge and that programs are funded adequately. However, too often we see failure in one or more of these key dimensions. Specifically, I have observed that: Agencies too often overpromise and underdeliver in the acquisition of major systems. Programs too often experience requirements instability that causes delays and cost growth in fielding capabilities. Programs too often proceed through the development and demonstration of systems without having achieved needed knowledge. Agencies sometimes budget for less than is needed and put Congress in a position of having to decide whether to provide additional funding. Agencies too often overpromise and underdeliver in the acquisition of major systems as a consequence of programs competing with each other for funding in a fiscally constrained environment. In examining defense programs, we have reported that competition for funding had incentivized programs to produce optimistic cost and schedule estimates, overpromise on capability, suppress bad news, and forsake the opportunity to identify better alternatives. In addition, because DOD starts more weapons programs than it can afford, it invariably finds itself in the position of having to shift funds to sustain programs—often to the point of undermining well-performing programs to pay for poorly performing ones. I believe that even if more funding were provided, it would not be a solution because wants will usually exceed the funding available. Rather, we have to live within our means, which requires us to make difficult choices between wants and needs. Once programs are under way, they often experience requirements instability during major systems development, thereby lengthening the duration of the program. As a result, the problem the program was seeking to address changes or the user and acquisition communities may simply change their minds about a program. The resulting program instability can cause cost escalation, schedule delays, and fewer end items, and can make it harder for the government to hold contractors accountable. For example, in 2005 the Department of Justice inspector general found that the Federal Bureau of Investigation’s Trilogy project experienced significant cost increases and schedule delays due to various factors including evolving design requirements. Acquisition programs that involve development and demonstration often face another challenge—developing the requisite knowledge indicated by best practices before proceeding through key knowledge points in the system acquisition process. In examining DOD’s operations, we have assessed weapon acquisitions as a high-risk area since 1990. Although U.S. weapon systems are the best in the world, the programs to acquire them often take significantly longer and cost significantly more than promised and often deliver smaller quantities and different capabilities than planned. In fact, it is not unusual for estimates of time and money to be off by 20 to 50 percent. It does not, however, have to be so. Our best practices work has shown that it is possible to get better outcomes if decisions are based on high levels of knowledge. Similarly, we have reported that other agencies do not ensure that major acquisition programs have adequate knowledge before proceeding with development. For example, the National Polar-orbiting Operational Environmental Satellite System (NPOESS) project—a tri-agency (National Oceanic and Atmospheric Administration, DOD, and NASA) effort— proceeded into development before the design was proven and before the technologies had properly matured, knowledge that is needed based on our best practices work. In 2004 we reported that the contractor for the project was not meeting expected cost and schedule targets on the new baseline because of technical issues in the development of key sensors. Again, in November 2005, we reported that NPOESS continued to experience problems in the development of a key sensor, resulting in schedule delays and anticipated cost increases. Also, earlier this year we found that DOE lacks a systematic process for ensuring that critical technologies have been adequately demonstrated to work as intended before committing to major construction projects to help maintain the nuclear weapons stockpile, conduct research and development, and process nuclear waste for disposal. In another example, we reported in March 2005 that DHS has adopted a number of acquisition best practices in establishing an investment review process. However, we also noted that this process did not include two critical management reviews that would help ensure that (1) resources match customer needs prior to beginning a major acquisition and (2) program designs perform as expected before moving to production. Our work has also shown that it is not uncommon to find an acquisition program underfunded. In our review of defense programs, we often see cases where the cost of a system in development grows and where, as a result, the return on the defense dollar is reduced. While such cost growth may be accommodated within an agency’s budget through reductions in the number of units to be acquired or by cutting other programs, it may also put Congress in a position of having to decide to provide additional funding if it finds accepting fewer units undesirable. As a consequence, other needed programs may not be fully funded or overall government spending may be increased, thereby adding to the federal deficit. The next set of systemic acquisition challenges relate to those faced at the contract management level. First and foremost, I believe that we must engage in a fundamental re-examination of when and under what circumstances we should use contractors versus civil servants or military personnel. This is a major and growing concern that needs immediate attention. Once the decision to contract has been made, we have observed challenges in setting contract requirements, using the appropriate contract with the right incentives given the circumstances, and ensuring proper oversight of these arrangements—especially considering the evolving and enlarging role of contractors in federal acquisitions. The failure to adequately address these challenges explains, in part, why agencies continue to experience poor acquisition outcomes in buying major systems, goods, and services. My observations are that: Contracts, especially service contracts, often do not have definitive or realistic requirements at the outset to control costs and facilitate accountability. Contracts typically do not accurately reflect the complexity of projects, or appropriately allocate risk between the contractor and the taxpayer. Incentive and award fees are often paid based on contractor attitudes and efforts versus positive results. Contracts, especially service contracts, often don’t have definitive requirements at the outset which are needed to control and facilitate accountability. For example, in January we reported that many reconstruction projects in Iraq have fallen short, in part because DOD had not clearly defined its needs before it entered into contract arrangements. The absence of well-defined requirements and clearly understood objectives complicated efforts to hold DOD and contractors accountable for poor acquisition outcomes in Iraq reconstruction. Given the range of federal projects and circumstances, agencies’ contracting approaches vary widely, and with them, the level of risk. We have found that agencies may not always use the most appropriate contracting approach for the circumstance or effectively oversee their use. Time-and-materials contracts. Time-and-materials contracts— agreements where contractors are paid based on the number of labor hours and materials—pose such risk to the government that federal regulations require contracting officers to make a determination and findings in writing that no other contract type is suitable before using such an arrangement. In a recent review of DOD’s use of such contracts, we found that DOD contracting and program officials frequently did not justify why time-and-materials contracts were the only contract type suitable for the procurement. Further, with a few exceptions, we found that little effort had been made to convert follow- on work to a less risky contract type when historical pricing data existed, despite guidance to do so. We also found that oversight of time-and-materials contracts was lacking as contracting officers generally relied on contractor-provided monthly status reports to conduct oversight. Interagency contracting. We added management of interagency contracting—the use of one agency’s contract by another agency or the provision of contracting assistance and support by another agency— to our high-risk list in 2005. Interagency contracts can leverage the government’s buying power and provide a simplified and expedited method of procurement. However, the rapid growth in use of such contracts, combined with the limited expertise of some agencies in their use and recent problems related to their management, causes some concern. For example, in July 2005, we reported that the use of franchise funds—government-run, fee-for-service organizations providing a portfolio of services, including contracting services—at the Departments of the Interior and the Treasury have not always resulted in fair and reasonable prices for the government. We have also found that agencies often do not have visibility into and effective oversight of their interagency contracts. Last year, for instance, we reported that while DHS spending through interagency contracting totaled billions of dollars annually, and increased by 73 percent in the past year, the department did not systematically monitor its use of these contracts to ensure desired outcomes. Undefinitized contract actions. DOD’s use of undefinitized contract actions can also carry risk to the government and potentially waste taxpayer dollars. These agreements allow contractors to begin work before reaching final agreement on contract terms and are sometimes used by agencies to rapidly fill urgent needs. In June 2007, we reported that DOD did not meet the definitization time frame requirement of 180 days after award on 60 percent of the 77 undefinitized contract actions we reviewed. In June 2004, we found that during Iraqi reconstruction efforts, when requirements were not clear, DOD often entered into contract arrangements that introduced risks. We reported that DOD authorized contractors to begin work before key terms and conditions, such as the projected costs of the work to be performed, were fully defined. In September 2006, we reported that, under this approach, DOD contracting officials were less likely to remove costs questioned by the Defense Contract Audit Agency auditors if the contractor had incurred these costs before reaching agreement on the work’s scope and price. In one case, the Defense Contract Audit Agency questioned $84 million in an audit of a task order for an oil mission. In that case, the contractor did not submit a proposal until a year after the work was authorized, and DOD and the contractor did not negotiate the final terms of the contract until more than a year after the contractor had completed the work. As a result, the DOD contracting officer paid the contractor for all questioned costs but reduced the base used to calculate contractor profit by $45 million. As a result, the contractor was paid about $3 million less in fees. Lead systems integrators. The use of lead systems integrators—prime contractors with increased responsibilities, such as collaborating with the government on system specifications—puts the government at additional risk because it complicates the relationship between the contractor and the government. We have found that agencies may use a lead systems integrator when they believe they do not have the capacity to manage a program, which is a risk in and of itself. This arrangement creates an inherent risk, as the contractor is given more discretion to make certain program decisions. Along with this greater discretion comes the need for more government oversight and an even greater need to develop well-defined outcomes at the outset. For example, since the program’s inception, we have raised concerns about the Coast Guard’s acquisition approach for its Deepwater program— including oversight of its lead systems integrator. For instance, we observed that the Coast Guard had not held its lead systems integrator accountable for taking steps to achieve competition among the suppliers of Deepwater assets. In June of this year, we reported that the Coast Guard has recently taken steps to hold the lead systems integrator accountable for problems that have arisen with the design and construction of certain Deepwater assets that will affect the lead systems integrator’s roles and responsibilities in executing the program moving forward. On the other hand, a close partner-like relationship such as the one the Army has with its Future Combat Systems integrator can also pose risks. Specifically, the government can become increasingly invested in the results of shared decisions and runs the risk of being less able to provide oversight compared with an arms- length relationship. A lack of oversight contributes to the risks of these contracting approaches and can contribute to poor outcomes for critical government projects. Compounding this risk is the growing reliance on contractors to perform functions previously carried out by government personnel. Emergency situations can further exacerbate this risk, providing additional oversight challenges. For example, although U.S. military forces in Iraq have used contractors to a far greater extent than in prior operations, DOD lacks sufficient numbers of contractor oversight personnel at deployed locations to oversee them. Similarly, in work examining contracts undertaken in support of response and recovery efforts for Hurricanes Katrina and Rita, we found that while monitoring was occurring on the contracts we reviewed, the number of monitoring staff available was not always sufficient or effectively deployed to provide oversight. Contractors have an important role to play in the discharge of the government’s responsibilities, and in some cases the use of contractors can result in improved economy, efficiency, and effectiveness. At the same time, there may be occasions when contractors are used to provide certain services because the government lacks another viable and timely option, or due to the preferences of some government officials. In such cases, the government may actually be paying more and incurring higher risk than if such services were provided by federal employees. In this environment of increased reliance on contractors, sound planning and contract execution are critical for success. We have previously identified the need to examine the appropriate role for contractors to be among the challenges in meeting the nation’s defense and other needs in the 21st century. The proper role of contractors in providing services to the government is currently the topic of some debate. In general, I believe there is a need to focus greater attention on what type of functions and activities should be contracted out and which ones should not, to review and reconsider the current independence and conflict-of-interest rules relating to contractors, and to identify the factors that prompt the government to use contractors in circumstances where the proper choice might be the use of civil servants or military personnel. Possible factors could include inadequate force structure, outdated or inadequate hiring policies, classification and compensation approaches, and inadequate numbers of full-time equivalent slots. We also have found that agencies sometimes pay contractors incentive and award fees—financial bonuses or profit intended to motivate excellent contractor performance—without a clear link to desired program outcomes. We have reported that DOD, DOE, and NASA have not fared well at using award and incentive-fee contracts to improve cost control behavior and performance. For example, in 2005, we reported that DOD paid award and incentive fees even when programs failed. About half of the 27 incentive fee contracts that we reviewed failed or were projected to fail to meet a key measure of program success, which was to complete the acquisition at or below the target price. In March 2005, we reviewed 33 DOE contracts using a performance incentive. Of those 33, we found that DOE had awarded 15 such contracts without an associate cost incentive or constraint, as required by regulations. Thus, the contractor could receive full fees by meeting all schedule baselines while substantially overrunning costs. Earlier this year, we reported that NASA paid significant amounts of available fee on all of the 10 contracts we reviewed, including those end item contracts that did not deliver a capability within initial cost, schedule, and performance parameters. In one case, NASA paid the contractor 97 percent of the available award fee despite a delay in the completion of the contract by over 2 years and an increase in the cost of the contract of more than 50 percent. However, when properly tied to program outcomes, incentive and award fees may have their desired effect. Last year, we reported that DOE’s use of an incentive fee contributed to the early completion of the cleanup of a former nuclear weapons production facility. The last set of challenges I will discuss relate to having a capable acquisition workforce and holding it accountable. These challenges underlie the federal government’s ability to strategically plan and effectively manage individual programs and contracts as they involve the people needed to carry out these functions. My observations are that: The government faces serious acquisition workforce challenges (e.g., size, skills and knowledge, and succession planning). Key program staff rotate too frequently, thus promoting myopia and reducing accountability (i.e., tours based on time versus key milestones). Additionally, the revolving door between industry and agencies presents potential conflicts of interest. Inadequate oversight has resulted in little or no accountability for recurring and systemic problems. Lack of high-level attention reduces the chances of success in the acquisition, contracting, and other key business areas. The acquisition workforce’s workload and complexity of responsibilities have been increasing without adequate agency attention to the workforce’s size, skills and knowledge, and succession planning. This situation is made all the more challenging by the increasing use of contractors to support program operations because of the additional oversight needed. Though many agencies lack good data on their workforces, it is clear that the size of the workforce has declined, while the size of government expenditures for goods and services has risen significantly. These trends represent a major challenge to the current workforce—dealing with a significantly increased workload. At the same time that the federal acquisition workforce has decreased in numbers and the size of its investments in goods and services has increased significantly, the nature of the role of the acquisition workforce has been changing and, as a result, so have the skills and knowledge needed in that workforce to manage more complex contracting approaches. One way agencies have dealt with this situation is to rely more heavily on contractor support. For example, DOD is relying on contractors in new ways to manage and deliver weapon systems. On the basis of our work looking at various major weapon systems, we have observed that DOD has given contractors increased program management responsibilities to develop requirements, design products, and select major system and subsystem contractors. In part, this increased reliance has occurred because DOD is experiencing a critical shortage of certain acquisition professionals with technical skills related to systems engineering, program management, and cost estimation. Without adequate oversight by and training of federal employees overseeing contracting activities, reliance on contractors to perform functions that once would have been performed by members of the federal workforce carries risk. As I noted earlier, the use of lead system integrators is being undertaken by agencies when they believe they lack the expertise needed to manage complex acquisitions. Our concern over the skills and knowledge of the workforce extends beyond DOD. At times skills may be in short supply in both government and the private sector. For example, in December 2006 we reported that employees with certain information technology skills are in short supply in both the federal and private sectors—particularly in enterprise architecture, project management, and information security. Demographic changes promise to further exacerbate agencies’ acquisition workforce problems. In 2006, Office of Personnel Management reported that approximately 60 percent of the government’s 1.6 million white collar employees and 90 percent of about 6,000 federal executives will be eligible for retirement over the next 10 years. The situation facing DOD exemplifies this problem as more than half of DOD’s workforce will be eligible for early or regular retirement in the next 5 years. In fact, Navy officials recently told us that they are already seeing a “hemorrhaging” of senior contracting officers as large numbers have started to retire. Agencies facing workforce challenges have used strategic human capital planning to develop long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. Additionally, agencies should engage in broad, integrated succession planning and management efforts that focus on strengthening their current and future organizational capacity to obtain or develop the knowledge, skill, and abilities they need to meet their missions. Without proper strategic human capital planning, the government will not be a good position to adjust to this challenge. We also have concerns that acquisition employees rotate too frequently— both between programs and between government and industry. In a recent assessment of selected DOD weapon systems, we found that many of the programs had multiple program managers within the same development phase, reducing accountability for poor program outcomes. We also reported that the Coast Guard experienced high turnover of key Deepwater program staff, resulting in the loss of knowledge on the teams responsible for managing the program and overseeing the system integrator. Also, the revolving door between industry and government may present potential conflicts of interest. Federal ethics rules and standards have been put in place to help safeguard the integrity of the procurement process by mitigating the risk that employees will use their positions to influence the outcomes of contract awards for future gain and that companies will exploit this possibility. We currently have reviews under way examining issues relating to the revolving door between federal employment and contractors working for the government including DOD actions to assess contractor hiring controls to address revolving door issues. Our work at DOD and other agencies has shown that there have been persistent acquisition problems, particularly for complex developmental systems, but also for the increasingly complex contracting arrangements being used by the government to purchase goods and services. For example, we reported on DOE’s weaknesses in managing its acquisitions and found that DOE is only meeting its cost and schedule goals for its ongoing construction projects about one-third of the time. We also found that DOE’s National Nuclear Security Administration has not developed a project management policy, implemented a plan for improving its project management practices, or fully shared project management lessons learned among its sites. Similarly, we also have reported on weaknesses in the Federal Aviation Administration’s (FAA) management of its acquisition process as the primary causes of its cost, schedule, and performance problems in developing systems for air traffic control. Because of these weaknesses, we continue to designate FAA’s modernization program as a high-risk area. A key part of addressing challenges to the acquisition workforce is having mechanisms to hold the workforce accountable and ensure sufficient high- level attention to systemic acquisition problems. We have noted the importance of sustained leadership to ensure accountability for results and addressing key deficiencies when faced with complex and long-term challenges. In July 2006, we reported that DOD continues to face vulnerabilities in contracting fraud, waste, and abuse, in part because it lacks sustained senior leadership in providing direction and vision, as well as in maintaining the culture of the organization. By not setting the right tone at the top, DOD allows a certain level of vulnerability into the acquisition process and problems to persist. Holding the workforce accountable has certain prerequisites. For example, we have reported that senior leaders have to provide program managers an executable business case, empower them, support them, and align managers’ tenures with delivery dates. We also have identified the need for similar high-level management attention at other agencies. For example, we have raised concerns in the past that DHS’s Chief Procurement Officer (CPO) did not have clear enforcement authority to ensure that acquisition initiatives are carried out. DHS recently stated that the Under Secretary for Management has authority as the Chief Acquisition Officer to monitor acquisition performance, establish clear lines of authority for making acquisition decisions, and manage the direction of acquisition policy for the department, and that those authorities also devolve to the CPO. A formal designation of a Chief Acquisition Officer and corresponding modifications to existing management directives should help address our earlier concerns. Similarly, after creating a Chief Operating Officer to head its air traffic modernization program, FAA was able to adopt more leading practices of private sector businesses to address cost, schedule, and performance shortfalls that have plagued air traffic control acquisitions. Also, our work looking at leading company practices used to acquire services found that companies elevated their procurement organizations from mission support to a more strategically important business unit that exercises more control over the acquisition of services. Further, on the basis of on our defense work, we have noted that an essential ingredient for better ensuring that overall DOD business transformation is implemented and sustained is to create a full-time and separate Chief Management Officer (CMO) position to address key business transformation challenges and stewardship responsibilities. Such a position could institutionalize accountability for DOD’s efforts to improve its business operations, including prioritizing investments across the department. In closing, I would like to reemphasize why it is imperative that we correct these systemic governmentwide acquisition challenges. The U.S. government’s current financial condition and long-term fiscal outlook require it to seek the best return it can on its investment in goods and services and make some difficult, but necessary, strategic choices between unlimited wants and real, affordable, and sustainable needs. The federal government needs to engage in a fundamental and comprehensive re-examination of the federal government’s overall approach to contracting. This includes when and on what basis the government should contract. In the day-to-day management and oversight of major projects and purchases of goods and services, agencies will need to be realistic in their requirements and technologies before they invest significant funds in programs and strike a better balance among expediency, best value, and oversight when entering into contracts for goods and services. Agencies must also assess the skills, knowledge, and appropriate size of their acquisition workforce, and must also have key leadership positions to set the right tone at the top and have high-level accountability to fix recurring acquisition issues. We should have zero tolerance for waste and mismanagement in times of surplus or deficit, but it will never be zero. Much, however, can and should be done to minimize it. We have made numerous specific recommendations to DOD and other agencies on how to address these systemic acquisition challenges, many of which have not been implemented. Where agencies are responding to our recommendations, we are seeing some improvements in their acquisition management. I appreciate this committee’s attention to this important and timely issue and look forward to working with you to see that agencies continue to take actions to address these challenges. Mr. Chairman and members of the committee, this concludes my testimony. I would be happy to answer any questions you might have. For further information regarding this testimony, please contact John P. Hutton at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this testimony. Key contributors to this testimony were Theresa Chen, Laura Holliday, John Neumann, Kenneth Patton, Sylvia Schatz, Karen Sloan, and Bruce Thomas. 1. Service budgets are allocated largely according to top line historical percentages rather than Defense-wide strategic assessments and current and likely resource limitations. 2. Capabilities and requirements are based primarily on individual service wants versus collective Defense needs (i.e., based on current and expected future threats) that are both affordable and sustainable over time. 3. Defense consistently overpromises and underdelivers in connection with major weapons, information, and other systems (i.e., capabilities, costs, quantities, and schedule). 4. Defense often employs a “plug and pray approach” when costs escalate (i.e., divide total funding dollars by cost per copy, plug in the number that can be purchased, then pray that Congress will provide more funding to buy more quantities). 5. Congress sometimes forces the department to buy items (e.g., weapon systems) and provide services (e.g., additional health care for non-active beneficiaries, such as active duty members’ dependents and military retirees and their dependents) that the department does not want and we cannot afford. 6. DOD tries to develop high-risk technologies after programs start instead of setting up funding, organizations, and processes to conduct high-risk technology development activities in low-cost environments, (i.e., technology development is not separated from product development). Program decisions to move into design and production are made without adequate standards or knowledge. 7. Program requirements are often set at unrealistic levels, then changed frequently as recognition sets in that they cannot be achieved. As a result, too much time passes, threats may change, or members of the user and acquisition communities may simply change their mind. The resulting program instability causes cost escalation, schedule delays, smaller quantities and reduced contractor accountability. 8. Contracts, especially service contracts, often do not have definitive or realistic requirements at the outset in order to control costs and facilitate accountability. 9. Contracts typically do not accurately reflect the complexity of projects or appropriately allocate risk between the contractors and the taxpayers (e.g., cost plus, cancellation charges). 10. Key program staff rotate too frequently, thus promoting myopia and reducing accountability (i.e., tours based on time versus key milestones). Additionally, the revolving door between industry and the department presents potential conflicts of interest. 11. The acquisition workforce faces serious challenges (e.g., size, skills, knowledge, and succession planning). 12. Incentive and award fees are often paid based on contractor attitudes and efforts versus positive results (i.e., cost, quality, and schedule). 13. Inadequate oversight is being conducted by both the department and Congress, which results in little to no accountability for recurring and systemic problems. 14. Some individual program and funding decisions made within the department and by Congress serve to undercut sound policies. 15. Lack of a professional, term-based Chief Management Officer at the department serves to slow progress on defense transformation and reduce the chance of success in the acquisitions/contracting and other key business areas. Several of my colleagues in the accountability community and I have developed a definition of waste. As we see it, waste involves the taxpayers in the aggregate not receiving reasonable value for money in connection with any government-funded activities due to an inappropriate act or omission by players with control over or access to government resources (e.g., executive, judicial or legislative branch employees; contractors; grantees; or other recipients). Importantly, waste involves a transgression that is less than fraud and abuse. Further, most waste does not involve a violation of law, but rather relates primarily to mismanagement, inappropriate actions, or inadequate oversight. Illustrative examples of waste could include the following: unreasonable, unrealistic, inadequate, or frequently changing proceeding with development or production of systems without achieving an adequate maturity of related technologies in situations where there is no compelling national security interest to do so; the failure to use competitive bidding in appropriate circumstances; an over-reliance on cost-plus contracting arrangements where reasonable alternatives are available; the payment of incentive and award fees in circumstances where the contractor’s performance, in terms of costs, schedule, and quality outcomes, does not justify such fees; the failure to engage in selected pre-contracting activities for contingent events; and congressional directions (e.g., earmarks) and agency spending actions where the action would not otherwise be taken based on an objective value and risk assessment and considering available resources. Human Capital: Federal Workforce Challenges in the 21st Century. GAO-07-556T. Washington, D.C.: March 6, 2007. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Securing, Stabilizing, and Rebuilding Iraq: Key Issues for Congressional Oversight. GAO-07-308SP. Washington, D.C.: January 9, 2007. Information Technology: Status and Challenges of Employee Exchange Program. GAO-07-216. Washington, D.C.: December 15, 2006. Polar-Orbiting Operational Environmental Satellites: Technical Problems, Cost Increases, and Schedule Delays Trigger Need for Difficult Trade-off Decisions. GAO-06-249T. Washington, D.C.: November 16, 2005. Human Capital: Selected Agencies Have Opportunities to Enhance Existing Succession Planning and Management Efforts. GAO-05-585. Washington, D.C.: June 30, 2005. Interagency Contracting: Problems with DOD’s and Interior’s Orders to Support Military Operations. GAO-05-201. Washington, D.C.: April 29, 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 1, 2005. Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity. GAO-04-394G. Washington, D.C.: March 2004. Acquisition Workforce: Status of Agency Efforts to Address Future Needs. GAO-03-55. Washington, D.C.: December 18, 2002. Contract Management: Taking a Strategic Approach to Improving Service Acquisitions. GAO-02-499T. Washington, D.C.: March 7, 2002. Defense Contracting: Improved Insight and Controls Needed over DOD’s Time-and-Materials Contracts. GAO-07-273. Washington, D.C.: June 29, 2007. Defense Contracting: Use of Undefinitized Contract Actions Understated and Definitization Time Frames Often Not Met. GAO-07-559. Washington, D.C.: June 19, 2007. Defense Acquisitions: Role of Lead Systems Integrator on Future Combat Systems Program Poses Oversight Challenges. GAO-07-380. Washington, D.C.: June 6, 2007. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Best Practices: An Integrated Portfolio Management Approach to Weapon System Investments Could Improve DOD’s Acquisition Outcomes. GAO-07-388. Washington, D.C.: March 30, 2007. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-07-406SP. Washington, D.C.: March 30, 2007. Rebuilding Iraq: Reconstruction Progress Hindered by Contracting, Security, and Capacity Challenges. GAO-07-426T. Washington, D.C.: February 15, 2007. Iraq Contract Costs: DOD Consideration of Defense Contract Audit Agency’s Findings. GAO-06-1132. Washington, D.C.: September 25, 2006. Department of Defense: Sustained Leadership Is Critical to Effective Financial and Business Management Transformation. GAO-06-1006T. Washington, D.C.: August 3, 2006. Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and Abuse. GAO-06-838R. Washington, D.C.: July 7, 2006. Defense Acquisitions: Actions Needed to Get Better Results on Weapons Systems Investments. GAO-06-585T. Washington, D.C.: April 5, 2006. Unmanned Aircraft Systems: DOD Needs to More Effectively Promote Interoperability and Improve Performance Assessments. GAO-06-49. Washington, D.C.: December 13, 2005. Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes. GAO-06-66. Washington, D.C.: December 19, 2005. Best Practices: Better Support of Weapon System Program Managers Needed to Improve Outcomes. GAO-06-110. Washington, D.C.: November 30, 2005. Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD Is Not Demonstrated. GAO-05-456. Washington, D.C.: July 29, 2005. Defense Ethics Program: Opportunities Exist to Strengthen Safeguards for Procurement Integrity. GAO-05-341. Washington, D.C.: April 29, 2005. Department of Energy: Major Construction Projects Need a Consistent Approach for Assessing Technology Readiness to Help Avoid Cost Increases and Delays. GAO-07-336. Washington, D.C.: March 27, 2007. DOE Contracting: Better Performance Measures and Management Needed to Address Delays in Awarding Contracts. GAO-06-722. Washington, D.C.: July 30, 2006. Department of Energy: Further Actions Are Needed to Strengthen Contract Management for Major Projects. GAO-05-123. Washington, D.C.: March 18, 2005. Coast Guard: Challenges Affecting Deepwater Asset Deployment and Management and Efforts to Address Them. GAO-07-874. Washington, D.C.: June 18, 2007. Department of Homeland Security: Progress and Challenges in Implementing the Department’s Acquisition Oversight Plan. GAO-07-900. Washington, D.C.: June 13, 2007. Department of Homeland Security: Ongoing Challenges in Creating an Effective Acquisition Organization. GAO-07-948T. Washington, D.C.: June 7, 2007. Information Technology: DHS Needs to Fully Define and Implement Policies and Procedures for Effectively Managing Investments. GAO-07-424. Washington, D.C.: April 27, 2007. Interagency Contracting: Improved Guidance, Planning, and Oversight Would Enable the Department of Homeland Security to Address Risks. GAO-06-996. Washington, D.C.: September 27, 2006. Homeland Security: Challenges in Creating and Effective Acquisition Organization. GAO-06-1012T. Washington, D.C.: July 27, 2006. Hurricane Katrina: Improving Federal Contracting Practices in Disaster Recovery Operations. GAO-06-714T. Washington, D.C.: May 4, 2006. NASA Procurement: Use of Award Fees for Achieving Program Outcomes Should Be Improved. GAO-07-58. Washington, D.C.: January 17, 2007. NASA’s Deep Space Network: Current Management Structure Is Not Conducive to Effectively Matching Resources with Future Requirements. GAO-06-445. Washington, D.C.: April 27, 2006. Next Generation Air Transportation System: Status of the Transition to the Future Air Traffic Control System. GAO-07-784T. Washington, D.C.: May 9, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal year 2006, the federal government spent over $400 billion for a wide variety of goods and services, with the Department of Defense (DOD) being the largest purchaser. Given the large and growing structural deficit, the government must get the best return it can on its investment in goods and services. For decades, GAO has reported on a number of systemic challenges in agencies' acquisition of goods and services. These challenges are so significant and wide-ranging that GAO has designated four areas of contract management across the government to be high-risk. This testimony highlights four key acquisition challenges agencies face: (1) separating wants from needs, (2) establishing and supporting realistic program requirements, (3) using contractors in appropriate circumstances and contracts as a management tool, and (4) creating a capable workforce and holding it accountable. Given the current fiscal environment, agencies must separate wants from needs to ensure that programs provide the best return on investments. Our work has shown that some agencies budget and allocate resources incrementally, largely based on historical precedents, rather than conducting bottom-up reviews and allocating resources based on agencywide goals. We have also seen examples of agencies using fragmented decision-making processes for acquisition investments. Agency spending actions that would not otherwise be taken based on an objective value and risk assessment and considering available resources, work against good strategic planning. Such spending can circumvent careful planning and divert resources from more critical needs, and can serve to exacerbate our serious long-range fiscal imbalance. Agencies also need to translate their true needs into executable programs by setting realistic and stable requirements, acquiring requisite knowledge as acquisitions proceed through development, and funding programs adequately. However, agencies too often promise capabilities they cannot deliver and proceed to development without adequate knowledge. As a result, programs take significantly longer, cost more than planned, and deliver fewer quantities and different capabilities than promised. Even if more funding were provided, it would not be a solution because wants will usually exceed the funding available. No less important is the need to examine the appropriate circumstances for using contractors and address contract management challenges. Agencies continue to experience poor acquisition outcomes in buying goods and services in part because of challenges in setting contract requirements, using the appropriate contract with the right incentives, and ensuring sufficient oversight. Exacerbating these challenges is the evolving and enlarging role of contractors in performing functions previously carried out by government personnel. Further, while contract management challenges can jeopardize successful acquisition outcomes in normal times, they also take on heightened importance and significantly increase risks in the context of contingency operations such as Afghanistan, Iraq, or Hurricane Katrina. Finally, it is imperative that the federal government develop an accountable and capable workforce, because the workforce is ultimately responsible for strategic planning and management of individual programs and contracts. Yet much of the acquisition workforce's workload and complexity of responsibilities have been increasing without adequate attention to the workforce's size, skills and knowledge, and succession planning. Sustained high-level leadership is needed to set the right tone at the top in order to address acquisition challenges and ultimately, prevent fraud, waste, and abuse.

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In each fiscal year, DOD establishes a standard price per barrel to be charged to its fuel customers. The Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), estimates and sets a standard price for its fuel and other fuel- related commodities that endeavors to closely approximate the actual per barrel price during budget execution, which occurs almost a year later. The Office of the Under Secretary of Defense (Comptroller) sets the standard price annually based on three components. Crude Oil—The baseline for setting the standard price is the forecasted price for crude oil, which is provided to DOD by OMB. To estimate the cost of crude oil, the Council of Economic Advisors, the Department of the Treasury, and OMB—referred to as the Troika— jointly prepare a set of economic assumptions for agencies to use in preparing their overall budgets. In developing the crude oil price projections, the Troika uses oil price projections coming from the prices in the futures market for both West Texas Intermediate (WTI) and Brent crude oil prices. DOD uses the WTI projection as its baseline. According to OMB Circular A-11, all baseline estimates used in the budget must be consistent with the economic assumptions provided by OMB. Refinement Markup—DOD adds a markup for the cost of refining the crude oil. Because DOD and its customers use refined oil products— such as jet fuel and diesel fuel—DOD has to include the additional cost of refining the fuel in its standard price. This refinement markup is estimated based on the historical price relationship between WTI crude oil and refined product prices. Nonproduct Costs—DOD adds an estimate for nonproduct costs associated with DLA’s overhead, including facilities sustainment, restoration, and modernization; transportation; and storage costs. Other nonproduct costs include an estimate of product losses and may include cost recovery adjustments for prior year fund losses to the Defense-wide Working Capital Fund, legal judgments, and rounding. Figure 1 identifies each of the price components as a percentage of the total standard price for fiscal year 2013. In developing their annual operation and maintenance budget requests, the military services use the standard price and their estimated fuel requirements based on activity levels (such as flying hours, steaming days, tank miles, and base operations). For example, the Air Force as the largest DOD customer for fuel, purchased approximately 49 million barrels in fiscal year 2013, representing 53 percent of all sales to the military services. In determining its Operation and Maintenance funding needs, the Air Force provided an estimate for fuel in its budget request based on an analysis of each aircraft’s fuel usage and future programmed flying hours. Figure 2 below generally illustrates the process and the main organizations involved in budgeting for fuel. DOD utilizes its Defense-wide Working Capital Fund to purchase bulk fuel for customers. According to DOD’s Financial Management Regulation, working capital funds were established to satisfy recurring DOD requirements using a businesslike buyer-and-seller approach. The Defense-wide Working Capital Fund is the Working Capital Fund managed by the defense agencies. The fund consists of six activity groups. Three of these activity groups are operated by DLA, two by the Defense Information Systems Agency, and one by the Defense Finance and Accounting Service. The activity group related to DOD’s bulk fuel program is the DLA Energy Management Activity group, which provides worldwide energy support including bulk fuel purchasing, transportation, and storage for the military services and other customers. The fund covers DLA’s costs for purchasing bulk fuel and is reimbursed through its sale of fuel to the military services and other customers at a standard price. The standard price is intended to remain unchanged until the next budget year. This helps to shield the military services from market price volatility by allowing the cash balance in the fund to absorb minor fuel price fluctuations. According to DOD’s Financial Management Regulation, the goal of the fund is to remain revenue-neutral, allowing the fund to break even over time—that is, to neither make a gain nor incur a loss. During the year the budget is executed, the actual price for a barrel of fuel on the world market may be higher or lower than DOD’s standard price. If the actual price is higher, the cash balance in the Defense-wide Working Capital Fund will go down. If the actual price is lower, the cash balance in the fund will go up. These fluctuations in the cash balance are known as a net outlay. To correct for these fluctuations, DOD may adjust the standard price for the following year. For example, DOD may increase the standard price to make up for losses in the previous year and bolster the cash balance in the fund. Alternatively, DOD may decrease the standard price to reimburse the services, which had paid a higher price the previous year. DOD can also cover fund losses during the execution year by obtaining an appropriation from Congress, transferring funds from another DOD account into the fund, or adjusting the standard price out of cycle. During fiscal years 2009 through 2013, DOD’s actual costs for bulk fuel differed considerably from its budget estimates, due largely to fluctuations in fuel price. During those years, DOD either under- or overestimated what it would have to pay for bulk fuel. The differences between estimated and actual fuel costs were accounted for primarily by fluctuations in the market price for fuel. In each of fiscal years 2010, 2011, and 2012, DOD underestimated its bulk fuel costs by about $3 billion. In 2009, DOD overestimated these costs by about $3 billion and in 2013 by about $2 billion. Table 1 shows the total difference between DOD’s estimated and actual fuel costs for fiscal years 2009 through 2013. We identified two primary factors that accounted for the difference between estimated and actual costs—(1) fluctuations in the market price of fuel and (2) differences between the services’ estimated and actual fuel consumption. Our analysis showed that from fiscal years 2009 through 2013, the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. In fiscal year 2012, for example, DOD estimated a standard price of $131.04 per barrel. DOD’s actual costs during that year averaged $167.33 per barrel—an underestimate of $36.29 per barrel—which represented 85 percent of the underestimate for fiscal year 2012. Figure 3 compares the actual price DLA paid for fuel with the standard price DOD used to calculate its budget estimates. Of the three components that constitute the standard price, crude oil prices and refinement markup costs accounted for most of the difference between the estimated standard price and actual fuel costs during fiscal years 2009 through 2013. In fiscal years 2009 and 2010, differences in the price of crude oil accounted for most of the difference between the estimated and actual prices—in 2009 for 95 percent of the difference and in 2010 for 72 percent. However, during fiscal years 2011 through 2013, the refinement markup became the main driver of the difference, accounting for between 65 and 79 percent of the difference, as shown in table 2. For fiscal years 2009 through 2012, DOD added a markup of 30 percent over the price of WTI to account for refinement costs in setting the standard price. According to DOD officials, the 30 percent markup over the WTI crude oil price had been a generally accurate predictive indicator for the price of DOD’s actual refined fuel costs. However, in fiscal year 2011, actual fuel costs exceeded the price of WTI by an average of 49 percent and in 2012 by an average of 60 percent. Therefore, DOD set the refinement markup too low in those years. According to DOD officials, to account for these differences, DOD increased the markup for refinement costs from 30 percent to 50 percent of the WTI price when developing the standard price for fiscal year 2013. Although fluctuations in fuel prices were, on average, the primary driver of the differences between estimated and actual fuel costs in fiscal years 2009 through 2013, differences between the services’ estimated and actual fuel consumption levels also contributed to the overall difference. These differences accounted for, on average, 26 percent of the difference between DOD’s estimated and actual fuel costs. In fiscal years 2009 through 2012, the military services’ estimated fuel requirements were within 5 percent of their actual consumption, as shown in figure 4. However, in fiscal year 2013, we found that differences between estimated and actual fuel consumption levels became the main driver of the total difference between estimated and actual fuel costs. In that year, DOD underestimated the cost of fuel but overestimated its consumption by approximately 19 million barrels, or 17 percent. According to DOD officials, actual consumption was much lower as a result of actions DOD took to address sequestration. In November 2013, we reported that for fiscal year 2013, DOD’s Operation and Maintenance accounts were reduced by approximately $20 billion, or 7.2 percent, due to sequestration reductions. We identified several actions DOD took to address these budgetary reductions. For example, in fiscal year 2013, the Air Force initially ceased flight operations from April through June for about one- third of active-duty combat Air Force units. Also, the Army curtailed training for all units except those deployed, preparing to deploy, or stationed overseas, and the Navy limited flight training for nondeploying units. DOD has taken actions to manage fluctuations in the cash balance of the Defense-wide Working Capital Fund caused by differences between its estimated and actual fuel costs. These actions included transferring funds into the Defense-wide Working Capital Fund from other accounts and adjusting the standard price DOD charged to its fuel customers. The Defense-wide Working Capital Fund provides the cash balance that is used to fund the day-to-day operations for six defense-wide activity groups, including DLA Energy, which provides, among other things, worldwide energy support to the military services and other authorized customers for bulk fuel purchasing, transportation, and storage. According to a DOD report, the volatility of fuel prices has historically posed a challenge to managing the cash balance of the fund. When DLA pays more or less for fuel than the standard price it charges its customers, the cash balance in the Defense-wide Working Capital Fund will go down or up. For instance, if fuel market prices rise significantly relative to the standard price, the cash balance in the fund will go down. On the other hand, if fuel market prices decrease relative to the standard price, the fund will generate excess cash and the balance will go up. In fiscal years 2009 through 2013, the fluctuations in the cash balance of the Defense-wide Working Capital Fund were partially driven by these net outlays for fuel, as shown in figure 5. The Defense-wide Working Capital Fund is intended to provide DOD with the flexibility to absorb some fluctuation in fuel prices. However, in some instances, DOD has sought to manage the fluctuations in the fund’s cash balance by transferring money into or out of the fund or by adjusting its standard price. For example, in fiscal years 2012 and 2013, DOD transferred funds into the Defense-wide Working Capital Fund. In 2012, DOD transferred $1 billion into the fund from the Afghanistan Security Forces Fund and in 2013 another $1.4 billion from various accounts, including the Foreign Currency Fluctuations account, to mitigate the cash shortfall caused by an increase in fuel costs over the standard price. DOD also transferred cash out of the fund during the period of our review. Specifically, in fiscal year 2011, Congress reduced funding for several DOD operation and maintenance accounts by about $2 billion to reflect excess cash balances in the Defense-wide Working Capital Fund. In response, DOD transferred almost $1.3 billion out of the Defense-wide Working Capital Fund to fund the reduced operation and maintenance accounts. We found that these transfers into or out of the fund can affect adjustments to the standard price. For example, according to DOD officials, the fiscal year 2013 transfer allowed DOD to maintain the same standard price throughout that year even though actual fuel costs exceeded the standard price. A DOD study noted that the fiscal year 2011 transfer out of the fund required DOD to increase its standard price by almost $40 per barrel because the cash balance in the Defense-wide Working Capital Fund was no longer sufficient to mitigate the increased costs of fuel in that year. DOD also used changes to the standard price to manage the cash balance in the Defense-wide Working Capital Fund. From the beginning of fiscal year 2009 through end of fiscal year 2013, DOD adjusted its standard price 13 times—increasing it 6 times and decreasing it 7 times. According to DOD, these price changes were due to changing product costs, approved transfers, and the availability of cash balances in the fund. For example, the fiscal year 2012 President’s Budget estimated a standard price of $131.04. However, in October 2011, DOD raised the standard price to $165.90. It then lowered the price to $160.44 in January 2012, to $151.20 in June 2012 and finally to $97.02 in July 2012, where the price remained for the rest of the fiscal year. Figure 6 shows the transfers and standard prices during fiscal years 2009 through 2013 and the cash balances in the Defense-wide Working Capital Fund. Standard price adjustments affect the military services. According to DOD officials, an adjustment to the standard price is not their preferred option for managing the fund’s cash balances because of the potential strain it places on the services’ budgets. For example, a Navy official told us that when the standard price is increased, the Navy must either reduce consumption by curtailing training or request additional funding. Fiscal year 2013 was the first year since 2004 during which DOD maintained its standard price for the entire year. DOD has studied various aspects of its bulk fuel program since 2004, but it has not updated its current approach for setting the standard price to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price—even though the differences between its estimated and actual costs have been considerable since that time. Since 2004, DOD has completed a number of studies reviewing various aspects of its bulk fuel program, including studies of its management of working capital funds. We identified six studies related to DOD bulk fuel pricing and management of the Defense-wide Working Capital Fund. See appendix II for a description of the purpose of the studies and any identified findings, including the status on any proposed recommendations. The John Warner National Defense Authorization Act for Fiscal Year 2007 required the Secretary of Defense to submit a report on fuel rate and the cost projections used in the DOD budget presentation. In response, DOD completed a study in February 2007 that compared the crude oil forecast provided by OMB with crude oil forecasts developed by the Department of Energy and 38 private forecasting companies. Based on its analysis, DOD elected to maintain its current approach—using OMB’s WTI forecast as its preferred baseline—because the study concluded that OMB’s forecasts were comparable to or better at estimating the actual crude oil price than the alternative forecasts it evaluated. More recently, in January 2012, in response to the Ike Skelton National Defense Authorization Act for Fiscal Year 2011, the Office of the Under Secretary of Defense (Comptroller) reviewed alternatives for managing the balances of the Defense-wide Working Capital Fund. The study found that fuel cost volatility poses a major threat to the fund’s solvency. As a result, the study concluded that DOD may need to request funding transfers that could disrupt investment programs or threaten readiness. The study recommended two alternatives for managing working capital funds. The first would allow DOD to transfer expiring unobligated balances from other appropriation accounts into the fund to build a cash reserve. The study noted that this alternative is similar to authorities provided to other federal agencies’ working capital funds, but that it would require statutory authorization. The second alternative would allow the fund to accumulate and reserve funds in times of positive cash flow—up to $12.5 billion, or two times the largest cash shortfall on record. The Office of the Under Secretary of Defense (Comptroller) identified several concerns with this alternative. For example, according to the study, DOD would need congressional authorization to accumulate positive operating results. Additionally, the study noted that maintaining a large cash balance in the fund to mitigate potential price risk is not a productive use of resources. According to DOD officials, DOD’s Financial Management Regulation is currently being updated with an estimated issuance of summer 2014 to allow for greater flexibility in developing cash balance targets for the Defense-wide Working Capital Fund. The 2012 study also listed other alternatives for managing working capital fund balances, which it did not recommend due to certain limitations, risks, and costs. These included some alternatives that had previously been studied and recommended by the Defense Business Board. For example, the Defense Business Board had previously studied the feasibility of hedging fuel on the open market, which includes purchasing financial instruments to minimize risk in future prices. However, according to the study, DOD has elected not to pursue hedging for a number of reasons including that it is outside of DOD’s current authority, would incur management fees that would increase total costs, and poses additional political and economic risk. The 2012 study also rejected the Defense Business Board’s recommendations to implement firm-fixed- price fuel contracts and to partner with the Department of the Interior to access additional funds when fuel costs increase. The study noted that firm-fixed-price contracts would shift pricing risk to the supplier, which would be likely to result in DOD paying a premium for the contracts. According to GAO’s Cost Estimating and Assessment Guide, a cost estimate should be updated regularly to reflect significant changes—such as changes to assumptions—and actual costs, so that it always reflects current conditions. Also, according to the guide, major assumptions should be assessed to determine how sensitive they are to changes, and risk and uncertainty analysis should be performed to determine the level of risk associated with the estimate. Further, OMB guidance states that agencies should consider the effect that demographic, economic, or other changes can have on assumptions for program levels beyond the budget year. However, the assumptions that DOD uses for setting the crude oil component of the standard price do not reflect current market conditions. Specifically, DOD’s assumptions do not consider (1) differences between crude oil benchmarks, (2) differences between domestic and international crude oil prices, and (3) the decreasing relationship between crude oil and refined prices. DOD’s approach for establishing the standard price has not accounted for changes in market conditions for crude oil. As discussed earlier in this report, DOD’s process of adding a refinement markup to the price of WTI in setting the standard price has resulted in estimated fuel costs that have been considerably lower than actual fuel costs. We found that, from fiscal years 2010 through 2013, the price for WTI diverged from other crude oil pricing benchmarks. According to a report from the Energy Information Administration, WTI was selling during this period for less than other crude oil pricing benchmarks, such as Brent—a commonly used crude oil benchmark. The price spread between WTI and Brent reached a high of $27 per barrel in September 2011, as shown in figure 7. Energy Information Administration officials also told us that, although the price spread between Brent and WTI has narrowed recently, they believe that the relationship between the pricing of Brent and WTI may remain volatile and that a price spread between the two benchmarks will likely continue. In its April 2014 Short-Term Energy Outlook, the Energy Information Administration estimates that in calendar year 2015 the price of WTI will be about $11 per barrel less than the price of Brent. Recognizing this market change, other federal agencies have adjusted their crude oil benchmarks for estimating energy prices because of this price spread. For example, in its 2013 Annual Energy Outlook, the Energy Information Administration shifted from WTI to Brent for estimating energy prices. According to officials from the Energy Information Administration, Brent crude oil prices have become the primary international crude oil benchmark. Furthermore, these officials noted that worldwide petroleum product prices—including in the United States—are typically based on Brent prices. This is consistent with DLA’s analysis, which found that domestic refined fuel products are more closely related with Brent than with WTI prices. OMB has also accounted for other crude oil benchmarks in its annual economic assumptions that are provided to federal agencies for budgeting purposes. According to officials from DOD and OMB, beginning with the fiscal year 2014 budget cycle, OMB began providing DOD and other federal agencies with forecasted Brent prices in addition to WTI prices. OMB officials told us that although OMB Circular A-11 requires that federal agencies’ budget estimates be consistent with OMB’s economic assumptions, DOD has discretion over which economic assumptions, such as an appropriate crude oil benchmark, to apply in developing its bulk fuel estimates. We identified other market conditions that DOD has not accounted for with its current approach to determining the crude oil component of the standard price. For example, DLA purchases about half of its fuel from overseas refiners. From fiscal years 2009 through 2013, DLA purchased, on average, 48 percent of its fuel from overseas sources. However, WTI is a pricing benchmark only for domestic crude oil. Because DOD uses WTI, its baseline for setting the standard price does not account for any potential price differences between domestic and overseas purchases. Furthermore, officials at DOD also expressed concerns that crude oil may no longer be a good indicator for refined product prices. According to an official from the Office of the Under Secretary of Defense (Comptroller), in recent years the relationship between crude oil prices and the price of DOD refined products has not been as closely related as it has in the past. This is consistent with our own analysis. Specifically, for fiscal years 2009 through 2013 we compared the actual price DLA paid for fuel with the actual price of other fuel products—including WTI crude oil, Brent crude oil, and commercial jet fuel—to determine the relationship among these prices. Based on our analysis of data from the Energy Information Administration, we found that in each year the prices DLA paid for fuel had a closer relationship with commercial jet fuel prices than with either WTI or Brent crude oil prices. To compensate for the limitations in its crude oil baseline, DOD has adjusted other components of its standard price. For example, as discussed earlier in this report, beginning in fiscal year 2013, DOD increased the refinement markup component of the standard price from 30 percent to 50 percent to account for the divergence between WTI and other crude oil pricing benchmarks. DOD has continued to use the 50 percent refinement markup in setting its standard price for fiscal years 2014 and 2015. This practice means that DOD is using the markup not only to account for refinement costs, but to cover the price spread between WTI and other crude oil pricing benchmarks. By using the increased refinement markup to compensate for the price spread, DOD is not addressing the underlying limitations with its crude oil baseline. Rather, DOD is adding further risk and uncertainty concerning its estimate, because the estimate must now account for additional price variables. Even though in recent years its methodology has been producing estimates that differ significantly from actual costs, DOD has not reevaluated its approach or documented the rationale behind the assumptions it uses for setting the standard price. DOD’s 2007 study found that its forecasting methodology produced results as good as or better than the forecasting models the study compared it with. However, that study focused exclusively on the crude oil component of the standard price. It did not evaluate the accuracy of the standard price methodology as a whole against other potential approaches. Moreover, since that time, DOD has not reevaluated whether using WTI as its baseline assumption—with the corresponding refinement markup—is still appropriate given recent market changes. Further, DOD has not considered whether a crude oil baseline is still reasonable at all. Officials from the Office of the Under Secretary of Defense (Comptroller) told us that they have held internal discussions regarding changing the crude oil pricing baseline used in the standard price, but no final decision has been made. Furthermore, DOD has not fully documented its rationale and assumptions for establishing each component of the standard price. GAO’s Cost Estimating and Assessment Guide states that a cost estimate should be supported by detailed documentation that describes how it was derived. According to the guide, the documentation should include, among other things, the estimating methodology used to derive the costs for each element of the cost estimate, and it should also discuss any limitations of the data or assumptions. Further, a well-documented methodology allows decision makers to understand and evaluate the budget request and make proper determinations. According to an official from the Office of the Under Secretary of Defense (Comptroller) responsible for overseeing DOD’s bulk fuel program, DOD’s Financial Management Regulation provides overarching guidance on establishing prices for working capital fund products, including fuel. Specifically, the Financial Management Regulation provides that all business areas of the fund are required to set their prices based upon full cost recovery, including general and administrative support provided by others. This official noted that DOD’s process for setting the standard price is based on this full cost recovery, as described in specific guidance in the Financial Management Regulation. Additionally, federal guidance also governs aspects of the rate-setting process. For example, OMB’s A-11 Circular requires DOD’s budget estimates for fuel to be consistent with OMB’s economic assumptions. For this reason the official stated that the establishment of a more specific methodology could be potentially redundant to the existing process, and could add additional administrative hurdles that may not add value. However, while DOD’s Financial Management Regulation provides overall principles for working capital funds, it does not require DOD to document its methodology for setting the standard price in a step-by-step process. Therefore, DOD does not have detailed documentation that describes the rationale for the assumptions it uses. For example, DOD has not documented its rationale for continuing to select WTI as a crude oil benchmark in establishing the standard price although OMB now provides more than WTI crude oil forecasts in its economic assumptions. Also, according to the Office of the Under Secretary of Defense (Comptroller) official, DOD determines its refinement markup to account for the fact that DLA purchases refined product and does not buy crude oil and that this factor is developed based on current commodity market experience balanced against DOD priorities. However, DOD has not documented its rationale or assumptions for determining these trade-offs. Reevaluating its approach for estimating the components of the standard price would allow DOD to develop more informed estimates and better position DOD to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. DOD has faced challenges in setting a standard price that closely approximates its actual fuel costs, and in recent years its estimated fuel prices have differed considerably from its actual costs. Actual prices have differed from DOD’s estimates largely because changes in fuel market conditions have not been reflected in the standard price. Additionally, DOD has not documented its rationale for continuing to use the same assumptions. The Defense-wide Working Capital Fund, designed to absorb the effects of price fluctuations, has been insufficient to absorb the significant net outlays for fuel. This has led to large transfers into the fund from other DOD accounts and adjustments to the standard price DOD charges to customers—disrupting other DOD programs and straining the military services’ budgets. Despite the recurring need for these transfers and price adjustments, DOD has not reevaluated its approach to setting the standard price since 2007. Until DOD has reevaluated its approach and documented its assumptions for setting the standard price, it may not be certain that its price reflects current conditions. To improve DOD’s process for setting its standard fuel price, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), to take the following two actions: reevaluate the approach for estimating the components of the standard price and document its assumptions, including providing detailed rationale for how it estimates each of these components. We provided a draft of this report to DOD, OMB, and the Energy Information Administration for review and comment. DOD provided written comments, which are summarized below and reprinted in appendix III. In its comments, DOD concurred with the first recommendation and partially concurred with the second recommendation. OMB and the Energy Information Administration did not provide comments on the draft report. DOD concurred with the first recommendation that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in coordination with DLA, to reevaluate DOD’s approach for estimating the components of the standard price. In its comments, DOD stated that this is an ongoing effort within the department and that the Office of the Under Secretary of Defense (Comptroller) and DLA are continually evaluating methods to better estimate the price of fuel. DOD stated that this is a challenge because the rate-setting process takes place a budget cycle in advance of execution. DOD noted that fuel-market volatility affects the Working Capital Fund’s ability to budget for, and customers’ ability to buy, fuel at a stabilized price. Additionally, in its comments, DOD stated that the department does not have the storage capacity to hold a year’s worth of fuel in advance, so fuel is purchased in real time throughout the execution year and sold at a price set 18 months prior. We agree that the rate-setting process is challenging, given the timing of DOD’s budget process and when the department actually purchases fuel. However, as stated in the report, DOD’s current approach for establishing the standard price has not accounted for changes in market conditions for crude oil, such as the decreasing relationship between crude oil and refined prices, even though its methodology has been producing estimates that differ greatly from actual costs. Although DOD noted in its comments that it is continually evaluating methods to better estimate the price of fuel, it did not specify any specific initiatives to that end. Moreover, the report did not identify any studies that DOD has undertaken since 2004 that constitute a reevaluation of the department’s approach for estimating the components of the standard price. Reevaluating its approach for estimating the components of the standard price would allow DOD to develop more- informed estimates and better position the department to minimize risks and uncertainty resulting from changing market conditions. DOD partially concurred with the second recommendation that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in coordination with DLA, to document its assumptions, including providing a detailed rationale for how it estimates each of the standard price components. In its comments, DOD stated that the department does not have a “documented” specific, step-by-step process to develop the fuel price. DOD further stated that it prices fuel by using a formal process that has been presented to the department’s leadership, briefed to congressional staffers, discussed with the administration, and reproduced in various instructional and informational briefings and papers. In its comments, DOD stated that the process for setting the fuel price is similar to other Working Capital Fund products and follows the intent of DOD’s Financial Management Regulation and congressional implementing language for full cost recovery. We stated in the report that DOD’s Financial Management Regulation provides overall principles for working capital funds, but it does not require DOD to document its methodology for setting the standard price in a step-by-step process. Therefore, DOD does not have detailed documentation that describes the rationale for the assumptions it uses, such as its rationale for selecting one crude oil benchmark over another benchmark or the factors and other tradeoffs that it considers when establishing the refinement markup. GAO’s Cost Estimating and Assessment Guide states that a cost estimate should be supported by detailed documentation that describes how it was derived. According to the guide, the documentation should include, among other things, the estimating methodology used to derive the costs for each element of the cost estimate, and it should also discuss any limitations of the data or assumptions. Documenting DOD’s assumptions, including the rationale for each component of the standard price, would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense; the Under Secretary of Defense (Comptroller); the Director of DLA; the Director of OMB; and the Administrator of the Energy Information Administration. In addition, this report is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have questions about this report, please contact Cary Russell at (202) 512-5431 or [email protected], or Asif A. Khan at (202) 512-9869 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 contributors to this report are listed in appendix IV. To address our objectives, we focused our analysis on fiscal years 2009 through 2013. We focused on these years because this period covered the most recent complete year of the Department of Defense’s (DOD) fuel sales and provided 5 years of cost data to analyze any trends. To determine how estimated bulk fuel costs have compared with actual costs since fiscal year 2009 and identify the factors that contributed to any differences, we compared the estimated budget costs for fuel against actual costs in the budget year of execution and identified any differences. We calculated DOD’s estimated fuel costs by multiplying the standard price per barrel by the number of barrels the military services estimated they would consume. To calculate DOD’s actual fuel costs, we multiplied the actual purchase price per barrel by the number of barrels sold to the military services. We then determined which factors contributed to the overall differences. Specifically, we calculated the percentage of the overall difference explained by either fuel price fluctuations or differences between estimated fuel consumption and actual consumption. Next, we compared each of the three components of the standard price (crude oil price, refinement markup, and nonproduct costs—such as transportation and facilities maintenance) against the actual costs for each component to determine which one contributed most to the difference between the standard price and actual fuel costs. We also interviewed officials from the Office of the Under Secretary of Defense (Comptroller), the Defense Logistics Agency (DLA), the military services, and the Department of Energy’s Energy Information Administration to discuss the factors that contributed to these differences. To determine the extent to which DOD has taken actions to manage the effect of any differences between estimated and actual fuel costs, we reviewed monthly cash balances in the Defense-wide Working Capital Fund for the period October 2008 through September 2013 and determined the effect of bulk fuel purchases and sales on those balances. In doing so, we determined net outlays from the Defense-wide Working Capital Fund and compared them with the cash balance in the fund. We analyzed DOD financial management documents for this same period to determine the number and amount of approved transfer actions related to fuel into and out of the Defense-wide Working Capital Fund and any fuel- related supplemental appropriations received into the fund. In addition, we analyzed DOD budget-justification materials and other documentation to identify all changes to DOD’s standard price. We also interviewed officials from DOD and the military services to determine the effect on the services’ budgets of transfers and changes to the standard price. To determine the extent to which DOD has considered options for adjusting its approach for estimating bulk fuel costs and managing working capital funds, we reviewed related studies and recommendations that we identified through interviews with DOD officials and literature searches that discuss options available to DOD to adjust its approach to managing bulk fuel costs and working capital funds. For this review we focused on relevant studies that have been conducted since 2004. We interviewed DOD officials to determine the status of any findings and recommendations from these studies related to DOD’s bulk fuel pricing or management of the Defense-wide Working Capital Fund. We also reviewed documentation that describes DOD’s current approach for estimating bulk fuel costs, including budget-justification materials and DOD reports, and discussed the department’s approach with officials from the Office of the Under Secretary of Defense (Comptroller), DLA, and the Office of Management and Budget. We compared this information with cost-estimating practices established in GAO’s Cost Estimating and Assessment Guide and Office of Management and Budget and DOD guidance. We also interviewed officials from DOD, the Office of Management and Budget, and the Department of Energy to discuss current fuel market conditions and alternative approaches to estimating bulk fuel costs and reviewed Department of Energy reports describing current fuel market conditions. To better understand the fuel market conditions, we reviewed DLA fuel purchase data for fiscal years 2009 through 2013 and compared the amount of domestic fuel purchases with the amount of international fuel purchases. We also performed analysis on the relationship of the West Texas Intermediate (WTI) crude oil benchmark with other crude oil pricing benchmarks to determine whether DOD’s approach to setting its standard price reflects current market conditions. Further, we conducted an analysis on the relationship of crude oil prices with refined product costs, including the cost of commercial jet fuel. To determine the reliability of the fuel cost data provided to us by DOD, we obtained information on how the data were collected, managed, and used through interviews with and questionnaires to relevant officials. We assessed the reliability of the data collected by analyzing questionnaire responses from Office of the Under Secretary of Defense (Comptroller) and DLA officials, which included information on their data system management, data quality-assurance processes, and potential sources of errors and mitigations of those errors. To determine the reliability of monthly cash balances in the Defense-wide Working Capital Fund, we (1) obtained and analyzed reports containing detailed data on transactions affecting the Working Capital Fund cash balance including collections, disbursements, direct appropriations to the fund, and funds transferred into and out of the fund; (2) reconciled year-end cash balances between DOD reports and Department of the Treasury records; and (3) obtained and analyzed documentation supporting the amount of funds transferred in and out of the Working Capital Fund. To determine the reliability of DLA fuel purchase data, we compared DLA domestic and international fuel purchases against fuel purchase data provided in DOD’s budget- justification materials. To determine the reliability of the Energy Information Administration’s data on Brent, WTI, and commercial jet fuel prices, we reviewed information on its methodology and data quality guidelines in accordance with GAO guidance on assessing data from federal statistical databases. Based on our review of the data, we determined that the data presented in our findings were sufficiently reliable for the purposes of this report. We interviewed officials, and where appropriate obtained documentation, at the following DOD locations: Office of the Under Secretary of Defense (Comptroller); Office of the Assistant Secretary of Defense for Operational Energy Defense Logistics Agency, Energy Management Activity Group; Air Force Petroleum Agency; Office of the Secretary of the Air Force, Financial Management and Army Petroleum Center; Naval Supply Systems Command; and Headquarters, Marine Corps, Programs and Resources, Operations and Maintenance Budget Formulations Branch. We also interviewed other officials from the following federal agencies and other organizations: Office of Management and Budget; Department of Energy, Energy Information Administration; and Institute for Defense Analyses. We conducted this performance audit from November 2013 to July 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 the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix contains a list of six studies conducted since 2004 on the Department of Defense’s (DOD) bulk fuel pricing and management of the Defense-wide Working Capital Fund. Table 3 provides information on each study’s name and purpose, as well as any findings and recommendations, and DOD’s response to the recommendations or status of their implementation. Some of the studies listed below included information outside the scope of our review; however, we have only included findings and recommendations related to DOD’s bulk fuel pricing or management of the Defense-wide Working Capital Fund. In addition to the contacts named above, Gregory Pugnetti, Assistant Director; Matthew Ullengren, Assistant Director; Pedro Almoguera; Russell Bryan; Virginia Chanley; Stephen Donahue; Adam Hatton; Joanne Landesman; Amie Steele; and Michael Willems made key contributions to this report.

DOD purchases bulk fuel and sells it to customers, including the military services. Each fiscal year, DOD sets a standard price for budgeting purposes, endeavoring to closely approximate the price it will pay when it buys the fuel almost a year later. If this price is different than the standard price, DOD may need to take actions to manage its working capital funds—funds used to purchase fuel and other commodities that are reimbursed through sales. Senate Report 113-44, accompanying a bill for the National Defense Authorization Act for FY 2014, mandated GAO to review DOD's approach for establishing its bulk fuel pricing. This report discusses, among other things, (1) how estimated bulk fuel costs have compared to actual costs since FY 2009 and the factors that have contributed to any differences; and (2) the extent to which DOD has considered options for adjusting its approach to estimating bulk fuel costs and managing working capital funds in light of any differences between estimated and actual fuel costs. GAO compared estimated and actual fuel costs for FY 2009 through 2013 and analyzed DOD actions to manage working capital funds. During fiscal years 2009 through 2013, the Department of Defense's (DOD) actual costs for bulk fuel differed considerably from its budget estimates, largely because of fluctuations in fuel price in the open market. During this period, DOD underestimated its costs for 3 years and overestimated them for 2 years as shown below. GAO identified two factors that contributed to the differences between estimated and actual costs—(1) fuel price fluctuations and (2) differences between the military services' estimated fuel requirements and their actual fuel consumption. GAO's analysis showed that the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. Specifically, of the three components of the standard price that DOD sets each fiscal year—crude oil, refinement markup, and nonproduct costs, such as transportation and facilities maintenance costs—differences in the price of crude oil accounted for most of the difference between estimated and actual fuel costs in fiscal years 2009 and 2010. In fiscal years 2011 through 2013, the refinement markup accounted for most of the difference. Differences between the services' estimated fuel requirements and actual fuel consumption accounted for an average of 26 percent of the difference between estimated and actual fuel costs. Since 2004, DOD has conducted reviews of aspects of its bulk fuel program to determine whether adjustments should be made, including managing acquisition strategies, managing working capital funds, and budgeting for cost fluctuations. However, it has not updated its approach to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price. GAO's Cost Estimating and Assessment Guide and Office of Management and Budget guidance state that a cost estimate should be updated regularly to reflect changes to assumptions and actual costs, so that it always reflects current conditions. Furthermore, cost estimates should be supported by detailed documentation that describes how they were derived. Reevaluating its approach for estimating the standard price would allow DOD to develop more informed estimates and better position it to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. GAO recommends that DOD reevaluate its approach for estimating the components of the standard price and document the rationale for its assumptions. DOD agreed with the first recommendation and partially agreed with the second stating there is a closely-monitored, formal process. GAO continues to believe the recommendation remains valid as discussed in the report.

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DOD’s procurement process spans numerous Defense agencies and military services. This process provides for acquiring supplies and services from nonfederal sources and, when necessary, administering the related contractual instruments. It also provides for administering grants, cooperative agreements, and other transactions executed by contracting offices. The procurement process begins with the receipt of a requirement and ends at the contract closeout. (See fig. 1 for a simplified diagram of the procurement process, the interaction of this process with the logistics and financial management processes, and those functions within the procurement process that SPS is to support.) In November 1994, DOD’s Director of Defense Procurement (DDP) initiated the SPS program to acquire and deploy a single automated system to perform all contract management-related functions within DOD’s procurement process for all DOD organizations and activities. From 1994 to 1996, DOD defined SPS requirements and solicited commercially available vendor products for satisfying these requirements. DOD subsequently awarded a contract to American Management Systems (AMS), Incorporated, in April 1997, to (1) use its commercially available contract management system as the foundation for SPS, (2) modify this commercial product as necessary to meet the requirements, and (3) perform related services. DOD also directed the contractor to deliver SPS functionality in four incremental releases. The department later increased the number of releases across which this functionality would be delivered to seven; reduced the size of the increments; and allowed certain, more critical functionality to be delivered sooner. Over the last 4 years, DOD and AMS have deployed four releases to 773 locations in support of 21,900 users. The fifth release was delivered in February 2001 for acceptance testing; however, due to software deficiencies, this release was sent back to the vendor for rework and has not been deployed. AMS is expected to provide a second version of this release to DOD in July 2001 for additional testing. If accepted, the fifth release is to be deployed to about 4,500 users beginning in fiscal year 2002. DOD has not yet contracted for the sixth and seventh releases. (See table 2 for the status of the various software releases, and table 3 for the summary of SPS functionality by increment.) As planned, SPS is to be used to prepare contracts and contract-related documents and to support contracting staff in monitoring and administering them. SPS also is intended to standardize procurement business practices and data elements throughout DOD and to provide timely, accurate, and integrated contract information. Using SPS, the goal is that required contract and contract payment data will be entered once— at the source of the data’s creation—and be stored in a single database. As depicted in figure 1, SPS is to electronically interface with DOD’s logistics community, which is the source of goods and services requests, and with the Defense Finance and Accounting Service (DFAS), which is responsible for contract payments. DDP is organizationally within the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. However, as shown in table 3, the management responsibility for SPS is shared among several organizations. Since 1996, DOD’s Office of the Inspector General (OIG) has issued three reports critical of SPS. In September 1996, the OIG reported that the needs of SPS users might not be met and that actual costs could exceed proposed costs because, among other things, the functional requirements were very broad, existing commercial software required substantial modification, and adequate development and operational test strategies had not been developed. The OIG later reported in May 1999 that SPS lacked critical functionality and concluded that the system may not meet mission needs with regard to standardizing procurement policy, processes, and procedures. The report also noted that users were receiving inadequate system training, guidance, and support, thereby forcing users to develop inefficient system workarounds. Finally, the report raised concerns about the cost- effectiveness of DOD’s contractual reliance on a single vendor to provide system support over the life of SPS, adding that an expanded license was needed to give DOD the ability to competitively compete support services. In March 2001, the OIG reported that lack of system functionality was still a serious program concern, productivity had not increased with the implementation of version 4.1, and users were generally dissatisfied with SPS. SPS program officials generally concurred with the OIG’s findings and agreed to issue guidance on the acquisition of commercial software for major automated information systems, support development of accurate life-cycle cost estimates for SPS, clarify responsibilities for the program office, the contractor, and the evaluate the cost and benefits of obtaining additional license rights and renegotiating the contract, require the program office to be aware of additional support contracts, and suggest that the component organizations provide funds to the program office to better integrate user needs, better coordinate training needs among the DOD component organizations, and require that before any future deployments of SPS, the DOD component organizations determine that the version meets their functional requirements and to identify the number of licenses required. Also, in response to the OIG’s March 2001 report, the SPS program office initiated its own study in June 2000 to assess the extent to which benefits will be realized as a result of its implementation of version 4.1 of SPS. The program office plans to publish the study results by October 2001. Federal information technology (IT) investment management requirements and guidance recognize the need to measure investment programs’ progress against commitments. In the case of SPS, DOD is not meeting key commitments and is not measuring whether it is meeting other commitments. According to the program manager, the program office is not responsible for ensuring that all program commitments are being met. Rather, the program office’s sole task is to acquire and deploy an SPS system solution that meets defined functional requirements. Given that SPS is a major Defense acquisition, the DOD CIO is the decisionmaking authority for SPS. However, according to officials in the CIO’s office, SPS has continued to be approved and funded regardless of progress against expectations on the basis of decisions made by individuals organizationally above the CIO’s office. Without measuring and reporting progress against program commitments and taking the appropriate actions to address significant deviations, DOD runs the serious risk of investing billions of dollars in a system that will not produce commensurate value. The Clinger-Cohen Act of 1996 and Office of Management and Budget (OMB) guidance emphasize the need to have investment management processes and information to help ensure that IT projects are being implemented at acceptable costs and within reasonable and expected time frames and that they are contributing to tangible, observable improvements in mission performance (i.e., that projects are meeting the cost, schedule, and performance commitments upon which their approval was justified). For programs such as SPS, DOD requires this cost, schedule, and performance information to be reported quarterly to ensure that programs do not deviate significantly from expectations. In effect, these requirements and guidance recognize that one cannot manage what one cannot measure. DOD has not met key SPS commitments concerning the timing of product delivery, user satisfaction with system performance, and the use of a commercial system solution, as discussed below: DOD committed to SPS’ being fully operational at all sites by March 31, 2000; however, this date has slipped by 3-½ years and is likely to slip further. Currently, DOD has established a September 30, 2003, milestone for making SPS fully operational, and the program manager attributed this delay to (1) problems encountered in modifying and testing the contractor’s commercial product to meet DOD’s requirements and (2) an increase in requirements. However, the SPS Joint Requirements Board chairperson stated that no additional requirements have been approved. Instead, the original requirements were clarified for the contractor to better ensure that the needs of the user would be met. However, satisfying even this revised commitment will be problematic for several reasons. First, the 2003 milestone does not recognize DOD components’ testing activities that need to occur before the system could be fully operational. For example, Department of the Air Force officials told us that they are typically 6 to 12 months behind the program office’s deployment milestones because of additional testing that the Air Force performs before it implements the software releases. Second, the 2003 milestone has not been updated to reflect the impact of events. For example, version 4.1, the latest deployed release, was recently changed from a single release to five subreleases to correct software problems discovered during operation of version 4.1; and version 4.2 recently failed acceptance testing, and the vendor is still attempting to correct identified defects. Third, the official responsible for SPS independent operational test and evaluation, as well as the official in DOD’s Office of Program Analysis and Evaluation who is responsible for reviewing the SPS economic analyses, told us that this milestone is likely to slip further. The reasons that these officials cited included incomplete system functionality, increased system complexity, and inadequate training. DOD committed to SPS’ satisfying the needs of its contracting community and meeting specified system requirements, ultimately increasing contracting efficiency and effectiveness. However, according to a recent DOD OIG report, approximately 60 percent of the user population surveyed was not satisfied with the system’s functionality and performance, resulting in the continued use of legacy systems and/or manual processes in lieu of SPS. Similarly, another DOD report describes SPS as unstable because the system frequently goes down, meaning that it is unexpectedly unavailable to users who are logged on and using the system, which, in turn, causes users to lose information. The report also notes that users complained that previously identified problems were not being resolved in later software releases, and that requested changes or enhancements were not being made. According to the program manager, at any one time, there was a backlog of 100 to 200 problems that needed to be addressed in order for SPS to meet specified requirements. In light of these challenges in meeting requirements and satisfying user needs, the official responsible for independent operational test and evaluation of SPS said that DOD should not invest in additional releases beyond version 4.2. In delivering SPS, DOD was to use a commercially available software product. However, the contractor has modified the commercial product extensively in an attempt to satisfy DOD’s needs; thus, SPS is now a DOD-unique system solution. According to the program manager, DOD knew when it selected the commercial product that the product provided only 45 percent of the functionality that DOD needed, and that extensive new software development and existing software modification were necessary. Nevertheless, the product was chosen because no commercial product was available that met DOD’s requirements, and, of the products available, DOD believed that AMS’ product and company would provide the best value. In accordance with industry best practices, software modifications to a commercial product should not exceed 10 to 15 percent. Beyond this degree of software change, experts generally consider development or acquisition of a custom system solution more cost-effective. Further, DOD guidance states that custom modifications to a commercial item, even if made and implemented by the commercial item’s vendor, result in custom system solutions. This guidance emphasizes the use of commercial items to reduce life-cycle costs and increase product reliability and availability. Since SPS is not a commercial product, DOD will not be able to take advantage of the reduced cost and risk associated with using proven technology that is used by a wide customer base. When it began the program, DOD promised that SPS would produce such benefits as (1) replacing 76 legacy systems and manual processes with a single system and thereby reducing procurement system operations and maintenance costs by an unspecified amount, (2) standardizing policies, processes, and procedures across the Department, and (3) reducing problem disbursements. However, DOD does not know the extent to which SPS is meeting each of these expectations, even though versions have been deployed to about 773 user locations. First, although DOD reports that it has retired two major legacy systems, neither the program office nor the DOD CIO office could provide us with information on what, if any, savings have been realized by doing so. Additionally, program officials told us that the number of legacy systems and manual processes that SPS is to replace is now significantly less than the 76 originally used to justify the program. In response to our inquiry, the SPS program manager recently surveyed the DOD component organizations to determine the number of legacy systems. According to the results of the survey, there were 55 legacy procurement systems. See table 4 for the status of these systems as of June 2001. According to the SPS program manager, 45 of the 55 systems remain, and 10 to 12 of these systems are to be replaced by SPS. However, another program official noted that SPS was always intended to replace only 14 major legacy systems. In either case, the latest economic analysis has not been updated to reflect this change in the number of systems to be replaced, and the associated cost savings are not known. Second, the standardization of policies, processes, and procedures benefit is not materializing because each military service is either in the process of developing, or has plans to develop, its own unique policies, processes, and procedures. Third, program officials were unable to provide evidence that implementing SPS has reduced problem disbursements or achieved the benefits outlined in the economic analysis. In fact, the latest economic analysis no longer even cites reducing problem disbursements as a benefit because the DOD components’ position was that SPS would not completely address this problem. According to the program manager and CIO officials, there is no DOD policy that requires them to assess whether the expected benefits are in fact being realized. When the SPS program began, DOD also committed to a system life-cycle cost of about $3 billion over a 10-year period. However, total actual program costs are not being accumulated and monitored against estimates, which in 2000 were revised to about $3.7 billion (a 28-percent increase). Thus, DOD does not know what has been spent on the program by all DOD component organizations. To date, the only actual program costs being collected and reported are those incurred by the SPS program office, which DOD reports to be about $322 million through September 30, 2000. To determine the total cost of the SPS program through September 30, 2000, we requested cost information from 18 Defense agencies and the four military services. These DOD components reported that they have collectively spent approximately $125 million through September 30, 2000. However, these reported costs are not complete because (1) 4 of the 22 DOD components did not respond, (2) components reported that SPS costs were being captured with other programs and could not be allocated accurately, and (3) all SPS costs, such as employee salaries and system infrastructure costs, were not included. According to program officials, no single DOD organization is responsible for accumulating the full DOD cost of SPS. Without knowing the extent to which SPS is meeting cost-and-benefit expectations, DOD is not in a position to make informed, and thus justified, decisions on whether and how to proceed further on the program. Such a situation introduces a serious risk of investing in a system that will not produce a positive net present value (i.e., estimated benefits to be realized would exceed estimated program costs). Federal IT investment management requirements and guidance, as well as DOD policy, recognize the need to economically justify IT projects before investing in them and to justify them in an incremental manner in an effort to spread the risk of doing many things over many years on large projects across smaller, more manageable subprojects. However, the department has not economically justified investing in SPS because its own analysis shows that expected life-cycle benefits are less than estimated life-cycle costs. Moreover, DOD is not approaching its investment in SPS on an incremental basis. Nevertheless, DOD continues to invest hundreds of millions of dollars in SPS each year, running the serious risk of spending large sums of money on a system that does not produce commensurate value. According to program and CIO officials, DOD continues to invest these funds because individuals above the CIO’s office decided that SPS was a departmental priority. The Clinger-Cohen Act of 1996 and OMB guidance provide an effective framework for IT investment management. Together, they set requirements for (1) economically justifying proposed projects on the basis of reliable analyses of expected life-cycle costs, benefits, and risks, (2) using these analyses throughout a project’s life cycle as the basis for investment selection, control, and evaluation decisionmaking, and (3) doing so for large projects (to the maximum extent practical) by dividing them into a series of smaller, incremental subprojects or releases. By doing so, the tremendous risk associated with investing large sums of money over many years in anticipation of delivering capabilities and expected business value far into the future can be spread across project parts that are smaller, of a shorter duration, and capable of being more reliably justified and more effectively measured against cost, schedule, capability, and benefit expectations. DOD policy also reflects these investment principles by requiring that investments be justified by an economic analysis and, more recently, that investment decisions for major programs, like SPS, be made incrementally by ensuring that each incremental part of the program delivers measurable benefit, independent of future increments. According to the policy, the economic analysis is to reflect both life-cycle cost and benefits estimates, including a return-on-investment calculation, to demonstrate that a proposal to invest in a new system is economically justified before that investment is made. DOD has developed three economic analyses for SPS—one in 1995 and two updates (one in 1997 and another in 2000). While the initial analysis reflected a positive net present value, the two updates did not. Specifically, the 1997 analysis estimated life-cycle costs and benefits to be $2.9 billion and $1.8 billion, respectively, which is a recovery of only 62 percent of costs; the 2000 analysis showed even greater costs ($3.7 billion) and fewer benefits ($1.4 billion), which is a recovery of only 37 percent of costs (see fig. 2). Nevertheless, these data were not reflected in the return-on-investment calculation in the analyses that were used as the basis for approving SPS. Instead, this return-on-investment calculation (1) included only those costs estimated to be incurred by the program office and (2) excluded the SPS implementation and operation and maintenance costs of DOD agencies and military services. According to program officials, the latter costs were excluded because either they would have been incurred anyway or the program office did not require them. For example, the officials stated that the DOD agencies and military services routinely upgrade their IT infrastructures to support existing systems; therefore, they assumed that the agencies and services would have purchased new infrastructures even if SPS had not been acquired. Also, program officials did not believe that training paid for by DOD agencies and military services should be included as a cost element because this is an elective expense (i.e., the program management office does not require this additional training). However, some DOD component officials told us that some of their infrastructure and other costs were being incurred solely to support implementation of SPS. Using DOD’s estimates, we calculated SPS’ net present value for fiscal years 1997 and 2000 to be about negative $174 million and negative $655 million, respectively. DOD’s Office of Program Analysis and Evaluation is responsible for, among other things, verifying and validating the reliability of economic analyses for major programs, such as SPS, and providing its results to the program approval authority, which in this case is the DOD CIO. According to Office of Program Analysis and Evaluation officials, although the economic analyses were reviewed, there are no written results of these reviews. These officials stated, however, that they orally communicated concerns about the analyses to program officials and to DOD CIO officials responsible for program oversight and control. They also stated that while they could not recall specific issues discussed, they concluded that the economic analyses provided a reasonable basis for decisionmaking. To be useful for informed investment decisionmaking, analyses of project costs, benefits, and risks must be based on reliable estimates. However, most of the cost estimates in the latest economic analysis are estimates carried forward from the 1997 economic analysis (adjusted for inflation). Only the costs being funded and managed by the SPS program office, which are 13 percent of the total life-cycle cost in the analysis, were updated in 2000 to reflect more current contract estimates and actual expenditures/obligations for fiscal years 1995 through 1999. The costs to be funded and incurred by DOD agencies and the military services were not updated to account for all program changes or to incorporate better information. In its review of the 2000 economic analysis, the Naval Center for Cost Analysis also noted that the DOD agencies and the military services’ cost information, which accounted for the majority of the program’s overall costs, had not been updated. In fact, only two cost elements were updated for the DOD component organizations in the 2000 economic analysis, and the estimates for these cost elements were based on estimates derived for just one service (the Air Force), and then extrapolated to all other DOD components. According to Departments of the Army, Navy, and Air Force component representatives, these original estimates of costs, as well as benefits, were highly questionable at best. However, this uncertainty was not reflected in the economic analysis by any type of sensitivity analysis (i.e., an analysis to explicitly present the return-on-investment implications associated with using estimates whose inherent imprecision could produce a range of outcomes). Such sensitivity analysis would disclose for decisionmakers the investment risk being assumed by relying on the calculations presented in the economic analysis. According to the SPS program manager, costs in the 2000 economic analysis were not updated because information for the DOD components was not readily available for inclusion. Additionally, updating DOD component costs was not viewed as relevant because the return-on- investment calculation cited in the latest economic analysis did not include these costs, and the updated analysis was done after DOD leadership had decided to increase funding and continue the program. However, by not using economic analyses that are based on reliable cost estimates, DOD is making uninformed, and thus potentially unwise, multimillion-dollar investment decisions. According to OMB guidance, analyses of investment costs, benefits, and risks should be (1) updated throughout a project’s life cycle to reflect material changes in project scopes and estimates and (2) used as a basis for ongoing investment selection and control decisions. To do less, risks continued investment in projects on the basis of outdated and invalid economic justification. The latest economic analysis (January 2000) is outdated because it does not reflect SPS’ current status and known risks associated with program changes. For instance, this analysis is based on a program scope and associated costs and benefits that anticipated four software releases, each providing more advanced features and functions. However, according to the program manager, SPS now consists of seven releases over which additional requirements are to be delivered. Estimates of the full costs, benefits, and risks relating to these additional three releases are not part of this latest economic analysis. Also, the 2000 economic analysis does not fully recognize actual and expected delays in meeting SPS’ full operational capability milestone. That is, the 2000 economic analysis assumed that this milestone would be September 30, 2003. However, as previously mentioned, this milestone date is unlikely to be met for a variety of reasons, such as user dissatisfaction with current system capabilities. According to the SPS program manager, the latest economic analysis has not been updated to reflect changes because the analysis is not used for managing the program and because there is no DOD requirement for updating an economic analysis when changes to the program occur. By not ensuring that the program is being proactively managed on the basis of current information about costs, benefits, and risks, DOD is unnecessarily assuming an excessive amount of investment risk. As we have previously reported, incremental investment management involves three fundamental components: (1) developing/acquiring a large system in a series of smaller projects or system increments, (2) individually justifying investment in each separate increment on the basis of costs, benefits, and risks, and (3) monitoring actual benefits achieved and costs incurred on completed increments and modifying subsequent increments or investments to reflect lessons learned. While DOD is acquiring and implementing SPS in a series of incremental releases (originally four and now seven), it is not making decisions about whether to invest in each release on the basis of the release’s costs, benefits, and risks, and it is not measuring whether it is meeting cost-and- benefit expectations for each release that is implemented. Instead, DOD is treating investment in SPS as one, monolithic investment decision, justified by a single, all-or-nothing economic analysis. Moreover, DOD has not measured whether the incremental software releases have produced expected business value, even though its economic analysis aligns expected benefits with the then four incremental releases. In June 2000, the SPS program office initiated a study in an attempt to validate the extent to which benefits would be realized as a result of DOD’s implementation of version 4.1 of the software. However, our review of the methodology and preliminary results revealed that the study was poorly planned and executed and that, while useful information may be compiled, DOD would be unable to use the study’s results to validate the accrual of benefits. As a result, DOD will have spent hundreds of millions of dollars on the entire system before knowing whether it is producing value commensurate with cost. The program manager told us that knowing whether SPS is producing such value is not the program office’s objective. Rather, its objective is to simply acquire and deploy the system. Similarly, DOD CIO officials told us that although the economic analysis promised a business value that would exceed costs, DOD is not validating that implemented releases are producing that value because there is no DOD requirement and no metrics defined for doing so. By not investing incrementally in SPS, DOD runs the serious risk of discovering too late (i.e., after it has invested hundreds of millions of dollars) that SPS is not cost-beneficial. DOD’s management of SPS is a lesson in how not to justify, make, and monitor the implementation of IT investment decisions. Specifically, DOD has not (1) ensured that accountability and responsibility for measuring progress against commitments are clearly understood, performed, and reported, (2) demonstrated, on the basis of reliable data and credible analysis, that the proposed system solution will produce economic benefits commensurate with costs before investing in it, (3) used data on progress against project cost, schedule, and performance commitments throughout a project’s life cycle to make investment decisions, and (4) divided this large project into a series of incremental investment decisions to spread the risks over smaller, more manageable components. Currently, DOD is not effectively performing any of these basic tenets of effective investment management on SPS, and, as a result, DOD lacks the basic information needed to make informed decisions about how to proceed with the project. Nevertheless, DOD continues to push forward in acquiring and deploying additional versions of SPS. Continuing with this approach to investment management introduces considerable risk. As a result, beyond possibly operating and maintaining already implemented releases for the remainder of fiscal year 2001 and meeting already executed contractual commitments, further investment in SPS has not been justified. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, as the designated approval authority for SPS, to clarify organizational accountability and responsibility for measuring SPS progress against commitments and to ensure that these responsibilities are met. We further recommend that the Secretary direct the Assistant Secretary to make investment in each new release, or each enhancement to an existing release, conditional upon (1) validating that already implemented releases of the system are producing benefits that exceed costs and (2) demonstrating on the basis of credible analysis and data that (a) proposed new releases or enhancements to existing releases will produce benefits that exceed costs and (b) operation and maintenance of already deployed releases of SPS will produce benefits that exceed costs. Also, we recommend that the Secretary direct the Director, Program Analysis and Evaluation, to validate any analysis produced to justify further investment in SPS and to report any validation results to the Assistant Secretary of Defense for C3I. We also recommend that no further decisions to invest in SPS be made without these validation results. Additionally, we recommend that the Secretary direct the Assistant Secretary of Defense for C3I to take the necessary actions, in collaboration with the SPS program manager, to immediately determine the current state of progress against program commitments addressed in this report and to ensure that such information is used in all future investment decisions concerning SPS. Last, we recommend that the Secretary direct the Assistant Secretary of Defense for C3I to report by October 31, 2001, to the Secretary and to DOD’s relevant congressional committees on lessons learned from the SPS investment management experience, including what actions will be taken to prevent a recurrence of this experience on other system acquisition programs. In written comments on a draft of this report (reprinted in appendix II), the Acting Deputy Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, who is also the DOD Deputy Chief Information Officer (CIO), agreed and partially agreed with our recommendations. In particular, the Deputy CIO agreed with our recommendation regarding the need to clarify organizational accountability and responsibility for measuring the program’s progress and ensuring that these responsibilities are met. The Deputy CIO also agreed to document lessons learned and have the Director of Program Analysis and Evaluation validate the results of any ongoing and future analyses of SPS’ return on investment. However, the Deputy CIO disagreed with our report’s overall finding that continued investment in SPS has not been justified, and disagreed with those elements of our recommendations that could delay development and deployment of SPS, specifically, acquiring and using the information we believe is needed to make informed investment decisions. To support its position, however, the Deputy CIO offered no new facts or analyses. Instead, the comments either cite information already in our report or claims that the demands of incremental investment management are “inefficient, costly, and overly intrusive” and will cause “unwarranted delays and disruption to the program” for no other reason than “to satisfy economists and accountants.” According to DOD’s comments, the latest SPS economic analysis and the existing efforts to measure progress against selected program commitments provide sufficient bases for continuing to invest hundreds of millions of dollars in SPS. In particular, DOD stated that it is making progress in improving its ability to standardize contracting for goods and services, adding that this standardization progress is not only saving operating costs by retiring legacy procurement systems, but is also providing a standard environment within DOD for the exchange of information and a consistent look and feel of contract information to companies doing business with the department. In light of these outcomes, DOD commented that one of its main goals under the program is the timely fielding of SPS capability. We disagree with these comments. As we describe in the report, incremental investment management practices are not only a best practice, but are also required by the Clinger-Cohen Act of 1996 and specified in OMB guidance and recently revised DOD acquisition policy. Therefore, DOD’s comments regarding incremental investment in SPS are at odds with contemporary practices and operative federal requirements and guidance. Additionally, the economic analysis that DOD’s comments refer to is not reliable for a number of reasons that are discussed in our report. Specifically, this analysis treats SPS as a single, monolithic system investment. Experience has shown that such an all-or-nothing economic justification is too imprecise to use in making informed decisions on large investments that span many years. This kind of approach for justifying investment decisions has historically resulted in agencies’ investing huge sums of money in systems that do not provide commensurate benefits, and thus has been abandoned by successful organizations. Further, the need to avoid this pitfall was a major impetus for the Clinger-Cohen Act investment management reforms. Also, as discussed in our report, the analysis highlights a return-on- investment calculation in its summary that does not include all relevant costs, such as the costs to be incurred by DOD components. Instead, the summary uses only SPS program office costs in this return-on-investment calculation. Further, this return-on-investment calculation does not reflect known changes in the program’s scope and schedule that would increase costs and reduce benefits. As our report points out, it does not, for example, reflect SPS’ change from four software releases to seven releases nor does it reflect the improbability of meeting a September 30, 2003, full operational capability date. DOD’s comments also promote continued spending on SPS without sufficient awareness of progress against meaningful commitments, such as reliable data measuring and validating whether return-on-investment projections are being met. In fact, DOD’s comments emphasize standardization and fast deployment as core commitments. However, neither factor is an end in and of itself. Unless SPS provides the capability to perform procurement and contracting functions better and/or cheaper, and does so to a degree that makes SPS a more attractive investment relative to the department’s other investment options, DOD will not have adequate justification for investing further in SPS. As our report demonstrates, the department presently does not have the information it needs to know whether this investment is justified, and the information that is available raises serious questions about SPS’ acceptance by its user community and its business value. Nevertheless, DOD’s comments indicate its intention to implement SPS as planned. Our recommendations are aimed at ensuring that the department obtains the information it needs to make informed SPS investment decisions before proceeding with additional acquisitions. DOD provided other clarifying comments that have been incorporated as appropriate throughout this report. The written comments, along with our responses, are reproduced in appendix II. 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 date of this letter. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services; Senate Appropriations Subcommittee on Defense; House Armed Services Committee; House Appropriations Subcommittee on Defense; Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, House Committee on Government Reform; and Subcommittee on National Security, Veterans Affairs, and International Relations, House Committee on Government Reform. We are also sending copies of this report to the Director, Office of Management and Budget; the Secretary of Defense; the Acting Secretary of the Army; the Acting Secretary of the Navy; the Acting Secretary of the Air Force; the Acting Assistant Secretary of Defense Command, Control, Communications, and Intelligence/Chief Information Officer; the Under Secretary of Defense for Acquisition, Technology and Logistics; the Principal Deputy and Deputy Under Secretary for Management Reform; the Acting Director of Operational Testing and Evaluation; the Director of Program Analysis and Evaluation; the Director of Defense Procurement; the Director of the Defense Contract Management Agency; and the Director of the Defense Logistics Agency. If you have any questions on matters discussed in this report, please call me at (202) 512-3439 or Cynthia Jackson, Assistant Director, at (202) 512-5086. We can also be reached by e-mail at [email protected] and [email protected], respectively. Key contributors to this assignment are listed in appendix III. Our objectives were to determine the progress that the Department of Defense (DOD) has made against the Standard Procurement System (SPS) program commitments and whether DOD has economically justified further investment in SPS. To determine the progress made, we first analyzed relevant legislative and Office of Management and Budget (OMB) requirements, associated federal guidance, and applicable DOD policy and guidance on investment management. We then analyzed relevant program management documents and interviewed program officials to identify estimates and expectations for SPS’ cost, schedule, and performance, including the system capabilities to be provided and benefits to be produced by these capabilities. Source documents for this information included, but were not limited to, the acquisition strategy and program baseline, acquisition decision memorandums, and the quarterly Defense Acquisition Executive Summary report. We then reviewed program management reports and briefings, interviewed program officials, and solicited information from the various DOD component organizations participating in SPS’ implementation to determine reported cost, schedule, and performance status. We compared this information against estimates and expectations to identify any variances. We did not independently validate the status information that we obtained. In cases where variances were found or status information was not available, we questioned program management and DOD’s Office of the Chief Information Officer (CIO) oversight officials. The DOD organizations that were part of our scope of contacts included the SPS program office within the Defense Contract Management Agency; the Office of the Director of Investments and Acquisition within the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I)/Chief Information Officer; the Office of the Deputy Director (Strategic and Space Programs) within the Office of Program Analysis and Evaluation under the Office of the Undersecretary of Defense (Comptroller/Chief Financial Officer); the Office of Strategic and C3I Systems within the Office of the Director of Operational Test and Evaluation; and various offices within the Defense agencies and military services responsible for implementing SPS. To determine whether DOD had economically justified SPS, we reviewed relevant legislative requirements and associated OMB guidance, as well as DOD policy and guidance on preparing and using economic analyses (cost, benefit, and risk), to measure progress against information technology (IT) investment decisions and to do so using an incremental or modular approach. We then obtained the original economic analyses prepared for the program and the two subsequent updates and evaluated them in light of relevant requirements, policies, and guidance to identify strengths and weaknesses. We also reviewed program management documents and interviewed program and oversight officials to understand how these analyses were reviewed and used, and we compared the results to relevant requirements and guidance. We also calculated the program’s net present value using the 1997 and 2000 economic analyses. In addition, we interviewed officials from the SPS program office, DOD CIO’s office, and DOD’s Program Analysis and Evaluation Office to discuss our results and seek clarifying information. We reviewed the methodology and preliminary results for the productivity study being conducted by DOD to substantiate the benefits to be realized by implementing SPS. We also interviewed officials from the SPS program office, Vector Research Incorporated, and Logistics Management Institute to discuss the methodology (e.g., survey execution, sampling, and analysis plans) and our conclusions on the study. We conducted our work at DOD headquarters offices in Washington, D.C., and Alexandria, Virginia, and at American Management Systems, Incorporated, headquarters in Fairfax, Virginia, from October 2000 through June 2001 in accordance with generally accepted government auditing standards. 1. See comments 2 through 9. 2. We did not independently validate DOD-reported data on the number of sites and procurement personnel who have received SPS training, the number of personnel who are located at sites where some version of SPS has been deployed, or the number and dollar value of contract actions completed in fiscal year 2000 using SPS; thus we have no basis to comment on the accuracy of these data. However, we do not agree with this comment’s thrust that these data points, combined with statements about DOD’s “improving its ability to standardize,” “providing a standard environment,” and providing “a consistent look and feel,” are sufficient measures of progress against commitments. As the Clinger-Cohen Act and OMB guidance emphasize, and as we state in our report, investments in information technology need to contribute tangible, observable improvements in mission performance. Thus, standardization should not be viewed as an end in and of itself, but rather the means to an end, such as increased productivity and reduced costs. DOD’s comment on progress does not address such tangible, observable benefits. Instead, DOD states that SPS is saving operating costs by retiring legacy procurement systems, which, when SPS was initiated and justified, were to total 76 systems. However, as we also state in the report, only two legacy systems have been retired thus far as a result of the system’s being deployed to 773 sites, and DOD could not provide what, if any, savings were being realized by doing so. Moreover, the number of legacy systems that DOD eventually expects to be replaced by SPS has decreased to between 12 and 14. Further, while DOD states that SPS is providing standardization of contracting for goods and services for a segment of its procurement community, our report points out that each service is either in the process of developing, or has plans to develop, its own unique procurement policies, processes, and procedures. 3. For the reasons discussed in our report, we do not agree that DOD has justified further SPS investment in its 2000 economic analysis. For example, only the SPS costs funded and managed by the SPS program office, which are 13 percent of the total life-cycle cost in the analysis, were updated in 2000. The costs to be funded and incurred by DOD agencies and the military services were not updated to account for all program changes or to incorporate better information. Exacerbating this is the fact that only two cost elements were updated for the DOD component organizations in the 2000 economic analysis, and the estimates for these cost elements were based on estimates derived for just one service and extrapolated to all other DOD components. As another example, the analysis does not reflect the reduced number of legacy systems to be retired as well as recent evidence of user non- acceptance and non-use of the system, both of which drive benefit accrual. We also do not agree that the analysis documented that a $163 million additional investment by the SPS program office would result in additional benefits of $389.5 million (in net present value terms). Rather, the analysis shows that acquiring, operating, and maintaining SPS over its life cycle will cost about $17 million more, but will produce about $390 million more in benefits (in net present value terms) than operating and maintaining legacy procurement systems. However, the analysis also shows that SPS as planned is not a cost- beneficial investment, because estimated costs exceed expected program benefits. 4. We do not disagree with DOD’s comments regarding the major program designation of SPS and the many organizations involved in the program. Also, while we agree that SPS program officials prepared the Acquisition Program Baseline and have reported quarterly against the commitments that are contained in this baseline, the baseline commitments and the associated reporting do not extend to all the relevant program goals and objectives that we cite in the report as needing to be measured in order to effectively manage a program like SPS, such as what the system is actually costing DOD and whether promised business value is actually being realized. Additionally, the Acquisition Program Baseline is dated May 4, 1998, and thus the commitments in this baseline are out of date. We do not agree with DOD’s comments characterizing the timing of the 2000 economic analysis update. As we state in our report, this update was prepared after the increase in SPS funding had been approved. In fact, the Program Analysis and Evaluation official responsible for reviewing the analysis stated that it was for this reason that the review was perfunctory at best. 5. We do not agree with DOD’s comment that delaying investment in new SPS releases or enhancements until DOD validates that already implemented releases of the system are producing benefits in excess of costs is contrary to best practice and would delay and disrupt SPS in a way that is not warranted. As we state in our report, available evidence raises serious questions about the cost and benefit implications of users’ limited acceptance of already deployed versions as well as the cost implications of DOD’s limiting its maintenance options to a single vendor. Our point is that answers to these questions are needed in order to make informed investment decisions, and to proceed as planned with new investments without this information risks continuing to invest in the wrong system solution faster. We agree with the comment that the program office initiated a productivity study in the summer of 2000. As we state in our report, this study was undertaken in response to DOD Inspector General findings that raised questions about user acceptance of the system. However, we do not agree that this study will substantiate the SPS benefit estimates and quantitatively document the benefits of SPS implementation through 2000 because the study’s scope and methodology are limited. For example: According to the program official responsible for the study, the purpose of the study is to estimate expected benefits to be realized in fiscal year 2003, from implementation of version 4.1. The sample selected was not statistically valid, meaning that the results are not projectable to the population as a whole. Relative to the other services, the Air Force was not proportionally represented in the study, meaning that any results would not necessarily be reflective of Air Force sites. The study was based on the 1997 economic analysis instead of the more current 2000 economic analysis despite key differences between the two analyses. For example, the 1997 analysis shows 22 benefits valued at approximately $1.8 billion over the program’s 10-year life cycle, while the 2000 analysis contains only 19 benefits valued at approximately $1.4 billion. According to SPS program officials, the survey instrument was not rigorously pre-tested. Such pre-testing is important because it ensures that the survey (1) actually communicates what it was intended to communicate, (2) is standardized and will be uniformly interpreted by the target population, and (3) will be free of design flaws that could lead to inaccurate answers. The information being gathered does not map to the 22 benefit types listed in the 1997 SPS economic analysis. Instead, the study is collecting subjective judgments that are not based on predefined performance metrics for SPS capabilities and impacts. Thus, DOD is not measuring SPS against the benefits that it promised SPS would provide. In addition, the senior official responsible for SPS implementation in the Air Force stated that the Air Force plans to conduct its own, separate survey to determine whether the system is delivering business value, indicating component uneasiness about the reliability of the SPS program office’s study. 6. We disagree. As we state in the report, incremental investment management practices are not only a best practice, but are also required by the Clinger-Cohen Act of 1996 and specified in OMB guidance and recently revised DOD acquisition policy. Therefore, DOD’s comments regarding incremental investment in SPS are at odds with contemporary practices and operative federal requirements and guidance. Additionally, the economic analysis that DOD’s comments refer to is not reliable for a number of reasons that are discussed in our report. Specifically, this analysis treats SPS as a single, monolithic system investment. Experience has shown that such an all-or-nothing economic justification is too imprecise to use in making informed decisions on large investments that span many years. This kind of approach to justifying investment decisions has historically resulted in agencies investing huge sums of money in systems that do not provide commensurate benefits, and thus has been abandoned by successful organizations. Further, the need to avoid this pitfall was a major impetus for the Clinger-Cohen Act investment management reforms. DOD’s comments also promote continued spending on SPS without sufficient awareness of progress against meaningful commitments, such as reliable data measuring and validating that return-on- investment projections are being met. In lieu of such measures, DOD’s comments emphasize standardization and fast deployment as core commitments. However, neither of these is an end in and of itself. Unless SPS provides DOD with the capability to perform procurement and contracting functions better and/or cheaper, and does so to a degree that makes SPS a more attractive investment relative to the department’s other investment options, DOD is not justified in investing further in SPS. As our report demonstrates, and as discussed in comments 2 and 3 above, DOD presently does not have the kind of reliable information it needs to know whether this investment is justified, and the information that is available raises serious questions about SPS’ acceptance by its user community and its business value. With regard to the timely fielding of SPS, we note in our report that the program has already been delayed 3-1/2 years. In fact, delivery of version 4.1 of the software was 22 months overdue, and version 4.2 is already 5 months behind. While the impact of schedule delays and cost increases is a valid concern on any project, these factors are not the sole criteria. Introducing the wrong system solution faster and cheaper is still introducing the wrong solution no matter how it is presented. It is thus critically important that investment decisions be based on an integrated understanding of cost, benefit, and risk. 7. We do not dispute that the cited events have occurred, although we would add for additional context that we met with Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I) officials on March 15, 2001, the day before the memorandum requesting the first program review, to share our concerns and seek clarification, and that we provided our draft report to DOD for comment on May 25, 2001. We do not agree with DOD’s comment that it is not necessary to have the Secretary of Defense direct the Assistant Secretary of Defense for C3I (DOD CIO) to determine the current state of SPS progress against commitments and to ensure that this information is used in future investiment decisions for several reasons. First, the recent reviews cited in the DOD comments were for the Defense Contract Management Agency, which is the Component Acquisition Executive, and the Office of the Director of Defense Procurement, which is the SPS functional sponsor. Neither of these entities is the DOD CIO, who is the designated decision authority for SPS milestones and thus under SPS’ management structure has ultimate accountability for SPS. Second, the recent reviews cited in DOD’s comments did not satisfy our recommendation for determining the current state of progress against the SPS commitments described in our report. In fact, we attended the April 27, 2001, review meeting, during which the senior attending official from the Defense Contract Management Agency stated that information being provided at this meeting was insufficient from a program management standpoint, lacking key information needed for informed SPS decision-making. Third, the March 16, 2001, memorandum cited in DOD’s comments acknowledges the need to update SPS’ economic justification in light of the program’s cost and schedule changes and to ensure compliance with Clinger-Cohen Act requirements. Fourth, the SPS program manager’s planned actions to respond to recent reviews are not sufficient to address the uncertainties surrounding SPS. According to the program manager, the acquisition program baseline would be updated to reflect the most recent program costs and expected schedule for full operational capability, but the program office had not planned any other actions. Last, DOD’s comment stating that the Office of the DOD CIO and the Office of the Director of Defense Procurement plan to conduct an independent review of SPS within the next 180 days does not satisfy our recommendation because (1) DOD’s schedule for SPS calls for issuing contract task orders for subsequent SPS releases during this 6-month period and (2) this commitment is only a vague statement to “plan to conduct” a review at some undetermined, potentially distant, future point in time rather than having a review scheduled to occur in time to effect meaningful investment management improvements. In light of DOD’s comments regarding this recommendation and for the reasons discussed above, we have modified our recommendation to specify that the recommended determination of the state of progress should occur immediately and should address each of the program commitments discussed in this report. 8. We acknowledge DOD’s agreement with the recommendation, but note that neither our recommendation nor DOD’s comment specifies when this report would be prepared. Accordingly, we have modified our recommendation to include a timeframe for reporting to the Secretary of Defense and relevant congressional committees on lessons learned and actions to prevent recurrence of those SPS experiences on other system acquisition programs. Additionally, we disagree with DOD’s comments about the findings and conclusions in our report. In our view, the totality of evidence presented in our report, along with the results of prior Defense Inspector General reviews, supports our conclusion that SPS is a lesson in how not to justify, make, and measure implementation of investment decisions. Also, as addressed in comments 2 and 3, we do not agree with DOD’s point that SPS has been justified by the 1997 and 2000 economic analyses. Last, we do not agree with DOD’s comments that we incorrectly calculated a negative return on investment for SPS and that our methodology for calculating net present value is incorrect. To calculate net present value, we used current OMB guidance, which requires that relevant life-cycle cost estimates be used. Additionally, we used DOD’s own life-cycle cost estimates from its economic analyses. While we acknowledge that SPS officials told us that these life-cycle cost estimates included the costs of operating legacy procurement systems, we also requested that these officials identify what these legacy system costs are so that we could back them out. However, SPS officials told us that they did not know the amount of these costs. As a result, our calculation is based on the best information that the SPS program office had available and could provide. 9. See comments 3 and 8. Also, we agree that applying our net-present- value calculation methodology to the SPS and status quo cost-and- benefit data provided in the January 2000 economic analysis show that SPS is cheaper than the status quo option. However, this calculation also shows that SPS as planned is not cost beneficial. Also, DOD’s comments compare only a small portion of SPS life-cycle costs (program office investment costs) against the difference between expected benefits under the SPS scenario and the status quo scenario. This comparison is illogical because it assumes that an arbitrary part of relevant investment costs can be associated with the total benefit difference between alternatives. Accordingly, we do not agree with DOD’s comment. While Appendix E of the January 2000 economic analysis contained some of the information provided in the tables contained in DOD’s comments, it did not provide a net present value calculation. Further, the Appendix E tables were not included in the economic analysis’ executive summary. Instead, the summary provided a benefits-to-costs ratio that excluded certain relevant costs. In addition to the person named above, Nabajyoti Barkakati, Harold J. Brumm, Jr., Sharon O. Byrd, James M. Fields, Sophia Harrison, James C. Houtz, Richard B. Hung, Barbarol J. James, and Catherine H. Schweitzer made key contributions to this report. Standard Procurement System Use and User Satisfaction, Office of the Inspector General, Department of Defense (Report No. D-2001-075, March 13, 2001). Defense Management: Actions Needed to Sustain Reform Initiatives and Achieve Greater Results (GAO/NSIAD-00-72, July 25, 2000). Department of Defense: Implications of Financial Management Issues (GAO/T-AIMD/NSIAD-00-264, July 20, 2000). Defense Management: Electronic Commerce Implementation Strategy Can Be Improved (GAO/NSIAD-00-108, July 18, 2000). Initial Implementation of the Standard Procurement System, Office of the Inspector General, Department of Defense (Report No. 99-166, May 26, 1999). Financial Management: Seven DOD Initiatives That Affect the Contract Payment Process (GAO/AIMD-98-40, January 30, 1998). Allegations to the Defense Hotline Concerning the Standard Procurement System, Office of the Inspector General, Department of Defense (Report No. 96-219, September 5, 1996).

This report reviews the Department of Defense's (DOD) ability to contract for goods and services by acquiring and implementing a standard procurement system (SPS). DOD's management of SPS is a lesson in how not to justify, make, and monitor the implementation of information technology investment decisions. Specifically, DOD has not (1) ensured that accountability and responsibility for measuring progress against commitments are clearly understood, performed, and reported; (2) demonstrated, on the basis of reliable data and credible analysis, that the proposed system solution will produce economic benefits commensurate with costs; (3) used data on progress against project cost, schedule, and performance commitments throughout a project's life cycle to make investment decisions; and (4) divided this large project into a series of incremental investment decisions to spread the risks over smaller, more manageable components. Because it has yet to effectively apply any of these basic tenets of effective investment management to SPS, DOD lacks the basic information needed to make informed decisions on how to proceed with the project. Nevertheless, DOD continues to push forward in acquiring and deploying additional versions of SPS. Continuing this approach involves considerable risk. GAO summarized this report in testimony before Congress; see DOD's Standard Procurement System: Continued Investment Has Yet to Be Justified, by Joel C. Willemssen, Managing Director for Information Technology Issues, before the Subcommittee on National Security, Veterans Affairs, and International Relations, House Committee on Government Reform. GAO-02-392T , Feb. 3 (13 pages).

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USCIS is responsible for processing millions of immigration benefit applications received each year for various types of immigration benefits, determining whether applicants are eligible to receive immigration benefits, and detecting suspicious information and evidence to refer for fraud investigation and possible sanctioning by other components or agencies. USCIS processes applications for about 50 types of immigration benefits. In fiscal year 2005, USCIS received about 6.3 million applications and adjudicated about 7.5 million applications. Figure 1 shows the percentage of applications completed by type of application in fiscal year 2005. To process these immigration benefit applications, in fiscal year 2005 USCIS had a staff of about 3,000 permanent adjudicators located in 4 service centers, where most applications are processed, and 33 district offices. In fiscal year 2004, for example, service centers adjudicated about 67 percent of all applications, and districts about 33 percent. In general, service centers adjudicate applications that do not require an interview with the applicant, using the evidence submitted with the applications. District offices generally adjudicate applications where USCIS requires an interview with the applicant (e.g., naturalization). USCIS also has eight offices that process applications for asylum in the United States. In fiscal year 2005, USCIS’s budget amounted to just under $1.8 billion, of which about $1.6 billion was expected from service fees and $160 million from congressionally appropriated funds. In fiscal year 2004, USCIS had a backlog of several million applications and has developed a plan to eliminate it by the end of fiscal year 2006. In June 2004, USCIS reported that it would have to increase production by about 20 percent to achieve its goal of adjudicating all applications within 6 months or less by the end of fiscal year 2005. At that time, it estimated that it would have to increase current annual processing from about 6 million to 7.2 million applications. Since USCIS did not plan for further increases in staffing levels, reaching its backlog goal would require some reduction in average application processing times, overtime hours, and adjudicator reassignments. With the creation of DHS in 2003, the immigration services and enforcement functions of the former INS transitioned to different organizations within DHS. USCIS assumed the immigration benefit functions and ICE assumed INS’s investigative and detention and removal of aliens functions. Within ICE’s Office of Investigations, the Identity and Benefit Fraud unit now conducts immigration benefit fraud criminal investigations and ICE’s Office of Detention and Removal Operations is responsible for identifying and removing aliens illegally in the United States. Because the immigration service and enforcement functions are now handled by separate DHS components, these components created two new units to, among other things, help coordinate the referral of suspected immigration benefit fraud uncovered by adjudicators to ICE’s Office of Investigations. First, USCIS created FDNS in 2003 to, among other things, receive fraud leads from adjudicators and determine which leads should be referred to ICE’s Office of Investigations. To accomplish this task, FDNS has Fraud Detection Units (FDU) at all four USCIS service centers and the National Benefits Center. When fraud is suspected, the applications are to be referred FDUs. The FDUs, comprised of Intelligence Research Specialists and assistants, are responsible for further developing suspected immigration fraud referrals to decide which leads should be referred to ICE for possible investigation. FDU staff are also to refer to ICE or other federal agencies applicants who may pose a threat to national security or public safety or who are potentially deportable. FDUs are responsible for following up on potential national security risks identified during background checks of immigration benefit applicants. FDUs also perform intelligence analysis to identify immigration fraud patterns and major fraud schemes. In addition to establishing FDUs, in January 2005 FDNS assigned 100 new Immigration Officers to USCIS district offices, service centers, and asylum offices to work directly with adjudicators to handle fraud referrals and conduct limited field inquiries. Second, ICE’s Office of Investigations created four new Benefit Fraud Units (BFU) in Vermont, Texas, Nebraska, and California located either at or near the four USCIS service centers. The ICE BFUs are responsible for reviewing, assessing, developing, and when appropriate, referring to ICE field offices for possible investigation immigration fraud leads and other public safety leads received from the FDUs and elsewhere. Specifically, the ICE BFUs are intended to identify those referrals that they believe warrant investigation, such as organizations and facilitators engaged in large-scale schemes or individuals who pose a threat to national security or public safety, and refer them to ICE field offices. In turn, ICE field offices will investigate and refer those cases they believe warrant prosecution to the U.S. Attorneys Offices. Figure 2 illustrates the typical immigration benefit fraud referral and coordination process. The Homeland Security Act of 2002 created the office of the Citizenship and Immigration Services Ombudsman. The ombudsman’s primary function is to: assist individuals and employers in resolving problems with USCIS; identify areas in which individuals and employers have problems in dealing with USCIS; and propose changes in the administrative practices of USCIS in an effort to mitigate problems. The ombudsman has issued two annual reports that have highlighted issues related to prolonged processing times, limited case status information, immigration benefit fraud, insufficient standardization in processing, and inadequate information technology and facilities. Other federal agencies also play important roles in the immigration benefit application process. The Department of State is responsible for approving and issuing a visa allowing an alien to travel to the United States. The Department of Labor’s (DOL) Division of Foreign Labor Certification provides national leadership and policy guidance to carry out the responsibilities of the Secretary of Labor under the Immigration and Nationality Act (INA) concerning foreign workers seeking admission to the United States for employment. DOL provides certifications for foreign workers to work in the United States, on a permanent or temporary basis, when there are insufficient qualified U.S. workers available to perform the work at wages that meet or exceed the prevailing wage for the occupation in the area of intended employment. The DOL Office of the Inspector General’s Office of Labor Racketeering and Fraud Investigations is responsible for investigating fraud related to these labor certifications. Fraudulent schemes used in several high-profile immigration benefit fraud cases sheds light on some aspects of the nature of immigration benefit fraud—particularly that it is accomplished by submitting fraudulent documents, that it can be committed by organized white-collar and other criminals, and that it has the potential to result in large profits for these criminals. The benefit fraud cases we reviewed involved individuals attempting to obtain benefits for which they were not eligible by submitting fraudulent documents or making false claims as evidence to support their applications. Fraudulent documents submitted included but were not limited to birth and marriage certificates, tax returns, financial statements, business plans, organizational charts, fictitious employee resumes, and college transcripts. For example, in what ICE characterized as one of the largest marriage fraud investigations ever undertaken, 44 individuals were indicted in November 2005 for their alleged role in an elaborate scheme to obtain fraudulent immigrant visas for hundreds of Chinese and Vietnamese nationals. According to a USCIS fraud bulletin, this scheme may have been ongoing for 10 years. Another major investigation revealed evidence that an attorney had filed about 350 applications on behalf of aliens seeking permanent employment as religious workers at religious institutions in the United States. Investigators found evidence that most of these aliens were unskilled laborers who were not pastors or other religious workers and had little or no previous affiliation with the religious institution. According to this investigation, some religious institutions appeared to specialize in obtaining legal status for aliens in the country who were not eligible for religious worker immigration benefits. In another investigation involving at least 2,800 apparently fraudulent marriage and fiancée applications identified in 2002 and investigated through 2004, a U.S. citizen appeared to have submitted multiple applications with as many as 11 different spouses. One USCIS Service Center prepared fraud bulletins using information from various State Department Consular posts overseas describing immigration fraud uncovered by these posts. Our analysis of the bulletins issued from July 2004 through December 2004 prepared by USCIS’s California Service Center revealed that aliens from 23 different countries were believed to have sought a variety of immigration benefits fraudulently. For example, individuals apparently sought to enter the United States through fraud by falsely claiming they were: (1) legitimately married to or a fiancé of a U.S. citizen; (2) a religious worker; (3) a performer in an entertainment group; (4) a person with extraordinary abilities, such as an artist, race car driver, or award winning photographer; (5) an executive with a foreign company; (6) a child or other relative of a citizen or permanent resident; or (7) a domestic employee of an alien legally in the United States, such as a diplomat or business executive. According to one of the bulletins, in one case State Department consular officers suspected illegal aliens were entering the United States under the guise of membership in a band. According to another bulletin, two individuals were suspected of smuggling children into the United States. In this case, the alleged parents submitted a non-immigrant visa application for their “daughter,” and provided a fraudulent birth certificate and passport for her. The “parents” eventually admitted to taking children to the United States as their own to reunite them with their illegally working family members. Some individuals seeking immigration benefits pose a threat to national security and public safety, and white collar and other criminals sometimes facilitate immigration benefit fraud. For example, according to FDNS, each year about 5,200 immigration benefit applicants are identified as potential national security risks, because their personal information matches information contained in U.S. Customs and Border Protection’s Interagency Border Inspection System, a database of immigration law violators and people of national security interest. Additionally, according to federal prosecutors, immigration benefit fraud may involve other criminal activity, such as income tax evasion, money laundering, production of fraudulent documents, and conspiracy. Also, organized crime groups have used sophisticated immigration fraud schemes, such as creating shell companies, to bring in aliens ostensibly as employees of these companies. In addition, a number of individuals linked to a hostile foreign power’s intelligence service were found to have been employed as temporary alien workers on military research. Investigations have revealed that perpetrating fraud on behalf of aliens can be a profitable enterprise. For instance, in 2003 and 2004, one USCIS service center identified about 2,800 apparently fraudulent marriage applications between low-income U.S. citizens and foreign nationals from an Asian country. The U.S. citizens appeared to have been paid between $5,000 and $10,000 for participating in the marriage fraud scheme. In another example from an investigation by DOL’s Inspector General, to fraudulently obtain the labor certifications needed to work in the United States, at least 900 aliens allegedly paid a recruitment firm an average of $35,000, with some aliens paying as much as $90,000, resulting in at least $31 million in revenue for this firm. In one of the largest labor certification fraud schemes ever uncovered, federal investigators found evidence that a prominent immigration attorney in the Washington, D.C., area submitted at least 1,436 and perhaps as many as 2,700 fraudulent employment applications between 1998 and 2002. According to the sworn testimony of a DOL special agent, this attorney and his associates are alleged to have made at least $11.4 million for the 1,400 applications that the agent reviewed, in all of which he found evidence of fraud, and perhaps as much as $21.6 million if all 2,700 applications were fraudulent, as he strongly suspected. In another case, an attorney allegedly charged aliens between $8,000 and $30,000 to fraudulently obtain employment-based visas to work in more than 200 businesses that included pizza parlors, auto parts stores, and medical clinics. Although the full extent of immigration benefit fraud is unknown, available USCIS data indicate that it is a serious problem. According to USCIS PAS data, in fiscal year 2005, USCIS denied just over 20,000 applications because USCIS staff detected fraudulent application information or supporting evidence during the course of adjudicating the benefit request. Three application categories accounted for more than three-quarters of the fraud denials: temporary work authorization (36 percent), application for permanent residency (30 percent), and application for a spouse to immigrate (14 percent). These three application types also accounted for almost half of all applications adjudicated by USCIS in fiscal year 2005. Moreover, in fiscal year 2005, USCIS denied approximately 800,000 applications for other reasons, such as ineligibility for the benefit sought or failure to respond to information requests. USCIS adjudications staff and officials told us that it is likely that some of these applications denied for other reasons also involved fraud. Information provided by State Department and DOL officials also indicates that fraud is a serious problem. Once USCIS approves a sponsor’s application on behalf of an alien to immigrate, the application is sent to the State Department’s National Visa Center, which forwards the application to the appropriate State Department overseas consulate post, which then interviews the alien to determine whether a visa should be issued. According to National Visa Center officials, out of 2,400 applications returned on average each month to USCIS by the National Visa Center, that are denied or withdrawn for various reasons, about 900 involve fraud or suspected fraud as determined by consular officers overseas. When the DOL Inspector General audited labor certification applications filed in 2001, it also found indications of a significant amount of fraud. According to the Inspector General, of the approximate 214,000 applications filed from January 1, 2001, through April 30, 2001, and not subsequently cancelled or withdrawn, 54 percent (about 130,000) contained false—possibly fraudulent—information. In June 2005, the FDNS completed the first in a series of fraud assessments. The results from this assessment of religious worker applications indicate that about 33 percent of the 220 sampled applications resulted in a preliminary finding of potential fraud. Based on a 33 percent rate, we estimate that, during the 6-month period of fiscal year 2004 from which the sample was drawn, about 660 out of approximately 2,000 applications may have been fraudulent. Of the 72 potential fraud cases discovered in the fraud assessment, about 54-percent (39 cases) showed evidence of tampering or fabrication of supporting documents; 44-percent (32 cases) of the petitioners’ addresses did not reveal a bona fide religious institution; about 42-percent (30 cases) may have misrepresented the beneficiaries’ qualifications; and 28-percent (20 cases) did not provide the salary noted in the application. The assessment also uncovered one case where law enforcement had identified an applicant as a suspected terrorist. Information from other investigations and prosecutions of benefit fraud also reveal that, in some cases, applicants may have submitted fraudulent documents and made false statements that were not detected before the applicant obtained an immigration benefit. For example, while investigating one fraud scheme, investigators identified more than 2,000 apparently fraudulent applications where there was evidence that some aliens, fraudulently claiming to be managers and executives of foreign companies with U.S. affiliates, acquired benefits that granted them the ability to work in the United States. To execute this scheme, organizers allegedly prepared application packages that included fraudulent business and employee related documents including financial statements, business plans, organizational charts, and fictitious employee resumes. One joint law enforcement investigation, previously mentioned, uncovered evidence that an attorney and his associate had filed at least 1,436 applications on behalf of legitimate companies—mostly local restaurants—that did not actually request these workers. In this case there was evidence that they forged the signatures of company management on the applications. Another investigation involving marriage fraud found evidence that U.S. citizens were recruited and paid to marry Vietnamese nationals. The fraud organizers appeared to have assisted the U.S. citizens in obtaining their passports, scheduled travel arrangements, and escorted them to Vietnam where they arranged introductions with Vietnamese nationals whom the citizens then married. These citizens then filed applications that facilitated these Vietnamese nationals’ entry into the United States as spouses even though it appeared that they did not intend to live together as husband and wife. Even when adjudicators rejected applications based on fraud, some of these applicants had already received interim benefits while their applications were pending final adjudication allowing them to live and work in the United States, and in some cases obtain other official documents, such as a driver’s license. Under current USCIS policy, for example, if USCIS cannot adjudicate an application for permanent residency and the accompanying application for work authorization within 90 days, the applicant is entitled to an interim work authorization, an interim benefit designed to let applicants work while awaiting a decision regarding permanent residency. According to the Citizenship and Immigration Services Ombudsman’s fiscal year 2004 and 2005 annual reports and our discussion with him, for many individuals the primary goal is to obtain temporary work authorization regardless of the validity of their application for permanent residency. That is, aliens can apply for temporary work authorization, knowing that they do not qualify for permanent residency, with the intent of exploiting the system to gain work authorization under false pretenses. Once a temporary work authorization is fraudulently obtained, an alien can use it to obtain other valid identity documents such as a temporary social security card and a driver’s license, thus facilitating their living and working in the United States. According to the FDNS Director, once such fraud scheme involved at least 2,500 individuals in Florida who allegedly filed frivolous applications for employment authorization and then used the receipt, showing they had filed an application, to obtain Florida State driver’s licenses or identification cards. ICE agents we interviewed also said that they suspected that many individuals apply for permanent residency fraudulently simply to obtain a valid temporary work authorization document. The interim benefit remains valid until it expires or until it is revoked by USCIS. In his 2005 report, the Ombudsman cites a DHS Office of Immigration Statistics estimate—which the ombudsman’s office confirmed with USCIS’s division of performance management—that about 85 percent of applicants for permanent residency also apply for temporary work authorization. As a result, according to the ombudsman, many aliens have received temporary work authorizations, for which they were later found to be ineligible. Our analysis of PAS data shows, for example, that from fiscal year 2000 through 2004, USCIS denied 26,745 applications due to fraud out of the approximately 3 million applications received for permanent residency. These data illustrate that, if aliens that filed fraudulent applications for permanent residency also requested temporary work authorization at a rate consistent with the 85 percent cited by the Office of Immigration Statistics, then thousands of aliens received temporary work authorization based on their fraudulent claims for permanent residency during fiscal year 2000 through 2004. To help it detect immigration benefit fraud, USCIS has taken some important actions consistent with activities prescribed by the Standards for Internal Control in the Federal Government and with recognized best practices in fraud control. Specifically, it has established an internal unit to act as its focal point for addressing immigration benefit fraud, outlined a strategy for detecting immigration benefit fraud, and is undertaking a series of fraud assessments to identify the extent and nature of fraud for certain immigration benefits. However, USCIS has not applied some aspects of internal control standards and fraud control best practices that could further enhance its ability to detect fraud. The Standards for Internal Control in the Federal Government provide an overall framework to identify and address, among other things fraud, waste, abuse, and mismanagement. Implementing good internal control activities and establishing a positive control environment is central to an agency’s efforts to detect and deter immigration benefit fraud. The standards address various aspects of internal control that should be continuous, built-in components of organizational operations, including the control environment, risk assessment, control activities, information and communications, and monitoring. As with work we have previously published related to managing improper payments, fraud control would typically require a continual interaction among these components in keeping with an agency’s various objectives. For example, internal controls that promote ongoing monitoring work together with risk assessment controls to provide a foundation for decision making. Also, as internal control standards advise, a precondition to risk assessment is the establishment of clear, consistent agency objectives. Once established, risk assessment controls must also work together with information and communication controls to ensure that that every level of the agency is cognizant of the commitment and approach to both controlling fraud and meeting other agency objectives. Similarly, conditions governing risk change frequently, and periodic updates are required to ensure that risk information—including threats, vulnerabilities, and consequences—stays current and relevant. Information collected through periodic assessment, as well as daily operations can inform the assessment, and particularly, the analysis of risk. As shown in figure 3, the control environment surrounds and reinforces the other components, but all components work in concert toward a central objective, which, in this case, is to minimize immigration benefit fraud. Other audit organizations have published guidance that includes discussion of sound management practices for controlling fraud that complement the internal control standards. Among these are the American Institute of Certified Public Accountants (AICPA) guidance on management of antifraud programs and controls to help prevent and deter fraud and a fraud control practices guide developed by the United Kingdom’s National Audit Office (NAO) entitled “Good Practices in Tackling External Fraud.” The NAO guidance outlines a risk-based strategic approach to combating fraud that also includes evaluating the effectiveness of sanctions. According to internal control standards, factors leading to a positive control environment include clearly defining key areas of authority and responsibility, establishing appropriate lines of reporting, and appropriately delegating authority and responsibility for operating activities. Similarly, the NAO fraud control guidance advises agencies to develop specific strategies to coordinate their fraud control efforts and to ensure that someone is fully responsible for implementing the plans in the way intended and that sufficient resources are in place. Consistent with internal control and best practice guidance, USCIS established the FDNS office to enhance its fraud control efforts by serving as its focal point for addressing immigration benefit fraud. Established in 2003, FDNS is intended to combat fraud and foster a positive control environment by pursuing the following objectives: develop, coordinate, and lead the national antifraud operations for oversee and enhance policies and procedures pertaining to the enforcement of law enforcement background checks on those applying for immigration benefits; identify and evaluate vulnerabilities in the various policies, practices and procedures that threaten the legal immigration process; recommend solutions and internal controls to address these vulnerabilities; and act as the primary USCIS conduit and liaison with ICE, U.S. Customs and Border Protection (CBP), and other members of the law enforcement and intelligence community. In September 2003, in support of its objectives, FDNS outlined a strategy for detecting immigration benefit fraud in USCIS’s National Benefit Fraud Strategy. According to the strategy, because most immigration benefit fraud begins with the filing of an application, a sound approach to fraud prevention begins at the earliest point in the process—the time an application is received. Accordingly, USCIS established FDNS Fraud Detection Units (FDU) in each of the service centers in order to help identify potential fraud and process adjudicator referrals. Subsequently, FDNS appointed staff to serve as Immigration Officers working directly with adjudicators at the service centers and district offices to identify potential fraud and, to some extent, verify fraud through administrative inquiries—once it was determined that ICE had declined to investigate a referral—in order to assist adjudicators in making eligibility determinations. The strategy also discusses various technological tools to help the FDUs detect fraud early in the process—in particular, by enabling FDNS staff to check databases to confirm applicant information and by developing new automated tools to analyze application system data using known fraud indicators and patterns to help identify potential cases of fraud. USCIS has hired a contractor to develop for FDNS an automated capability to screen incoming applications against known fraud indicators, such as multiple applications received from the same person. According to FDNS, it plans to deploy an initial data analysis capability by the third quarter of fiscal year 2006 and release additional data analyses capabilities at later dates, but could not predict when these latter capabilities would be achieved. However, according to an FDNS operations manager, the near and midterm plans are not aimed at providing a full data mining capability. In the long term, USCIS plans to integrate these data analyses tools for fraud detection into a new application management system being developed as part of USCIS’s efforts to transform its business processes for adjudicating immigration benefits, which includes developing the information technology needed to support these business processes. Also, in the long term, according to the FDNS Director, a new USCIS application management system would ideally include fraud filters to screen applications and remove suspicious applications from the processing stream before they are seen by adjudicators. FDNS has adopted as one of its objectives the identification and evaluation of vulnerabilities in USCIS policies, practices, and procedures that threaten the immigration benefit process. Consistent with this objective and good internal control practices, in February 2005, FDNS began to conduct a series of fraud assessments aimed at determining the extent and nature (i.e., how it is committed) of fraud for several immigration benefits that FDNS staff determined, based on past studies and experience, benefit fraud may be a problem. To conduct these assessments, FDNS first selected a statistically valid sample of applications. FDNS field staff then attempted to verify whether key information on the applications was true. They did this by doing such things as comparing information contained in benefit applications with information in USCIS data systems and law enforcement and commercial databases, conducting interviews with applicants, and, in some cases, visiting locations to verify, for example, whether a business actually existed. As of December 2005, FDNS had completed its assessment of the religious worker application and replacement of permanent resident card applications, and was in the process of completing the assessment of two immigrant worker application subcategories. As of December 2005, FDNS planned to initiate two other assessments in January 2006 and another at a later time. Although USCIS has taken some important steps consistent with internal control standards and other good fraud control practices, it has not yet implemented some aspects of internal control standards and fraud control best practices that could further enhance its ability to detect fraud. Specifically, it lacks (1) a comprehensive approach for managing risk, (2) a monitoring mechanism to ensure that knowledge arising from routine operations informs the assessment of policies and procedures, (3) clear communication regarding how to balance multiple agency objectives, (4) a mechanism to help ensure that adjudicators staff have access to important information, and (5) performance goals related to fraud prevention. Although FDNS has initiated a fraud assessment program that identifies vulnerabilities for the specific benefit being assessed, it does not employ a comprehensive risk management approach to help guide its fraud control efforts. That is, FDNS has not (1) developed a plan for assessing the majority of benefits that USCIS administers, (2) fully incorporated threat and consequence information as part of the assessment process, and (3) applied a risk-based approach to evaluating alternatives for mitigating identified vulnerabilities. A central component of the Standards for Internal Control in the Federal Government is risk assessment, which includes identifying and analyzing risks that agencies face from internal and external sources and deciding what actions should be taken to manage these risks. NAO’s fraud control guide also advises that in the fraud context, risk assessment involves such things as assessing the size of the threat from external fraud, the areas most vulnerable to fraud, and the characteristics of those who commit fraud. Moreover, we have consistently advocated a model of risk management that takes place in the context of clearly articulated goals and objectives and includes comprehensive assessments of threats, vulnerabilities, and consequences to help agencies evaluate and select among alternatives for mitigating risk in light of the potential for a given activity to be effective, the related cost of implementing the activity, and other relevant management concerns (including its impact on other agency objectives). FDNS fraud assessments are an initial step toward adopting a risk management approach. However, FDNS has no specific plans to assess the majority of the benefit types that it administers. FDNS’s current plan calls for assessing benefit types that represent only about 25 percent of the applications USCIS received in fiscal year 2004, for example, and do not include benefits like temporary work authorization which accounted for almost 30 percent of applications received in 2004, and which the CIS Ombudsman suspects may be a high risk for fraud, and for which PAS data show a high denial rate for fraud. FDNS officials told us that, although the fraud assessments have been valuable, they have taken more time and effort than originally planned. Likewise, FDNS has not established a strategy and methodology for prioritizing any future fraud assessments. Until it extends the assessments to additional benefit types, the fraud assessments offer only limited information about vulnerabilities to the immigration benefits system Moreover, the approach to risk management that we advocate calls for the assessment of threats and consequences, in addition to the vulnerability information provided by the current approach to fraud assessment. Currently, the fraud assessments do not incorporate a comprehensive threat assessment—that is, they do not draw on all available sources of threat information—for example, information that might be available from such sources as ICE’s Office of Intelligence and other DHS intelligence gathering efforts. Threat assessment might help FDNS identify, for example, whether terrorists might be more likely to try to exploit certain immigration benefits. Neither do the fraud assessments include an assessment of the consequences of granting a particular benefit to a fraudulent filer. Such an assessment might help USCIS determine the relative harm that granting such a benefit might pose to the United States and its immigration benefit system. Although ultimately any benefit obtained under false pretenses undermines the system established by U.S. immigration law, consideration of whether, for example, granting a specific benefit may also facilitate easier access for potential terrorists to critical infrastructure or pose a greater detriment to the U.S. economy could inform sound risk-based decision making. Equipped with a more comprehensive understanding of the risks it faces— particularly which benefits represent the highest risk, USCIS management would then be in a better position to select appropriate risk mitigation strategies and actions, particularly in situations where it is necessary to make resource trade-offs or to balance multiple agency objectives. For example, an obvious vulnerability to the immigration benefit system is the submission of false eligibility evidence. Currently, however, USCIS procedures do not include the verification of any eligibility evidence for any benefit, despite its potential to help mitigate vulnerability to fraud. Verification of such evidence—by comparing it to other information in USCIS databases, by checking it against external sources of information, or by interviewing applicants—is the most direct and effective strategy for mitigating this vulnerability. Employer wage data reported to state labor agencies, for example, could be a useful source of information to help determine if an employer has paid prevailing wages. Data from state motor vehicle departments can be used to verify that the two individuals claiming to be married live at the same address. We previously reported that USCIS could benefit from verifying employer related information with the Internal Revenue Service. USCIS adjudicators told us that access to commercial databases that provide identification and credential verification would be helpful in verifying information contained in benefit applications. Additionally, district office adjudicators told us that it was often only during interviews that fraud became evident, even when their earlier review had not raised suspicions. A successful State Department effort offers further evidence that the practice of verifying key information can be an effective mitigation strategy. Due to a high incidence of fraud in a program that allows foreign companies to bring executives into the United States, one State Department consular post in Latin America began verifying with local authorities two key pieces of evidence that applicants were required to submit. According to the post, it subsequently noticed a decrease in the number of potentially fraudulent applications for this benefit. On the other hand, verifying any applicant-submitted evidence in pursuit of its fraud-prevention objectives represents a resource commitment for USCIS and a potential trade-off with its production and customer service- related objectives. In fiscal year 2004, USCIS had a backlog of several million applications and has developed a plan to eliminate it by the end of fiscal year 2006. In June 2004, USCIS reported that it would have to increase monthly production by about 20 percent to achieve its legislatively mandated goal of adjudicating all applications within 6 months or less by the end of fiscal year 2006. According to USCIS, because it does not plan to increase its current overall staffing level, meeting its backlog reduction goal will require some combination of reductions in the standard processing time for various applications, overtime hours, and adjudicator reassignments. It would be impossible for USCIS to verify all of the key information or interview all individuals related to the millions of applications it adjudicates each year—approximately 7.5 million applications in fiscal year 2005—without seriously compromising its service-related objectives. Identifying situations and benefits that represent the highest risk to USCIS could help its management determine whether and under what circumstances verification is so vital to maintaining the integrity of the immigration benefits system that it outweighs any potential increase in processing time and costs. In this example, such an approach to risk management would inform selection among alternative verification strategies by considering (1) the risk of failing to detect fraud based on information provided by assessments of vulnerabilities, threats, and consequences, (2) the cost of conducting the verification (including its effect on other organizational objectives like service), and (3) the potential for the verification activities, given the current tools and information available, to actually detect fraud. In addition to procedural vulnerabilities like the verification example, a risk management approach could also guide USCIS in the evaluation of policies that strike a balance between two or more agency objectives and organizational priorities. For example, as previously discussed, USCIS’s policy of granting interim employment authorization documents to applicants whose adjustment of status applications have not been adjudicated within 90 days can be exploited by aliens seeking to gain work authorization under false pretenses and to use work authorization to obtain valid identity documents such as temporary social security cards and drivers licenses. In his 2004 and 2005 annual reports, the CIS Ombudsman identified this policy as a significant vulnerability in the immigration benefits process, because he contends that for many individuals the primary goal is to obtain temporary work authorization regardless of the validity of their applications for permanent residency. On the other hand, as we have previously reported, the reason for issuing temporary work authorization is to allow legitimate applicants to work as soon as possible, which according to USCIS, can serve to reduce the negative effects of delay on applicants and their families. Using more comprehensive risk information to evaluate policies that represent trade- offs between fraud control and other agency objectives may help USCIS management determine whether and to what extent unintended policy consequences like in this example place the integrity of the immigration benefits system at risk. This kind of risk management approach also would provide USCIS management an opportunity to evaluate and select among various approaches to balancing fraud control with other agency objectives. In the temporary work authorization example, USCIS could evaluate a variety of alternative strategies and select among them on the basis of all available information, including risk. These strategies might include: (1) maintaining the current policy if it is found to pose a tolerable level of risk, (2) seeking applicable regulatory changes, or (3) applying the policy disparately, to the extent allowed by law, across benefit types based on the level of risk each represents. In commenting on a draft of this report, DHS stated that a proposed regulatory change would clarify USCIS’s ability to withhold the adjudication of an application for employment authorization pending an ongoing investigation. Internal control standards advise that controls should be generally designed to ensure that ongoing monitoring occurs in the course of normal operations and is ingrained in the agency’s operations. FDNS’s fraud assessment program provides some information about how fraud is committed in the form of concentrated periodic assessments. However, currently USCIS does not have a mechanism to ensure routine feedback to FDNS about vulnerabilities identified during the course of normal operations and to incorporate it into adjudication policies and procedures. Besides information about vulnerabilities obtained from its operational experience adjudicating applications, additional information might be available to FDNS from external entities that also have responsibility for some aspect of controlling benefit fraud. One external source of fraud information that might inform USCIS operations is the U.S. Attorneys Office, which prosecutes immigration benefit fraud cases. For example, one U.S. Attorney, based on cases his office has prosecuted, has issued memoranda showing how underlying regulatory and adjudication processes have invited abuse of the immigration system. A March 2005 memorandum prepared by this office explained how a recent investigation revealed significant weaknesses in the asylum process that allowed ineligible aliens to obtain asylum, and made suggestions for reforming the process. The memorandum stated that these suggestions were intended to start a discussion among federal agencies with immigration responsibilities that could lead to needed reforms. In commenting on a draft of this report, DHS stated that USCIS is developing a plan of action to work with other DHS entities and the Executive Office of Immigration Review within the Department of Justice to respond to specific recommendations made by the U.S. Attorney that prepared the memorandum on asylum program weaknesses. Another source of information available to USCIS about fraud vulnerabilities are the criminal investigations conducted by ICE, DOL, and the DHS Office of Inspector General, which could reveal such information as the characteristics of those who commit fraud and how these individuals exploited weaknesses in the immigration benefit process to obtain benefits illegally. USCIS’s National Benefit Fraud Strategy does not mention incorporating lessons learned from investigative and prosecutorial activities into its fraud control efforts—specifically, how the knowledge ICE, DOL, and DHS investigators and U.S. Attorneys gained during the course of investigations and prosecutions could be collected and analyzed in order to become aware of opportunities to reduce fraud vulnerabilities. A mechanism to help ensure that information from these and related sources results in appropriate refinements to policies and procedures could enhance USCIS’s efforts to address fraud vulnerabilities. DOL, which plays an important role in the benefits process for some permanent employment benefits, has used external information to refine its procedures in this way. Specifically, it analyzed the results of major criminal investigations and prosecutions to evaluate and establish new procedures that require verifying key application information, such as the existence of a business. DOL found it was necessary to change its permanent labor certification procedures to require verification of basic application information in order to mitigate the risk of mistakenly approving permanent labor certification applications, and protect the fundamental integrity of the labor certification process from blatant abuse. Internal control standards advise that for agencies to manage their operations, they must have relevant, reliable, and timely communications. Furthermore, establishing a positive fraud control environment is central to an agency’s efforts to detect and deter immigration benefit fraud. The NAO guidance also advises management to ensure that all levels of the organization are made to share a concern about fraud. It is the stated mission of USCIS to provide the right benefit, to the right person, at the right time, and no benefit to the wrong person. Specifically, it aims to adjudicate all benefit requests within 6 months of receipt, without compromising the integrity of the process, nor significantly increasing staff. These objectives—speed, quality, and cost—are inherently in tension with one another. Therefore, it is particularly important, given USCIS’s multiple objectives, that it clearly communicates the importance of each of the objectives at every level of the organization, and provides clear guidance to adjudicators about how to balance them in the course of their daily duties. Although USCIS’s backlog elimination plan acknowledges the need to balance its focus on reducing the backlog with efforts to ensure adjudicative quality, some USCIS adjudicators we interviewed indicated that it was not clear to them how the agency expected them to balance fraud detection efforts and production goals during the course of their duties. Adjudicators we spoke with said that communications from management emphasized meeting production backlog goals almost exclusively. They said that management’s focused attention on reducing the backlog placed additional pressure on them to process applications faster, thereby increasing the risk of making incorrect decisions, including approving potentially fraudulent applications. For example, adjudicators at all four service centers we spoke with told us that operations management seemed to be almost exclusively focused on reducing the backlog in order to meet production goals. USCIS headquarters operations management responsible for overseeing adjudications at service centers and district offices told us that the adjudications operation is a “high-pressure” production environment and that they are seeking to increase production, but it was not their intention that this should come at the expense of making incorrect adjudication decisions. The FDNS Director told us that he had also discussed with operations management the need to strike a more balanced approach to meeting production goals and ensuring that the right eligibility decision is made. He acknowledged that until FDNS establishes an ability to proactively identify fraud through its automated analysis tools, adjudicators will continue to play a primary role in detecting fraud. Therefore, he acknowledged the importance of clear and balanced communications from operations management to adjudicators in support of USCIS’s new fraud detection process and the shared responsibilities in this regard. Nevertheless, adjudicators we interviewed told us that they have received guidance from different parts of the agency regarding the lengths to which they should go in confirming suspected fraud that they were uncertain how to interpret. For example, in December 2004, the FDNS Director issued guidance stating that adjudicators should obtain the evidence needed to support their suspicions of fraud before making a referral, including, if necessary, requesting additional evidence from applicants. According to adjudicators and FDU staff we interviewed, this guidance appears to conflict with a subsequent January 2005 memorandum, issued by the Director of Service Center Operations, which states that adjudicator requests for information should not be used as a device simply to “investigate” suspected fraud. Adjudicators we interviewed at one service center said that whenever operations management communicated with them about practicing more discretion in issuing requests for additional evidence, they believed it was primarily intended to put more pressure on them to process applications faster, which in turn they said puts additional pressure on them to not to request additional evidence when making eligibility decisions. Consequently, they were concerned about having to approve applications with less confidence in the correctness of their determinations. An FDNS Immigration Officer working in a service center echoed the adjudicators concerns about seemingly conflicting guidance, saying that interpreting such guidance from management made the job of adjudicators more difficult. However, he said that adjudicators and local managers would more likely heed the direction of USCIS operations management, their direct supervisors, rather than FDNS. Clear communications about the importance of both fraud prevention-related and service-related objectives and how they are to be balanced may help adjudicators ensure that they are appropriately supporting USCIS’s multiple objectives as they carry out their duties. In commenting on a draft of this report, DHS stated that the USCIS Director moved FDNS to a new directorate that reports directly to the USCIS Deputy Director. This will allow FDNS to provide focus and guidance to all USCIS operations. USCIS does not have a mechanism to help ensure that adjudicators have access to information related to detecting fraud they may need to carry out their responsibilities. Information regarding fraud trends can be provided in various forms including e-mails, intranet Web pages, and bulletin board notices. The adjudicators at the service centers and district offices we visited received some fraud-related information or training subsequent to their initial hire. Our interviews indicated, however, that the frequency and method for distributing ongoing information about fraud detection is not uniform across the service centers and district offices we visited; some adjudicators reported that more information or a more centralized information management system would better prepare them to detect fraud. At two service centers, adjudicators we interviewed told us that, after their initial training, they were provided with some information regarding fraud trends via e-mail. However, these adjudicators also reported difficulty with managing the information in this format. They said that providing this information through a different means—either through a Web-based system or through a training course that would summarize new knowledge related to fraud trends—would be easier and quicker to use. One of the service centers provided adjudicators with operating manuals—developed for specific benefit application types—that included information regarding typical fraud trends encountered by the service center, which adjudicators said they found useful in their efforts to detect fraud. At two other service centers, adjudicators we interviewed told us that they were not provided any fraud e-mail updates but received some limited information about fraud during general group meetings. Adjudicators at these two centers told us that receiving more specific and detailed information about fraud trends and practices would enhance their ability to detect fraud. At one service center, adjudicators suggested that having a method by which to incorporate the knowledge and lessons learned from experienced adjudicators would also help them to better detect fraud. Additionally, one of the district offices we visited provided an additional 2- day training course that included techniques for detecting fraud during an interview. Adjudicators we interviewed at this district office told us that the course helped prepare them to better detect fraud. USCIS headquarters officials responsible for field operations told us that there is no standard training regarding fraud trends and that fraud-related training varied across field offices. In addition to calling for relevant information to be shared internally, internal control standards require that management ensure that there are adequate means of communicating with and obtaining from external stakeholders information that may have a significant impact on achieving agency goals. During our audit work, USCIS and ICE, had not yet established a feedback mechanism for the timely sharing of information related to the status and outcomes of fraud referrals that is essential to the fraud referral process shared by USCIS and ICE. According to FDNS field staff we interviewed, information from ICE field offices on the status of USCIS referrals—for example, whether ICE has initiated an investigation in response to a referral—was sporadic and incomplete in some cases and non-existent in other cases. In addition, when ICE fails to accept a referral, FDNS may initiate an administrative inquiry to resolve an adjudicator’s suspicions of fraud. However, because ICE did not routinely provide information about its investigative decisions, it was difficult for FDNS to know when to initiate such inquiries or to plan for the staff time needed to conduct them. Moreover, according to FDNS staff and adjudicators we interviewed, without timely feedback about the investigative status of their referrals, adjudicators lacked the information needed to make more timely eligibility determinations, whether or not an investigation is opened by ICE. In November 2005, ICE and USCIS officials told us that ICE investigators were recently assigned to each of the FDUs, which may help increase communication and information sharing between USCIS and ICE. Additionally, according to the FDNS Director, having direct access to information stored in ICE’s case management information system, the Treasury Enforcement Communication System (TECS) maintained by Customs and Border Protection (CBP), would allow FDNS staff to determine with greater certainty whether someone who has filed for an immigration benefit is connected to any ongoing ICE criminal investigation. However, ICE officials told us they opposed allowing FDNS access to sensitive case management information. They said that there was a need to segregate sensitive law enforcement data about ongoing cases from non-law enforcement agencies like FDNS. In commenting on a draft of this report, DHS provided us with a February 14, 2006, memorandum of agreement between ICE and USCIS that established a mechanism for the sharing of information related to the status and outcomes of fraud referrals. In addition the agreement provides USCIS staff with access to TECS data so USCIS can determine whether someone who has filed for an immigration benefit is connected to any ongoing ICE criminal investigation. If properly implemented, this agreement should resolve USCIS’s concerns regarding the status and outcome of fraud referrals to ICE and access to TECS data. Internal control standards call for agencies to establish performance measures to monitor performance related to agency objectives. Measuring performance allows an organization to track progress made toward achieving its objectives and provides managers with crucial information on which to base management decisions. The Government Performance and Results Act (GPRA) of 1993 also requires that agencies establish long- term strategic and annual goals, measure performance against these goals, and report on the progress made toward meeting their missions and objectives. It calls for agencies to assess specific outcomes related to their missions and objectives, in addition to designing output measures to describe attributes of the goods and services produced by the agencies’ programs. USCIS’s 2005 Strategic Plan includes both a prevention theme—ensuring the integrity of the system, and a service theme—providing efficient and customer oriented services, along with related goals and objectives. However, DHS and USCIS have not established specific performance goals to assess benefit fraud activities. In fiscal year 2004 USCIS reported performance goals related to naturalization, legal permanent residency, and temporary residency to DHS for its annual Performance and Accountability Report. The objective for each of these three performance goals was to “provide information and benefits in a timely, accurate, consistent, courteous, and professional manner; and prevent ineligible individuals from receiving” the benefit. Although the objective includes preventing ineligible individuals from receiving the benefit, the related measure—achieve and maintain a 6-month cycle time goal—does not. There is no discussion in the strategic plan of how to balance its prevention objectives with its service objectives. Instead, USCIS’s long- term strategic approach appears to rely heavily on the development of an enhanced case management system, new fraud databases and data analyses tools, and automated information services to overcome the inherent tension between these prevention and services themes as they relate to the prevention of benefit fraud and reducing the backlog of immigration applications. Establishing output measures—for example, the number of cases referred to and accepted by FDNS—and outcome measures—for example, the percentage of fraudulent applications detected relative to targets established using baseline data from fraud assessments—could provide USCIS with more complete information about the effectiveness of its fraud control efforts in meeting its strategic goal objective to ensure the security and integrity of the immigration system. FDNS officials told us that they are now participating in USCIS’s Office of Policy and Strategy Performance Measurement Team’s efforts to develop performance metrics, and that FDNS is leading an effort to develop metrics related to USCIS’s strategic goal to ensure the security and integrity of the immigration system by increasing the detection of attempted immigration benefit fraud. However, specific DHS metrics regarding USCIS’s antifraud efforts have yet to be developed and approved by DHS. Although best practice guidance suggests that sanctions for those who commit benefit fraud are central to a strong fraud control environment, and the INA provides for criminal and administrative sanctioning, DHS does not currently actively use the administrative sanctions available to it. Fraud control best practices advise that a credible sanctions program, which incorporates a mechanism for evaluating its effectiveness, including the wider value of deterrence, is an integral part of fraud control. According to the AICPA’s fraud guidance, the way an entity reacts to fraud can send a strong message that helps reduce the number of future occurrences. Therefore, taking appropriate and consistent actions against violators is an important element of fraud control and deterrence. The guide further advises that a strong emphasis on fraud deterrence has the effect of persuading individuals that they should not commit fraud because of the likelihood of punishment. Similarly, the NAO guide states that a key element of a good fraud control program is to impose penalties and sanctions on those who commit fraud in order to penalize those who commit fraud and deter others from carrying out similar types of fraud. Data provided by USCIS indicates that most benefit fraud it uncovers and refers to ICE is not prosecuted. In fiscal year 2005, USCIS referred 2,289 immigration benefit fraud cases to ICE BFUs. However, 598, about 26 percent were accepted by the BFUs. Neither USCIS nor ICE provided us with information about which of the FDNS referrals accepted by the BFUs resulted in an ICE investigation. However, ICE officials said that the majority of ICE’s immigration benefit fraud investigations do not originate with USCIS referrals, but from other investigative sources. Given limits on its resources, ICE officials told us that they generally prioritize their investigative resources and assign them to cases involving individuals who are filing large numbers of fraudulent applications for profit, because these cases generally have a greater probability of being prosecuted by the U.S. Attorneys Offices. Therefore, the principal means of imposing sanctions on most immigration benefit fraud would be through administrative penalties. The INA provides both criminal and administrative sanctions for those who commit immigration benefit fraud. The act’s criminal provisions provide for fines and/or imprisonment for up to 5 years for a person who fails to disclose that they have, for a fee, assisted in preparing an application for an immigration benefit that was falsely made, and monetary fines and/or imprisonment for up to 15 years for a second such conviction. The act also provides for administrative penalties for applicants who make false statements or submit a fraudulent document to obtain an immigration benefit or enter into a marriage solely to obtain an immigration benefit. For document fraud committed after 1999, it provides monetary fines ranging from $275 to $2,200 per document subject to a violation for a first offense and from $2,200 to $5,500 per document for those who have previously been fined. Monetary penalties collected are to be deposited into the Immigration Enforcement Account within the Department of the Treasury. Funds from this account can be used for activities that enhance enforcement of provisions of the INA including: (1) the identification, investigation, apprehension, detention, and removal of criminal aliens; (2) the maintenance and updating of a system to identify and track criminal aliens, deportable aliens, inadmissible aliens, and aliens illegally entering the United States; and (3) for the repair, maintenance, or construction of border facilities to deter illegal entry along the border. In addition, under certain circumstances, individuals determined through the adjudication process to have committed fraud, are deemed inadmissible should they later try to file another immigration application. In some cases, aliens who are determined in a formal hearing to have committed fraud can be removed from the United States and be barred from entering in the future. DHS does not currently have a clear and comprehensive strategy for imposing sanctions or evaluating their effectiveness and is not actively enforcing the administrative penalties provided for by the INA. This is largely due to a 1998 federal appeals court ruling upholding a nationwide permanent injunction against the procedures used by INS to institute civil document fraud charges under the INA. The court found that INS provided insufficient notice to aliens regarding their right to request a hearing on the imposition of monetary fines and the immigration consequences of failing to do so, and that until proper notifications were included on the fine and hearing waiver forms, INS was enjoined from implementing civil penalties for document fraud. According to the Director of Field Operations for ICE’s Office of Principal Legal Advisor, after the court ruling, the government’s cost to investigate and prosecute an immigration fraud case administratively, including appeals costs, would not be offset by the monetary sum that might be obtained. Moreover, the director stated that even if successful, there was no guarantee that the government could collect its fine from the alien. Therefore, according to the director, ICE does not consider implementing the administrative penalties for document fraud to be cost-effective. Accordingly, DHS has not made updating the forms in response to the ruling a priority. Similarly, another USCIS attorney told us that the provision of INA that pertains to marriage fraud is rarely used because, due to the significant commitment of resources necessary to establish a finding of fraud, enforcing it might not be cost-effective. However, DHS has not conducted a formal analysis, which includes an attempt to value the benefit of deterrence, to determine the total costs and benefits of imposing sanctions. Senior USCIS officials we spoke with, however, told us that administrative sanctions are important to their fraud control efforts. According to the FDNS Director, without the credible threat of a penalty, individuals have no fear of filing future fraudulent applications. In this regard, he said that FDNS administrative investigations of fraud referrals not investigated by ICE are critical, and, in his estimation, the resulting denial of a benefit and potential removal of an alien offer an effective deterrent to immigration benefit fraud. However, the director said that although an alien who commits immigration benefit fraud might be removable from the United States and, therefore, has some disincentive to commit fraud, U.S. citizens, if they are not prosecuted criminally, have little disincentive because without the enforcement of administrative sanctions they are not likely to be penalized, even if their violations are detected. Additionally, according to the Chief of Staff for USCIS, a strategy for administratively sanctioning those who commit fraud is necessary for controlling and deterring fraud. Although DHS does not actively use its authorities to impose administrative penalties, Congress has continued to support the concept in legislation. In particular, the Real ID Act of 2005 allows the Secretary of Homeland Security, after notice and an opportunity for a hearing, to impose an administrative fine of up to $10,000 per violation on an employer for a substantial failure to meet any of the conditions of a petition for certain non-immigrant workers or a willful misrepresentation of a material fact in such a petition, and allows the secretary to deny petitions filed with respect to that employer for at least 1 year and not more than 5 years. However, without a strategy that includes a mechanism for assessing the effectiveness of sanctions and considers both the monetary value of fines collected and the value of deterrence, DHS will not be able to determine how and under what circumstances to best use the authority provided by the INA and other legislation to promote a credible threat of punishment in order to deter fraudulent filers. Although it lacks a strategy for imposing criminal and administrative sanctions, DHS, along with DOL, has proposed administrative rule changes that will help sanction those who commit fraud. Among other things, DHS has proposed that USCIS be able to deny, for a period of time, all applications from employers that DOL or DHS has found, respectively, to have submitted false information about meeting regulatory requirements or provided statements in their applications that were inaccurate, fraudulent or misrepresented a material fact. Final rules have not yet been published. In light of competing organizational priorities, institutionalizing fraud detection—so that it is a built-in part of the adjudications process and always a central part of USCIS’s planning, procedures, and methods—is vital to USCIS’s ability to accomplish its goals and objectives, particularly protecting the integrity of the immigration benefit system. USCIS has taken some important steps to implement internal controls, primarily through the activities of the Office of Fraud Detection and National Security. By strengthening existing controls and implementing additional fraud control practices, USCIS could enhance its ability to detect benefit fraud and gain greater assurance that its operations are designed to protect the integrity of the system, even as it strives to enhance service and meet its backlog reduction goals. Specifically, expanding the types of benefits it assesses, including assessments of consequence, and drawing on all available sources of threat information to develop current fraud assessment activities into a more comprehensive risk management approach would provide additional knowledge about fraud risks and put the agency in a better position to make risk-based evaluations of its policies, procedures, and programmatic activities. Also, a mechanism to ensure that information uncovered during the course of normal operations—in USCIS and related agencies—feeds back into USCIS policies and procedures would help to ensure that it addresses loopholes and procedural weaknesses. In addition, clear communication of the importance of fraud prevention-related objectives and how they are to be balanced, in practice, with service-related objectives would help USCIS adjudicators to ensure that they are supporting the agency’s multiple objectives as they carry out their duties. Moreover, the provision of the tools and the relevant information that its adjudicators need to help them detect fraud could help them make eligibility determinations with greater confidence of their accuracy. Finally, performance goals—that include output and outcome measures, along with associated targets—reflecting the status of fraud control efforts would provide valuable information for USCIS management to evaluate its various policies, procedures, and programmatic activities and a better understanding of both the progress made and areas requiring more focused management attention to enhance fraud prevention. By demonstrating sufficiently adverse consequences for individuals who perpetrate fraud, sanctions serve to discourage future fraudulent filings, as individuals observe that the potential costs of engaging in fraud are likely to outweigh the potential gains. It is important to any program that encounters fraud to have a credible sanctions program to penalize those who engage in fraud and deter others from doing so. Currently, DHS’s sanctions program for immigration fraud is not a threat to most perpetrators because relatively few are prosecuted criminally and administrative sanctions are not actively being used. Although DHS officials told us that administrative sanctions are not cost-effective, comparing only the costs of administering sanctions with the potential return from the collection of fines may undervalue their potential deterrent effects. Although developing a sound methodology to establish and determine the value of deterrence provided by sanctions will require effort, best practices call for cost-effective sanctions, and consideration of the full range of costs and benefits, financial and nonfinancial, is central to making a valid determination of cost-effectiveness. Developing and implementing a strategy for imposing sanctions that includes a mechanism for assessing effectiveness and that more fully evaluates costs and benefits, including nonfinancial benefits like the value of deterrence, could give DHS a better indication of how and under what circumstances administrative sanctions should be employed to enhance USCIS’s fraud deterrence efforts. In order to enhance USCIS’s overall immigration benefit fraud control environment, we recommend that the Secretary of Homeland Security direct the Director of USCIS to take the following five actions, which are consistent with internal control standards and best practices in the area of fraud control: Enhance its risk management approach by (1) expanding its fraud assessment program to cover more immigration application types; (2) fully incorporating threat and consequence assessments into its fraud assessment activities; and (3) using risk analysis to evaluate management alternatives to mitigate identified vulnerabilities. Implement a mechanism to help USCIS ensure that information about fraud vulnerabilities uncovered during the course of normal operations—by USCIS and related agencies—feeds back into and contributes to changes in policies and procedures when needed to ensure that identified vulnerabilities result in appropriate corrective actions. Communicate clearly to USCIS adjudicators the importance USCIS’s fraud-prevention objectives and how they are to be balanced with service-oriented objectives to help adjudicators ensure that both objectives are supported as they carry out their duties. Provide USCIS’s adjudicator staff with access to relevant internal and external information that bears on their ability to detect fraud, make correct eligibility determinations, and support the new fraud referral process—particularly ongoing updates regarding fraud trends and other information related to fraud detection. Establish output and outcome based performance goals—along with associated measures and targets—to assess the effectiveness of fraud control efforts and provide more complete performance information to guide management decisions about the need for any corrective action to improve the ability to detect fraud. In addition, in order to enhance DHS’s ability to sanction immigration benefit fraud, we recommend the Secretary of Homeland Security direct the Director of USCIS and the Assistant Secretary of ICE to: Develop a strategy for implementing a sanctions program that includes mechanisms for assessing its effectiveness and for determining its associated costs and benefits, including its deterrence value. We provided a draft of this report to the Departments of Homeland Security, State, Justice, and Labor for review. On March 1, 2006, we received written comments on the draft report from the Department of Homeland Security, which are reproduced in full in appendix II. The Departments of State, Justice, and Labor had no comments on our draft report. In its written comments, DHS stated that our report generally provided a good overview of the complexities associated with pursuing immigration benefit fraud and the need to have a program in place that proactively assesses vulnerabilities within the myriad of immigration processes. However, DHS stated that our report did not fully portray USCIS’s efforts to address immigration benefit fraud and provided other examples of efforts USCIS has undertaken or plans to undertake. Where appropriate, we revised the draft report to recognize these additional efforts by USCIS to address immigration benefit fraud. DHS noted that USCIS used GAO’s 2002 report on immigration benefit fraud as the foundation to build its antifraud program and believes that USCIS is on the right track to creating an effective antifraud program. We believe that USCIS is moving in the right direction and recognize that FDNS is in the beginning stages of developing and implementing a new antifraud program for USCIS. Overall, DHS agreed with and plans to take action to implement four of our six recommendations, and cited actions it has already taken to indicate that aspects of our other two recommendations are already in place. Specifically, regarding our recommendation that DHS enhance its risk management approach, DHS agreed that USCIS can enhance its risk management approach by expanding its fraud assessment program to cover more application types and plans to do so. DHS stated that its initial fraud assessments focused on benefits that were high risk, but that given existing resources it was not possible to conduct assessments on all benefit types within the first years of operation. DHS stated that USCIS believes that the benefit fraud assessments currently underway do provide a comprehensive risk analysis to identify vulnerabilities and measures to mitigate such vulnerabilities. DHS cites FDNS involvement in interagency anti-fraud efforts and that FDNS staff are assigned to various intelligence units as support that its fraud assessments draws on sources of strategic threat information. However, DHS did not provide evidence or explain how, if at all, these efforts systematically incorporated threat and consequences into its fraud assessment process. In addition, DHS did not explain or provide us with evidence of how USCIS will use the results of the fraud assessments as part of a continuous, built-in component of its operations to evaluate and adjust, as necessary, policies and procedures. Regarding our recommendation that DHS provide USCIS adjudicator staff relevant information, DHS agreed that it needs to provide USCIS staff access to relevant internal and external information and is initiating training for supervisory adjudication officers and is planning to provide adjudicators selective access to the State Department’s Consolidated Consular Database and other open source databases. Regarding our recommendation that DHS establish performance goals to assess the effectiveness of fraud control efforts, DHS stated that FDNS has created performance goals for the number of benefit fraud assessments conducted during the year and the number of recommended policy, procedural and regulatory changes. DHS agreed that additional output and outcome based performance goals and measures are needed but did not specify what action(s) they were planning to take. Regarding our recommendation that DHS develop a strategy for implementing a sanctions program, DHS agreed to study the costs and benefits of an administrative sanctions program though DHS believes that the process it has established to place aliens determined to have committed immigration fraud in removal proceedings is an effective deterrent. While this process may deter aliens from committing immigration fraud, this process does not impact citizens who may commit fraud and therefore a sanctions strategy for citizens is still needed. DHS stated that with regard to two of our recommendations, it has already take actions that are consistent with these two recommendations. Regarding our recommendation that USCIS implement a mechanism to feed back information uncovered during the course of its normal operations and those of related agencies about fraud vulnerabilities, DHS stated that it believes such a feedback loop already exists within the process. DHS stated that FDNS is currently developing its back-end processes, which include sharing information/lessons learned from routine operations and addressing shortcomings. For all major conspiracy cases, a report is to be prepared summarizing among other things, factors that lead to fraudulent applications being approved. USCIS also stated that based upon meetings that FDNS leadership had with a U.S. Attorneys Office regarding vulnerabilities in the asylum process, USCIS is developing a plan of action to respond to the recommendations made by the U.S. Attorney’s office. DHS also stated that USCIS is developing regulatory changes to mitigate vulnerabilities identified during the religious worker fraud assessment. Although these are all positive efforts, USCIS does not yet have policies and procedures that specify how information about fraud vulnerabilities uncovered during the course of normal operations—by USCIS and related agencies—is to be gathered—from which internal and external sources—and the process for evaluating this information and making decisions about appropriate corrective actions. Therefore, we continue to believe that USCIS needs to institutionalize through policies and procedures a feedback mechanism. Regarding our recommendation that USCIS clearly communicate the importance of USCIS’ fraud-prevention activities, DHS stated USCIS leadership clearly advocates balancing objectives related to timely and quality processing of immigration benefits. DHS stated that creation of FDNS and the recent move of FDNS to a new directorate that reports directly to the Deputy Director of USCIS allowing FDNS to provide focus and guidance to all USCIS operations as support that USCIS is focused on the integrity of USCIS’s data and processes. Although USCIS management believes these efforts demonstrate the importance of fraud prevention, our interviews with adjudicators in service centers and district offices indicate that this message may not be reaching USCIS’s adjudications staff. Therefore, we continue to believe that more is needed to clearly communicate the importance of fraud prevention and more specific guidance on how USCIS staff are to balance the fraud prevention and service oriented objectives. DHS disagreed with our recommendation that USCIS and ICE establish a mechanism for the sharing of information related to the status and outcomes of USCIS fraud referrals to ICE. DHS provided us a February 2006 memorandum of agreement between ICE and USCIS that establishes a mechanism for the sharing of information related to the status and outcomes of fraud referrals; therefore, we withdrew this recommendation. We are sending copies of this report to the Secretaries of Homeland Security, State, and Labor; the Attorney General; and other interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on 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) 512-8777 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 appendix III. To examine the extent and nature of immigration fraud, we reviewed the results of the Office of Fraud Detection and National Security’s (FDNS) ongoing fraud assessments. Regarding the fraud assessments, we interviewed the FDNS managers responsible for administering the assessment, reviewed documentation outlining the assessment’s design, implementation and initial results from two fraud assessments. To better understand the nature of immigration benefit fraud and to identify common fraud patterns, we analyzed examples of fraud case histories for several petition types planned to be assessed by FDNS. In addition, we analyzed information contained in fraud bulletins prepared by U.S. Citizen Immigration Services’ (USCIS) California Service Center that contained reports by various State Department overseas consular posts on immigration fraud these posts had uncovered. We also analyzed USCIS’s Performance Analysis System (PAS) data to determine trends in the volume of applications being processed, approved, and denied. We assessed the data derived from PAS and determined that these data were sufficiently reliable for the purposes of this review. We interviewed adjudications staff and field managers to evaluate the extent to which internal controls and practices for detecting fraud were incorporated into USCIS policies, procedures, and tools. We met with headquarters officials from USCIS operations and FDNS, as well as officials from the Departments of Labor and State responsible for fraud detection efforts. We conducted site visits or contacted staff at all four USCIS services centers—we visited three USCIS service centers in Laguna Niguel, California; Dallas, Texas; and St. Albans, Vermont; and conducted telephone interviews with USCIS staff at the Lincoln, Nebraska, service center. We also interviewed 59 adjudicators at the four USCIS service centers and two USCIS district offices with responsibility for and familiarity with adjudicating different types of applications in a group setting, which allowed us to identify points of consensus among the adjudicators. We also visited USCIS district offices in Dallas and Boston responsible for coordinating their fraud referrals with two of the four service centers we visited. USCIS service center and district office officials selected the adjudicators we interviewed based upon our request that we meet with adjudicators that had responsibility for and familiarity with adjudicating different types of applications. We also interviewed FDNS staff assigned to work with the four service centers and two district offices we visited or contacted. We also interviewed staff from Immigration and Custom Enforcement’s (ICE) Identity and Benefit Fraud Unit in Washington, D.C., and those agents assigned to Benefit Fraud Units (BFU) in California, Texas, and Vermont. As we did not select a probability sample of USCIS staff and ICE Office of Investigations agents to interview, the results of these interviews cannot be projected to all USCIS staff and ICE Office of Investigations officials nationwide. In addition, we reviewed efforts by the Department of Labor’s Inspector General to determine the extent of immigration fraud in the Permanent Labor Certification Program. We also met with the CIS Ombudsman to discuss his fiscal year 2004 and fiscal year 2005 reports. To determine what actions USCIS has taken to improve its ability to detect immigration benefit fraud, we reviewed USCIS’s efforts to improve its fraud detection capabilities, including resources devoted specifically to detecting fraud by FDNS. We also reviewed USCIS’s policies, adjudication procedures, and fraud detection processes as well as the tools used by adjudicators to detect fraudulent immigration benefit applications. To determine what actions have been taken to sanction those who commit fraud, we interviewed USCIS and ICE attorneys, identified the investigative resources that ICE had made available for immigration fraud investigations, and determined how USCIS and ICE coordinate the investigation of potential fraud. In addition, we examined fraud investigation and prosecution statistics, and analyzed USCIS statistics about the amount of fraud identified by its adjudicators. We also determined how ICE investigative efforts are coordinated with the U.S. Attorneys Offices and how their priorities affect the investigation and prosecution of immigration benefit fraud schemes of various types. For this portion of our review, we met with headquarters officials from ICE, and interviewed agents in four ICE field offices based in Boston, Dallas, Los Angeles, and San Antonio. We also interviewed representatives from the U.S. Attorneys Office for the Eastern District of Virginia and the Executive Office of the U.S. Attorneys within the Department of Justice. Finally, we examined the current sanctions for those who commit immigration benefit fraud and reviewed proposed fraud regulatory changes. To evaluate DHS efforts to detect and sanction immigration benefit fraud, we used the Standards for Internal Control in the Federal Government and with best practices advocated by the American Institute of Certified Public Accountants (AICPA) and by the United Kingdom’s National Audit Office (NAO). We conducted our work between October 2004 and December 2005 in accordance with generally accepted government auditing standards. In addition to the above, Joel Aldape, David Alexander, Jenny Chanley, Frances Cook, Michael P. Dino, Nancy Finley, Carlos Garcia, Kathryn Godfrey, Larry Harrell, and David Nicholson were key contributors to this report.

In 2002, GAO reported that immigration benefit fraud was pervasive and significant and the approach to controlling it was fragmented. Experts believe that individuals ineligible for these benefits, including terrorists and criminals, could use fraudulent means to enter or remain in the U.S. You asked that GAO evaluate U.S. Citizenship and Immigration Service's (USCIS) anti-fraud efforts. This report addresses the questions: (1) What do available data and information indicate regarding the nature and extent of fraud? (2) What actions has USCIS taken to improve its ability to detect fraud? (3) What actions does the Department of Homeland Security (DHS) take to sanction those who commit fraud? Although the full extent of benefit fraud is unknown, available evidence suggests that it is a serious problem. Several high-profile immigration benefit fraud cases shed light on aspects of its nature--particularly that it is accomplished by submitting fraudulent documents and can be facilitated by white collar and other criminals, with the potential for large profits. USCIS staff denied about 20,000 applications for fraud in fiscal year 2005. USCIS has established a focal point for immigration fraud, outlined a fraud control strategy that relies on the use of automation to detect fraud, and is performing risk assessments to identify the extent and nature of fraud for certain benefits. However, USCIS has not implemented important aspects of internal control standards established by GAO and fraud control best practices identified by leading audit organizations--particularly a comprehensive risk management approach, a mechanism to ensure ongoing monitoring during the course of normal activities, clear communication regarding how to balance multiple objectives, mechanisms to help ensure that staff have access to key information, and performance goals for fraud prevention. DHS does not have a strategy for sanctioning fraud. Best practices advise that a credible sanctions program, which includes a mechanism for evaluating effectiveness, is an integral part of fraud control. Because most immigration benefit fraud is not prosecuted criminally, the principal means of sanctioning it would be administrative penalties. Although immigration law gives DHS the authority to levy administrative penalties, the component of DHS that administers them does not consider them to be cost-effective and does not routinely impose them. However, DHS has not evaluated the costs and benefits of sanctions, including the value of potential deterrence. Without a credible sanctions program, DHS's efforts to deter fraud may be less effective, when applicants perceive little threat of punishment.

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Our objective was to assess IRS’ performance during the 1994 filing season. Specifically, we focused on IRS’ ability to (1) process income tax returns and refunds accurately and efficiently and (2) provide taxpayers access to forms, information, and electronic filing methods. To achieve our objective, we validated the results of 1 service center’s test of the accuracy and timeliness of refunds by reviewing 853 randomly selected refunds; analyzed filing season-related data from IRS’ Management Information System for Top Level Executives and IRS data on processing errors, including those involving the EIC; reviewed IRS reports on refund fraud; reviewed computer system availability reports and attended weekly operational meetings held by IRS’ National Office Command Center; assessed the availability of tax materials by visiting 10 walk-in sites; tested taxpayers’ access to ordering forms and publications from IRS’ 3 tax material distribution centers by placing phone calls to those centers; analyzed IRS’ toll-free telephone system accessibility data, telephone activity data for area distribution centers, and telephone accessibility reports for the TeleFile system; compiled trend data for various indicators of IRS’ filing season performance; and interviewed IRS National Office officials and IRS officials in the Atlanta; Cincinnati; Fresno, CA; and Kansas City, MO, Service Centers responsible for the various activities we assessed. We did our work from January through August 1994 in accordance with generally accepted government auditing standards. With the exception of the refund accuracy rate and refund timeliness measure, we did not test and verify statistical data provided by IRS. We discussed our findings and conclusions in an exit conference attended by cognizant IRS officials, including the National Director for Submission Processing, the Assistant Commissioner for Taxpayer Services, the Director for Taxpayer Service Design and Review, and the Chief of the Publishing Distribution Section. Their comments are presented and evaluated on page 15. Other changes resulting from their comments were made in the body of the report as appropriate. There were many positive aspects of the 1994 filing season. After an unexpected drop in individual income tax return filings in 1993, the number filed in 1994 went up, although not as much as IRS had originally anticipated; and more of those returns were filed through alternative methods like electronic filing. IRS’ computer systems generally performed well with intermittent problems causing only minor delays. IRS also exceeded its accuracy and timeliness goals for processing refunds and its accuracy goal for processing returns and took positive steps to improve its processing of tax receipts. However, there were some problems. The EIC continued to be a leading source of errors by taxpayers and tax practitioners in preparing returns, thus contributing to IRS’ error resolution workload; and the number of fraudulent refund claims identified by IRS continued to grow at a troubling pace. As of September 9, 1994, IRS had received 113.4 million individual income tax returns, compared to 112.7 million for the same period in 1993. In planning for the 1994 filing season, IRS had expected to receive 117.5 million individual returns—a projection that was based on historical growth rates. As shown in figure I.1 in appendix I, in the several years preceding 1993, the number of individual income tax returns filed increased consistently from year to year. However, there was an unexpected reduction in the number of returns filed in 1993. Because of the drop in the number of filers, IRS’ Research Division analyzed the shortfall in 1993 individual income tax returns. IRS determined that the major causes of this shortfall were (1) the IRS Reduce Unnecessary Filings program, (2) a drop in interest rates that reduced the income levels of certain taxpayers below filing requirement thresholds, and (3) the 1992 change in withholding rates that apparently left some individuals with an unanticipated balance due and who then did not file a return. On the basis of its analysis of the 1993 filing season, which was not completed until the spring of 1994—well into the 1994 filing season, IRS revised its projection model and dropped the expected 1994 filings to 114.5 million from the original 117.5 million. We did not review or test the assumptions IRS used to revise its projection model and, therefore, cannot comment on the reasonableness of the adjustment. As of September 9, however, the number of filings was still 1.1 million short of IRS’ revised expectations. Although the overall number of individual filers has not significantly increased, taxpayer use of the various alternative filing methods generally increased in 1994. IRS offers three types of filing alternatives to the traditional paper return: electronic, TeleFile, and 1040PC. Electronic and TeleFile use increased in 1994; 1040PC use declined slightly. In 1994, 13.5 million individual income tax returns were filed electronically—up from 12.3 million in 1993. As shown in figure I.2 in appendix I, this continues the consistent growth in electronic filing since it became available nationwide in 1990. Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free number on touch-tone telephones. In 1993, TeleFile was available to taxpayers in 1 state, and about 149,000 taxpayers used the system. IRS expanded the availability of TeleFile to 7 states in 1994, and the number of users grew to about 519,000. In 1995, IRS plans to expand TeleFile to all or parts of three more states and to double the number of telephone lines. IRS expects to further expand the system in 1996 and make it available nationwide in 1997. Under the 1040PC method, a filer uses personal computer software that produces tax returns in an answer-sheet format. The 1040PC shows the tax return line number and the data (dollar amount, name, etc.) on that line. Only lines on which the taxpayer has made an entry are included on the 1040PC. IRS received about 4.8 million 1040PC returns in 1993, but only about 4.2 million in 1994. IRS attributes the decline to a delay by a major return preparer in submitting its 1040PC software for IRS approval. The decline might also be attributed to problems with the 1040PC that were discussed during a September 1993 meeting of the Internal Revenue Commissioner’s Advisory Group. As reported in the September 3, 1993, issue of the Daily Tax Report, those problems involved taxpayers’ inability to interpret the 1040PC and use it as an aid in doing such things as (1) preparing state tax returns and (2) completing financial aid forms for children. IRS officials told us that steps have been taken to address these problems. In the future, 1040PC software packages will be required to provide the taxpayer with a legend explaining the lines on the 1040PC or a printed copy of the full return. IRS’ computer systems generally performed well during the 1994 filing season. However, some systems problems occurred that had operational impacts, such as downtime for IRS employees and short delays in refunds for taxpayers. Systems problems caused the computer systems at various locations to be unavailable to IRS personnel for generally short periods of time (less than 12 hours). According to IRS problem assessments, this limited downtime usually had a minimal impact on IRS’ overall operations. However, in 1 instance, a problem with the Automated Underreporter System at 1 service center caused IRS to lay off 270 temporary employees for about 1 week. IRS officials attributed this event to systemic problems in the software provided by the vendor. IRS had some intermittent systems problems that affected taxpayers. For example, one problem caused tax returns that were electronically filed at one service center on February 1, 1994, to not be processed on time. IRS estimated that the problem caused about a 1-week delay in processing those refunds. Two of IRS’ goals are to issue individual income tax refunds within an average of 40 days and with at least a 98-percent accuracy rate. IRS reports show that each of the 10 service centers met the timeliness goal, and the average issuance time for all 10 centers was 36 days. Also according to IRS data, 8 of the 10 centers met or exceeded the accuracy goal; the other 2 centers’ accuracy rates were within 1 percent of the goal. The average accuracy rate for all service centers was 98.6 percent. IRS measures refund accuracy by reviewing samples of nonelectronically filed returns with a refund due to the taxpayer. It compares the taxpayer’s name, address, and refund amount on the tax return with the same information on IRS’ master file, which is used to generate the refund check. By comparing this information, IRS can determine if an error was made and who made the error. IRS uses the same sample to measure refund timeliness. IRS computes the number of days from the return’s signature date to the date the taxpayer would have received the refund, allowing 2 days after issuance for the refund to reach the taxpayer. For the 1994 filing season, we examined the methodology IRS uses in measuring refund accuracy and timeliness. Using IRS criteria for testing accuracy and timeliness, we replicated its test at one service center using its four cluster samples. We selected and compared the results from a random sample of 853 refunds out of the service center’s 3,693 refunds used for its test. We agreed with 98.6 percent of the service center’s results. The 1.4-percent difference consisted of instances where service center personnel overlooked errors that our review caught. On the basis of these results, we concluded that the test conducted at one service center provides a valid measure of that service center’s accuracy and timeliness of refunds. In an effort to improve check processing and deposit tax receipts more timely, IRS (1) tested the use of lockboxes and (2) required each of the service centers to develop procedures for depositing revenues. Establishing lockboxes was not a new procedure for IRS. It has been using lockboxes for estimated tax payments since 1989. To assess taxpayers’ willingness to use different procedures for mailing tax payments associated with their returns, IRS conducted three lockbox tests during the 1994 filing season. For each test, IRS sent special Form 1040 packages to selected taxpayers. These packages included (1) mailing instructions that were different for each of the three tests and (2) a payment voucher that could be scanned by optical character recognition equipment. One test package contained a return envelope with two different tear-off address labels—one label addressed to the lockbox was to be used for a return with a tax balance due, while the other label addressed to the service center was to be used for a return with a refund due to the taxpayer. Taxpayers with balance-due returns were instructed to include the return, payment, and voucher in one envelope and to affix the label addressed to the lockbox. The bank that serviced the lockbox separated the return from the payment, deposited the payment, recorded the payment information on a computer tape, and forwarded the return and the computer tape to IRS for processing. Another test package used two envelopes—one addressed to the service center, the other addressed to the lockbox. All taxpayers were instructed to send only the return in the envelope addressed to the service center. However, taxpayers who owed a balance were to use the second envelope to send their payments and vouchers to the lockbox. The bank processed the payment and voucher as described above. The third test package also contained two envelopes. This test was no different from the other two-envelope test, except that these envelopes were postage paid. Thus, taxpayers incurred no expense by separating their returns from their payments and mailing them to the two addresses. On the basis of preliminary results of the three tests, IRS has decided to continue testing the two-label and two-envelope methods nationwide during the 1995 filing season. IRS plans to initiate some type of lockbox collection process nationwide in 1996. One measure of service center efficiency is the speed with which they deposit tax receipts. In response to our past recommendations, IRS required each service center to provide a plan on how they would expedite the identification and depositing of large dollar remittances during the peak filing season. Service centers were required to give priority handling to mail in oversized envelopes because IRS had determined that a high proportion of those envelopes contained large tax payments. However, because service centers were not required to separately track the amounts extracted from oversized envelopes, IRS could not determine the actual impact of this priority handling. In another effort to expedite deposits, IRS also required that all tax payments received with individual tax returns around the April 15th filing deadline be deposited by May 2, 1994. Nine of the 10 service centers met the goal; the other center was 1-day late. Service centers processed and deposited more tax payment revenues from individuals than in the previous year. Between April 15 and May 2, 1994, service centers deposited $41.5 billion compared to $36.2 billion during the same time period in 1993. In 1993, IRS began using a new system to measure the accuracy of its returns processing activity. The measure is derived from the Computer Assisted Pipeline Review (CAPR), which is a complete review of all returns identified by service centers’ computers as having math or other errors needing resolution before processing at the service centers can be completed. CAPR information identifies who was responsible for the error—service center staff or taxpayers, which includes tax practitioners—and what part of the return was in error. IRS had separate accuracy goals for the two service center groups that are primarily responsible for processing returns. The Code and Edit Section, whose staff review returns to ensure that all data are present and legible, had an accuracy goal of 94.4 percent in 1994. The goal for the Transcription Section, whose staff enter data from the returns into the computer, was 94.1 percent. As of the end of June 1994, according to IRS data the Code and Edit Sections in the 10 service centers had achieved a combined accuracy rate of 95.3 percent, up from 94 percent for the same period in 1993 and the Transcription Sections in the 10 centers had achieved a combined accuracy rate of 95.8 percent, up from 94.9 percent for the same period in 1993. IRS also measures the extent to which taxpayers or their representatives make errors in filling out their returns. That data, also as of the end of June 1994, showed an accuracy rate of 94.2 percent, well above IRS’ goal of 88.3 percent. Although these rates indicate that taxpayers correctly filed and IRS accurately processed the great majority of returns, CAPR data show that the EIC continues to cause particular problems for taxpayers and tax practitioners. As of July 2, 1994, 14.4 million taxpayers had received over $14.9 billion in EIC benefits—an increase compared to the 13.6 million taxpayers who had received almost $12.8 billion at the same point in time in 1993. The EIC continues to be a source of many mistakes by taxpayers and tax practitioners in preparing returns, which, in turn, increases IRS’ error resolution workload. Data from CAPR showed that in both 1993 and 1994, EIC-related mistakes were among the top errors made by taxpayers and tax practitioners when preparing returns. Other IRS data showed that IRS found a total of about 1 million Schedule EIC errors in 1994 and that taxpayers and practitioners had particular difficulty in figuring the amount of earned income and the basic credit and in determining “qualified” children. While acknowledging the many errors associated with the EIC, IRS officials noted that more than 90 percent of the over 14 million Schedule EICs filed in 1994 were processed without change. In an effort to reduce errors and better ensure that only qualified taxpayers received the EIC, IRS changed its procedures in 1993 by requiring taxpayers to submit a completed Schedule EIC with their returns when claiming the credit. However, in 1994, some taxpayers who claimed the credit did not submit the Schedule EIC. CAPR data showed that staff in the service centers’ Code and Edit Sections sometimes overlooked that taxpayers had not included the required Schedule EIC. According to IRS, when taxpayers do not include the proper schedules, the Code and Edit Section should send a notice instructing the taxpayer to submit the schedule in order for the credit to be granted and the return to be processed. When the Code and Edit Section overlooks the missing schedule, it is up to other departments to catch the error and correspond with the taxpayer. This delays the processing of the return, which then causes the eligible taxpayer a delay in receiving the benefit. In another effort to reduce errors, IRS officials said that IRS will make a greater effort in 1995 to encourage taxpayers to allow IRS to compute their EIC. As we have discussed in past reports and testimonies and as shown in table I.4 in appendix I, the number and dollar amount of IRS-detected fraudulent refund claims, on both electronic and paper returns, have been steadily increasing over the past several years. That trend continued in 1994. By the end of June 1994, IRS had identified 58,828 returns involving fraudulent refunds, twice as many as had been identified during the first 6 months of 1993. Of that total, 34,713 were paper returns and 24,115 were electronic returns. What is unclear is (1) how much of this growth is due to increased fraudulent activity rather than an improvement in fraud detection and (2) how much additional fraud might be going undetected. In an effort to better control filing fraud, IRS has taken several steps. For example, IRS has (1) added additional up-front computer checks in an attempt to prevent fraudulent returns from entering the electronic filing system, (2) added staff to its fraud detection teams in the service centers in an attempt to detect more fraudulent returns, (3) initiated studies in an attempt to better understand the fraudulent schemes confronting IRS, and (4) engaged the services of the Los Alamos National Laboratory in an attempt to improve IRS’ ability to identify fraudulent refund claims through the use of artificial intelligence and thus reduce expensive manual screening procedures. Also, at the request of the House Committee on Ways and Means and its Subcommittee on Oversight, the Secretary of the Treasury, in April 1994, established an interagency task force to investigate refund fraud. Additional steps are planned for 1995. For example, IRS has tightened the standards for electronic return originators—individuals and firms that are authorized to submit returns electronically. Among other things, new applicants will be required to submit fingerprints that can be used to obtain a criminal records check from the Federal Bureau of Investigation. Although it is unclear how such a procedure would work, IRS’ intent is consistent with a recommendation in our December 1992 report that IRS seek access to National Crime Information Center data for the purpose of checking the backgrounds of persons applying to be electronic return originators. IRS has also announced that it will be taking additional steps to ensure that taxpayers claiming refunds use the proper taxpayer identification number. In 1994, as in 1993, almost all of the fraudulent returns identified by IRS involved EIC claims. One of the studies undertaken by IRS in 1994 in an attempt to better understand fraudulent schemes involved a sample of about 1,000 returns that were electronically filed in January 1994 and that claimed the EIC. As part of its study, IRS contacted return preparers, taxpayers, and employers to confirm income, filing status, and the existence of dependents. As of September 1, 1994, IRS was still analyzing the study results. Recent expansion of the EIC under the Omnibus Budget Reconciliation Act of 1993 is expected to make about 6 million more persons eligible for the credit and could encourage even more attempts to defraud the system in 1995. Those legislative changes expanded eligibility for the EIC and increased the maximum credit amount. Taxpayers call IRS during the filing season for a variety of reasons. As we reported in the past, taxpayers have had problems reaching IRS by telephone to get answers to their questions. That problem worsened in 1994. Not only did the accessibility of IRS’ toll-free telephone assistance decline, but taxpayers calling IRS to order forms and taxpayers trying to use the TeleFile system also had problems getting through. A key indicator of filing season performance is how well IRS serves taxpayers who call toll-free telephone assistance to ask questions about their account, the tax law, or IRS procedures. Our analysis of IRS’ data on the toll-free telephone system shows that accessibility during the 1994 filing season was lower than in 1993 while accuracy of answers to tax law questions remained the same. Accessibility decreased primarily because of an increase in the number of calls received while the number of calls answered remained fairly constant. As in our reviews of previous filing seasons, we measured accessibility using information on actual calls from IRS’ Telephone Data Report. We computed accessibility by dividing the total number of calls answered by the total number of calls received, which we defined as the sum of (1) calls answered, (2) busy signals, and (3) calls abandoned by the caller before an assistor got on the line. For the period from January 2, 1994, through April 30, 1994, IRS received 87.9 million calls and answered 18.6 million calls—an accessibility rate of 21 percent. This rate indicates that about four out of five calls were not answered. As shown in figure I.3 in appendix I, the 1994 accessibility rate continued a downward trend since 1989 and was 3 percentage points below last year. On the other hand, IRS’ accuracy rate on answers to tax law questions during the 1994 filing season was 89 percent, the same rate as in 1993 and 26 percentage points higher than in 1989. Demand for telephone assistance has increased in recent years. Despite this trend, IRS’ fiscal year 1995 budget request included a decrease of about 40 staff years at the toll-free call sites. If demand continues to increase, this reduction in resources could exacerbate the accessibility problem. Taxpayers can obtain tax forms, instructions, and publications through telephone and mail orders placed with 1 of 3 IRS distribution centers or by visiting 1 of IRS’ over 600 walk-in sites. Over 90,000 banks, post offices, and libraries also stock the more commonly used forms and instructions. During the 1994 filing season, we conducted two limited tests of the level of service IRS provides to taxpayers seeking copies of tax forms and publications. Taxpayers were likely to find tax materials they needed if they visited a walk-in site, but they had to be persistent to order materials over the telephone. In one test, we placed calls to each of IRS’ three area distribution centers that provide tax materials to walk-in sites and fill taxpayers’ telephone and mail orders. These were toll-free telephone calls but the toll-free telephone number for ordering forms is different from the toll-free number taxpayers call when they have a tax law or account question. Each day, except Sunday, during a 2-week period in March 1994, we placed calls to the distribution centers from Washington, D.C.; Mission, KS; and San Francisco. We did not order any materials; our intention was to test access to the telephone order system. If we received a busy signal when making a call, we waited 1 minute after hanging up and then redialed. If after 9 redials (10 calls in total) we had not gotten through, we considered the attempt unsuccessful. Of 100 attempts to contact a distribution center, 75 were successful on the first try; 9 were successful after one redial; 11 were successful after 2 or more redials; 3 were aborted after 9 unsuccessful redials; and 2 (both placed from Washington, D.C., on a Saturday) were aborted after we let the phone ring for 2 minutes without receiving either a busy signal or an answer. Our 100 attempts to contact a distribution center required a total of 175 calls. Of those 175 calls, we succeeded in getting through to an IRS representative 95 times—a 54-percent accessibility rate. This result is consistent with data in IRS’ Telephone Activity for the Area Distribution Centers report. Using the actual number of busy signals and abandons from that report, we calculated an accessibility rate of 53 percent for the first half of 1994. We used the same method to calculate this rate as we did to calculate the accessibility rate for toll-free telephone assistance. While not disputing the accuracy of our 54-percent computation, IRS officials responsible for forms distribution activities said that they think the more meaningful result of our test was that 84 percent of our attempted contacts were successful after only one or two calls. In the second test of forms and publications accessibility, we visited 10 IRS walk-in sites in 6 states and Washington, D.C., during the week of March 21, 1994, to see whether they had the 101 tax forms, instructions, and publications that all walk-in sites were required to stock for the 1994 filing season. Of the 10 sites, 5 had all of the required items; 4 were missing 1 item each; and 1 was missing 4 items. We made follow-up visits during the next week to the five sites that were missing items and found that the site missing four items and three of the sites missing one item had received a new stock of those items. The other site missing one item received new stock of the item before the filing deadline of April 15. The results of our test of walk-in sites during the 1994 filing season were better than the results from the last time we conducted such a test in February 1992. At that time, we visited 10 different sites and found that no site had all of the required items; 4 sites were missing 1 item; and 6 sites were missing between 2 and 5 items. IRS mailed 4.7 million TeleFile tax packages to taxpayers in the 7 states participating in the program in 1994. IRS had projected that almost 519,000 returns would be filed through TeleFile in 1994. As of mid-April 1994, IRS had received TeleFile returns in line with its projection. The number of TeleFile returns might have been higher if the system were better able to handle the volume of calls. Using IRS data, we computed a TeleFile accessibility rate of 13 percent for the period January 13 through February 10, 1994, the peak period for TeleFile. We divided the total number of successful connections by the total number of calls received, which we defined as the sum of successful connections (about 547,000) and busy signals (about 3.8 million). There is no way to know how many individual taxpayers these busy signals represented or how many of them might have used TeleFile had they been able to get through. For the 1995 filing season, IRS will be expanding TeleFile to 3 more states and plans to double the number of phone lines to 288. IRS expects that the additional telephone lines will help handle the increased demand. IRS will not test the use of a voice signature in 1995, which should shorten the length of some calls and thus also help to increase IRS’ capacity. To further reduce busy signals, IRS plans to publicize the best times to reach the TeleFile system. Also in 1995, IRS expects to learn how many different phone numbers have been used to try to access the TeleFile system. This information may help IRS better estimate the number of taxpayers trying to use TeleFile to file their returns. A successful filing season requires that IRS effectively manage various programs. IRS achieved many of its goals for processing tax returns and assisting taxpayers and, in many respects, had a successful 1994 filing season. However, there continue to be some serious problems. Once again this year, the incidence of detected refund fraud has increased significantly. While that trend is troubling in and of itself, even more troubling is the uncertainty as to how much fraud might be going undetected. As IRS continues to add more controls and increase its fraud detection capabilities, it continues to find more fraud. The EIC continues to be a problem area for IRS and taxpayers. It is the source of many of the errors made by taxpayers and tax practitioners in preparing returns, and almost all of the refund fraud cases identified by IRS involve the EIC. That situation may only worsen in 1995 as more people become eligible to claim the credit. Taxpayers continue to experience considerable difficulty reaching IRS over the telephone, and those difficulties appear to be widening. According to IRS data, taxpayers in 1994 had problems not only accessing IRS’ toll-free telephone assistance but also contacting IRS to order forms and publications and to file their returns. An inability to contact IRS by telephone can heighten taxpayer frustration and contribute to a negative view of IRS. We are not making any recommendations to address these significant problems because (1) there are several efforts already underway and planned—such as the review being conducted by Treasury’s Fraud Task Force and IRS’ plan to increase the number of telephone lines for TeleFile—that should have a positive effect on these issues and (2) we have other work underway, which is specifically targeted at those issues and may help us better identify root causes. We met with IRS officials on September 26, 1994, to discuss a draft of this report. Except as noted below, they agreed with the matters discussed in the report. In some cases, they provided additional information on events that occurred in 1994 and IRS’ plans for 1995. We incorporated those comments where appropriate in the body of the report. IRS officials disagreed with our methodology for computing telephone accessibility. They said that we focused on the number of calls rather than the number of callers, thus overlooking the fact that many callers could be using features, such as automatic redial, that enable persons to continuously redial until they get through—thus inflating the real demand for IRS assistance. Although we agree that the number of callers trying to reach IRS would be less than the number of calls being made, IRS does not yet have a viable way to measure accessibility based on the number of callers. We have been working with IRS to develop a better measure of telephone accessibility. Until then, we will continue using the measure we have used in the past—the percent of incoming calls that are answered. We are sending copies of this report to various congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, and other interested parties. Major contributors to this report are listed in appendix II. Please contact me on (202) 512-5407 if you have any questions. This is our ninth report on IRS’ tax filing season for the House Ways and Means Oversight Subcommittee. We first reviewed IRS’ performance during the 1985 filing season. In 1985, a combination of insufficient computer capacity, inefficient software, and inadequate training played a major role in creating returns processing backlogs and document control problems. As a result (1) more refunds were delayed in 1985 than in the past and interest payments on late refunds increased substantially, (2) many taxpayers had to file duplicate returns to expedite receipt of their refunds, (3) many erroneous taxpayers notices were issued, (4) correspondence and other inventories increased, (5) the number of telephone calls from taxpayers grew, (6) overtime costs increased, and (7) the productivity of service center personnel declined significantly. Since then, IRS’ service centers have acquired more computer hardware; and computer programs that took many hours to run in 1985 are now running more efficiently. IRS also improved its procedures for dealing with computer-related problems and implemented ways that taxpayers could file returns that bypass the labor intensive and error-prone paper processing system. IRS also established the National Office Command Center in 1986 to coordinate and monitor the resolution of hardware and software problems. The command center helps ensure that problems are addressed in a timely manner and helps identify problems involving multiple locations. As a result of these changes, IRS’ filing season performance has generally improved over the past several years. Receipts of unpostables, error resolution, and adjustments/correspondence cases have decreased (see tables I.1, I.2, and I.3), refund timeliness has increased, receipts of returns on other than paper have increased along with the overall increase in the number of returns received (see figs. I.1 and I.2), and telephone tax law accuracy has increased (see fig. I.3). However, not all of the trends are positive. The number of detected fraudulent refunds has increased dramatically (see table I.4), and telephone accessibility has decreased by 37 percentage points since 1989 (see fig. I.3). Table I.4: Number of Detected Fraudulent Refunds in Calendar Year 1986 Through 1994 Data as of June 1994. Doris J. Hynes, Evaluator-in-Charge H. Yong Meador, Evaluator Marge Vallazza, Reports 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. 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 Internal Revenue Service's (IRS) performance during the 1994 tax filing season, focusing on: (1) IRS individual income tax returns and refunds processing; and (2) taxpayer accessibility to IRS information. GAO found that: (1) during the 1994 filing season, the number of filed tax returns increased and taxpayers increased their use of alternative filing methods; (2) tax refunds were accurately and timely issued at one IRS service center; (3) IRS reduced the amount of rework and downtime by improving the accuracy of its returns processing and computer operations; (4) IRS fulfilled most taxpayer requests for tax forms and publications and provided accurate toll-free telephone assistance to taxpayers with tax law questions; (5) during the 1994 filing season, IRS identified twice as many fraudulent claims as in 1993; (6) it is unclear whether the growth in tax fraud was due to increased fraudulent activity or improved IRS monitoring and detection; (7) taxpayers' ability to reach IRS by telephone continued to decline during the 1994 filing season; (8) at the peak of the 1994 filing period, IRS answered only about 20 percent of its toll-free telephone assistance calls, 50 percent of the calls to its forms distribution centers, and 13 percent of the calls to its Telefile system; (9) the Earned Income Credit (EIC) provision continued to cause problems for IRS and taxpayers; (10) EIC was the source of many tax preparation errors and almost all of the refund fraud cases identified by IRS; and (11) EIC fraud could increase significantly as more taxpayers become eligible to claim EIC.

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Medicaid was established in 1965 as a jointly funded federal-state program providing medical assistance to qualified low-income persons. Each state designs and administers its own Medicaid program, subject to federal requirements for eligibility, services covered, and provider payments. States decide whether to cover optional services and how much to reimburse providers for a particular service. The federal government pays a portion of whatever qualifying expenditures a state Medicaid program incurs. At the federal level, the program is administered by the Health Care Financing Administration (HCFA), an HHS agency. In recent years, Medicaid costs have escalated. To control these costs, some states have sought to move some or most of their Medicaid population into a capitated managed care system. However, certain provisions of the Medicaid law—such as freedom of choice and the “75-25” beneficiary requirements—inhibit states’ use of managed care. States may obtain waivers of these provisions from HCFA under the authority of section 1115 of the Social Security Act. Section 1115 of the act offers HCFA the authority to waive a broad range of Medicaid requirements for state demonstration projects. In granting a waiver, HCFA requires the applying state to demonstrate that its proposal is budget neutral—that is, that federal expenditures for the entire demonstration project will not exceed costs projected for the existing Medicaid program. Until recently, budget neutrality was expected to be achieved in each year of the demonstration. However, HCFA now allows increased costs in some years as long as states achieve budget neutrality for the entire demonstration. HCFA may also require the state to implement improved quality assurance systems, which may include data collection on enrollee medical care utilization and an assessment of these data to determine the adequacy of enrollee access to and quality of medical care. As of June 1995, 10 states had HHS-approved statewide waivers, 8 had applications pending, and 5 had inquired about submitting waiver applications. In November 1993, 5 months after Tennessee submitted its 1115 waiver application, HHS approved it. On January 1, 1994, Tennessee became the first state to move its Medicaid program enrollees to a statewide demonstration project. To meet our reporting objectives, we interviewed officials and reviewed documents from the TennCare Bureau and HCFA’s Central Office in Baltimore and its Regional Office in Atlanta. In addition, we spoke with Tennessee officials from the Department of Finance and Administration and the Department of Commerce and Insurance, as well as officials from the Tennessee Medical Association (TMA), Tennessee Hospital Association, Tennessee Health Care Campaign, MCOs, federally qualified health centers, hospitals, physicians, and other advocacy groups. We also reviewed the results of provider and beneficiary surveys conducted by HCFA, the University of Tennessee, TMA, and the Tennessee Association of Legal Services and other available literature and studies. We also obtained financial data from MCOs and from financial reports filed with the Tennessee Department of Commerce and Insurance. Much of the MCO financial data were unaudited, and we did not attempt to verify them. Our work was performed between April 1994 and May 1995 in accordance with generally accepted government auditing standards. Tennessee’s demonstration project was designed to use a capitated managed care system to expand coverage to the uninsured population and to control total program and state costs. TennCare’s ceilings on total allowable federal funding are intended to be budget neutral—a requirement for HCFA approval of all demonstration projects. The state-federal sharing arrangements of the financing plan tend to favor the state since several waiver provisions allow it to effectively reduce its share of total spending. In addition, the waiver includes provisions to monitor and ensure enrollee access to quality care. TennCare was designed to expand health coverage by allowing non-Medicaid eligible persons to enroll and by extending the period of coverage for Medicaid-eligible persons. It also increased the scope of coverage by lifting restrictions on many services and by allowing additional types of services to all enrollees. In addition to including all Medicaid eligible persons, TennCare offered insurance to uninsured and uninsurable persons regardless of income who were not eligible for Medicaid. To qualify as an uninsured enrollee, a person must not have had access to health insurance on or after March 1, 1993. Therefore, a person must have been uninsured at least 10 months to qualify for TennCare as an uninsured person on January 1, 1994. To stay within budget ceilings, the state limited total enrollment to 1.3 million for the first year and 1.5 million in succeeding years. Tennessee expected enrollment of uninsured and uninsurables of 300,000 in the first year and 500,000 in succeeding years. The state expected that the 500,000 would include most of its uninsured. Under TennCare, enrollees who are not eligible for Medicaid and have incomes above the poverty level would be required to pay monthly premiums based on their income. At the MCO’s option, these enrollees also may be required to pay a deductible and make copayments for costs that exceed the deductible as medical costs are incurred. However, TennCare enrollees cannot be required to make deductible payments or copayments for preventive care, and copayments depend on the enrollee’s gross income. TennCare limits the total enrollee out-of-pocket expense. TennCare also extended the period of health coverage for many persons qualifying under Medicaid. Under TennCare, over 65 percent of Medicaid-eligible persons are effectively guaranteed 12 months of coverage at no cost to themselves because TennCare eligibility redeterminations are made only once every 12 months. If, after that time, these enrollees no longer qualify for Medicaid, they can continue in TennCare, subject to the same requirements as the formerly uninsured. In addition, TennCare expanded services to include inpatient psychiatric facility services for persons between 21 and 65 years old and outpatient substance abuse treatment programs. TennCare also lifted many restrictions and limitations, such as the allowable number of inpatient physician services, outpatient visits, home health visits, and prescriptions. To implement its prepaid managed care system, the state contracted with 12 MCOs to provide delivery of all Medicaid acute and primary care services and to handle claims processing in exchange for a monthly payment per enrollee. In addition to these monthly payments, MCOs having enrollees with high-cost chronic conditions and higher than average utilization rates would receive additional payments. Subject to the availability of unallocated TennCare funds, MCOs could also receive payments for the cost of providing the first 30 days of care to uninsured and uninsurable enrollees and one-time payments for financial difficulties attributed to TennCare start-up. MCOs are not responsible for long-term care services or for special services to the severely and persistently mentally ill or to Children’s Plan enrollees. TennCare contracts with health maintenance organizations (HMO) and preferred provider organizations (PPO) to operate as MCOs. The state requires HMOs to be licensed as such. The primary contractual distinctions between these types of organizations are that (1) administrative fees and operating profits are restricted for PPOs but not for HMOs and (2) the TennCare Bureau required on January 1, 1994, that HMOs assign each of their enrollees to a primary care physician responsible for managing and coordinating the enrollee’s care; the contract with PPOs allows them until January 1, 1997, to assign enrollees to primary care physicians. Most enrollees have a choice of four MCOs, and enrollees in metropolitan areas have a choice of as many as seven. Figure 1 shows the geographic divisions of the state and the number of MCOs participating in each division. The two largest MCOs, BlueCross BlueShield and Access MedPLUS, operate statewide and account for 73 percent of enrollees. Table 1 lists each MCO and shows the type of contract, number of enrollees, and percent of total enrollees. The table lists MCOs in descending order according to the percentage of total TennCare enrollees in the MCO. In addition to making capitated payments to MCOs, TennCare seeks to encourage managed care in several ways. TennCare requires that by 1997, all MCOs assign their enrollees to primary care physicians responsible for managing and coordinating enrollee care. As of February 1995, MCOs had assigned approximately half of all enrollees to primary care physicians. TennCare promotes continuity of care by requiring enrollees to stay with the same MCO for a year, by providing extended enrollment periods to many Medicaid eligibles, and by allowing persons to continue in TennCare as “uninsured” if they lose their Medicaid eligibility. TennCare also encourages preventive care by not allowing deductibles and copayments for preventive care services. TennCare provides for incentive payments to physicians and allows several types of supplemental payments to hospitals based on the availability of unallocated funds. TennCare’s design provides for two types of annual incentive payments to participating physicians: one to physicians that have a greater than average TennCare patient load and another to physicians whose practices are at least 10 percent TennCare to pay a portion of their malpractice insurance premiums. Subject to the availability of unallocated funds, TennCare may also make supplemental payments to hospitals for graduate medical education and care provided to those eligible for, but not enrolled in, TennCare as well as payments to hospitals that provide care to large numbers of TennCare or indigent persons. To finance expanded coverage while keeping Medicaid expenditures within the budget limits set by the waiver agreement, Tennessee set capitation rates that are substantially below historical Medicaid costs. Further, it discontinued its DSH program and established a smaller Primary Care Provider Fund. In setting capitation rates, the state began with the average annual cost per Medicaid-eligible person and then made “charity care” adjustments, which reduced the average capitation rate by 22 percent. The state’s rationale for making these adjustments was that the costs of charity care that had been built into the rates paid historically to providers would be significantly reduced by expanded insurance coverage. To save additional funds, Tennessee also discontinued its DSH program and established a smaller Primary Care Provider Fund. Under its Medicaid DSH program in state fiscal year 1993, the state provided $438 million in supplementary payments to hospitals that served large numbers of Medicaid enrollees or low-income persons. The Primary Care Provider Fund, budgeted for $185 million in state fiscal year 1994, was intended to provide essential provider payments, a reserve for MCO adverse selection of enrollees or other unforeseen circumstances, and payments to primary care physicians with large TennCare caseloads. Table 2 illustrates how savings from capitation discounts and the elimination of the DSH program offset the expected costs of expanded coverage and the new Primary Care Provider Fund. As shown in the table, savings from charity discounts and foregone DSH payments would more than offset the costs associated with the expanded coverage. In accordance with the requirement that demonstration waivers be budget neutral, the TennCare waiver agreement includes an overall available federal funding limit for the 5-year waiver period and sets interim limits on the availability of federal funding. The federal spending limits apply to the total TennCare program expenditures, including Medicaid expenditures for services not covered under capitated payments, such as long-term care. For the 5-year TennCare waiver period, the federal government will provide no more than $12.165 billion. For every $1 in TennCare expenditures, the federal government pays approximately $.67 and the state pays approximately $.33. The overall federal funding limit for the waiver period was established by estimating what the federal funding for Tennessee’s Medicaid program would have been during the first year without TennCare and increasing federal funding 8.3 percent or by the amount of the growth caps included in the President’s 1993 health care reform proposal, whichever is lower, each subsequent year. For the first year, HCFA estimated that federal expenditures under Tennessee’s existing Medicaid program would be slightly more than $2 billion, a 15.5-percent increase over the previous year’s federal funding. Increases in federal funding for the subsequent years would range from 5.1 to 8.3 percent. Table 3 shows the annual spending limits calculated for each year. However, because HCFA allows budget neutrality to be achieved over the waiver’s duration and not each year, the state has flexibility in annual spending. HCFA established cumulative federal funding targets that allow federal TennCare funding to exceed the spending limits as long as the cumulative annual spending limits are not exceeded by more than the set percentage. Table 4 shows the cumulative annual spending targets and the percentage by which they exceed the sum of the cumulative annual spending limits. If TennCare exceeds the cumulative limit for the first year, it must downsize the program or otherwise reduce expenditures. In its waiver application, Tennessee stated that it would control TennCare spending to stay within the available resources. The waiver provides for cost containment by beginning to restrict new enrollment of uninsured persons when enrollment reaches 85 percent of the limit. The federal spending limits apply to the entire TennCare program, which includes services that are not part of TennCare’s capitated managed care program. Long-term care and special services to severely and persistently mentally ill and Children’s Plan enrollees are not included in TennCare’s capitated program. The year before TennCare’s implementation, the increase in long-term care expenditures was over 18 percent. Our analysis of federal spending ceilings in the waiver agreement shows that the amount of federal spending allowed in the first year of TennCare exceeds the federal funds estimated to be spent if the state’s Medicaid program had continued. However, the amounts allowed in the second through fifth years are less than we estimate would be spent under Medicaid, and the federal spending limit of $12.165 billion for the entire waiver is less than would be spent if the state’s current Medicaid program had continued. TennCare’s financing mechanisms and program expansions have enabled Tennessee to reduce its revenue contributions while increasing the federal dollars it receives. The waiver agreement explicitly allows the state to claim losses incurred by some nonstate hospitals in caring for TennCare eligibles and to keep most of the premiums paid by TennCare participants. In addition, the waiver permits federal cost sharing for expenditures for services to enrollees in state mental hospitals that are not normally covered by Medicaid. The TennCare waiver provides other, indirect benefits to the state by expanding coverage for those not previously eligible under Medicaid but who received services through other state-funded programs, which allows the state to reduce its funding of such programs. In addition, since TennCare is a capitated program, the state obtains revenue from state taxes on capitation payments made to MCOs. The state is allowed to claim hospital losses incurred in caring for TennCare eligibles at certain public and private hospitals as TennCare expenses, which makes these claims eligible for federal cost sharing. However, the state is not required to forward any of the resulting federal payments to the hospitals. For the first 6 months of 1994, the state estimated that qualifying hospitals would incur total losses of approximately $64 million; however, these hospitals incurred only $34 million in such losses, according to a subsequent analysis by the Tennessee Office of the Comptroller of the Treasury. The federal government paid its share on the $34 million claim, which is approximately $23 million. The state is also allowed to keep most of the premiums paid by TennCare participants who are required to pay premiums—about half of the non-Medicaid TennCare enrollees. The state and HCFA agreed that for the first $75 million in premium revenues collected annually, the state gets $.90 of each dollar and shares the remaining $.10 with the federal government, according to the standard sharing rate. As revenue collections surpass $75 million, the percentage of premium revenue allowable as state share gradually decreases. The state initially estimated that it would collect $21 million for state fiscal year 1994 and an additional $101 million for state fiscal year 1995 but subsequently revised its state fiscal year 1995 estimate to $30 million. Actual collections to date have been less than estimated. The state benefits from federal funding provided to state mental hospitals for expanded TennCare coverage, some of which is not covered under Medicaid rules. Most significantly, Medicaid does not cover persons between the ages of 21 and 65 in state mental hospitals. TennCare allows short-term coverage of this population and reimburses mental hospitals directly for the actual costs of such services. Federal TennCare cost sharing for this population reduces the amount of state subsidy needed for state mental hospitals. As a result, Tennessee officials identified $69 million in annual state funding of state mental hospitals that could be used to fund TennCare. Indirect benefits to the state result from covering persons not previously included in Medicaid and making capitated payments to MCOs instead of fee-for-service reimbursements to individual providers. Covering the uninsured and uninsurable allows the state to reduce its funding for other state programs that had served these populations. Therefore, in addition to the state funding of mental hospitals, state officials identified $91 million in annual funding of other state programs that could be used to fund TennCare, which now provides such services to the uninsured. Most of this funding—$65 million—comes from reduced state funding of community mental health services. Also included is $5 million in reduced state funding for the Tennessee Comprehensive Health Insurance Program and $21 million for public health services, such as communicable diseases and hemophilia services. Making capitated payments to MCOs indirectly benefits the state because these payments are then subject to certain taxes; fee-for-service payments to providers generally were not. The state has a tax of 2 percent on payments made to HMOs and 1.75 percent on payments to PPOs. The tax on HMOs existed before TennCare, and a tax on accident and health insurers that existed before TennCare was extended to include PPOs. Although the HMO tax existed before TennCare, only one HMO, which covered about 25,000 Medicaid-eligible persons, had been subject to the tax for Medicaid revenues. Total capitation tax payments for 1994 were approximately $24 million, $16 million of which are essentially federal dollars returned to the state treasury. Under the waiver agreement, HCFA permitted new requirements to address enrollee access to care and systems to evaluate the quality of care provided to substitute for the usual Medicaid quality assurance requirements and systems. HCFA waived the requirement that beneficiaries have the freedom to choose any participating provider and the requirement that participating HMOs have at least 25 percent private enrollment. Under TennCare, HCFA requires the TennCare Bureau to ensure adequate enrollee access to providers and quality of care. HCFA further requires the state to submit quarterly progress reports on quality of care, access, utilization of health services, financial results, benefits packages, and other operational issues. HCFA’s primary care access standards for TennCare MCO networks include a minimum primary care provider to patient ratio (1 to 2,500), maximum travel distances and times (30 miles or 30 minutes for rural areas and 20 miles or 30 minutes for urban areas), and maximum allowable delays for scheduling and waiting for appointments (3 weeks for nonemergency scheduling and 45 minutes for waiting). In addition, TennCare has standards for specialty care, hospitalization, and other services. TennCare’s planned monitoring of these standards includes periodically evaluating the ratio of primary care providers to enrollees; surveying recipients, including measuring waiting periods for health care services; and measuring referral rates to specialist physicians. HCFA’s quality standards for TennCare include ensuring the implementation of quality monitoring programs and evaluating MCO data to assess quality of care. TennCare’s quality monitoring program derives from the National Committee for Quality Assurance quality monitoring program requirements for its MCO quality assurance programs. These requirements include credentialing of providers, grievance procedures, and utilization review. In addition, the state has included a required minimum data set of quality indicators. For the first year, TennCare essentially met its objectives of expanding coverage and controlling costs. The state had expanded eligibility to include 300,000 of the state’s uninsured, yet actual program costs for the state fiscal year ending June 30, 1994, were less than budgeted. However, the operation of a key monitoring system to determine the accessibility and quality of medical care provided through TennCare has been delayed. In January 1995, more than 400,000 uninsured persons and almost 800,000 Medicaid-eligible persons were enrolled in TennCare. The state expanded eligibility as of October 1, 1994, by allowing persons to enroll who had (1) lost private coverage from March 1993 to July 1994 or (2) insurance that offered limited coverage. However, on January 1, 1995, TennCare stopped new enrollment for most uninsured. Only persons who (1) had applications pending before January 1, 1995, or they would lose Medicaid eligibility or (2) could not obtain commercial insurance because of serious medical conditions continued to be eligible. Because of this, enrollment may decrease as the formerly uninsured leave the program and the currently uninsured are not allowed to enroll. During state fiscal year 1994, the first year in which the waiver became effective, TennCare expenditures were $2.7 billion, less than 1 percent over the prior year’s Medicaid expenditures and significantly less than the 10 percent increase in national Medicaid expenditures for federal fiscal year 1994. The state achieved these savings even though (1) Tennessee’s regular Medicaid program remained in effect for the first 6 months of the year, (2) enrollment increased by hundreds of thousands in the last 6 months of the year, and (3) long-term care costs increased 11 percent for the year. Our analysis shows that the overall increase in expenditures was attributable to lower than expected Medicaid expenditures during the first 6 months and the introduction of a capitated payment system on January 1, 1994, that paid rates far below historical Medicaid payments. Delays in the MCOs’ implementation of information systems have severely affected the state’s ability to monitor enrollee utilization, patient access, physician practice patterns, and enrollee medical outcomes for TennCare. The state has conducted other analyses that generally indicate that MCOs are in compliance with the required numbers of primary care physicians. Nonetheless, surveyed beneficiaries indicated access problems, and almost half of those surveyed with prior Medicaid said that the care they received was worse than under Medicaid. Advocacy groups also reported that access to care is a problem. An important part of the state’s quality assurance program is the analysis of encounter data (information on each enrollee’s use of services). Using such data, the state can analyze utilization, access, physician practice patterns, and medical outcomes. However, the state has had difficulty obtaining data from the MCOs and has conducted only limited analyses of available data. According to HCFA’s 1994 TennCare Monitoring Report, at the year’s end, three MCOs were still submitting data in a format not usable to the state. Additionally, the state had identified problems with the data from the other nine MCOs. During the first year of the program, the state withheld 10 percent of capitation payments for a varying number of months to all but one MCO for failure to comply with reporting requirements. To help ensure that the MCOs gather accurate data, the state is reviewing the MCOs’ data systems and providing technical assistance to them. The state estimates that data for the first year of TennCare’s operation will not be available before summer 1995. The state also reviewed MCO provider networks and contracted with a state university to conduct a beneficiary survey to assess access and quality of care. Although the TennCare Bureau reported that the MCOs generally had met the required standards for primary care, the state has not provided the data on all the access standards to HCFA. As a result, HCFA has been unable to validate the TennCare Bureau’s determination. Further, HCFA recommends that the state require the MCOs to provide data that ensure that provider networks have been validated as adequate and requests that the state submit provider lists whose accuracy has been validated. A beneficiary survey conducted for the state by the University of Tennessee in September 1994 also raised concerns about access and quality of care. The survey indicated that 45 percent of TennCare enrollees who had previously been on Medicaid said that the care they received under TennCare was worse than under Medicaid, citing limited choice of doctors and difficulty in finding providers as the most significant reasons. The survey also provided information on MCO adherence to HCFA’s access standards. Enrollees were able to schedule appointments generally within 3 weeks, the requirement for primary care; however, 12 percent responded that it took over 3 weeks for the first available appointment, and 21 percent said it took more than 3 weeks for a follow-up appointment. The survey results show that it took enrollees an average of 25 minutes to travel to their doctor’s office, but the survey did not indicate how often travel time exceeded the 30-minute requirement for primary care. In addition, average reported waiting time in physician offices was an hour longer than TennCare’s maximum waiting time of 45 minutes. Advocacy groups have also expressed concerns about the availability of medical care under TennCare. In October 1994, the Tennessee Association of Legal Services surveyed physicians who had been identified as participating in TennCare in an April 1994 survey. Of 461 physicians who said that their practices were accepting new patients, 144 or 31 percent said that they were not accepting new TennCare patients. In January 1995, a TennCare monitoring group—made up of patient advocates, health care providers, researchers, and others—expressed concerns about the inadequate numbers of both primary and specialty care physicians in some areas of the state. Several factors could jeopardize TennCare’s future. The capitation rates that have been set are questionable and may be insufficient to allow MCOs to operate profitably while paying reimbursement rates sufficient to enlist and sustain provider participation. Almost half of the MCOs, representing over 60 percent of TennCare enrollees, reported losses in the first year. Although the program’s financial impact on providers is inconclusive at this writing, hospitals have indicated that TennCare payments did not cover their estimated costs of treating TennCare patients, and physicians report that their practices are financially worse off than they were under Medicaid. Expected reductions in future supplemental payments from the TennCare Bureau will also negatively affect MCOs and providers. And although access and quality of care have not yet been fully analyzed, access to care will likely be inadequate if large numbers of providers choose to discontinue or drastically reduce their participation. TennCare’s success in expanding coverage and controlling costs stems primarily from its average capitation rates being substantially below adjusted historical Medicaid per capita fee-for-services costs. In its November 16, 1993, report, Milliman and Robertson, Inc., consultants to the state legislature, concluded that in the aggregate, the capitation rates were about 25 percent below projected 1994 fee-for-service Medicaid costs, even before capitation discounts, and did not account for regional cost variations. In addition, the report stated that the (1) capitation rates were not based on commonly accepted actuarial methods, (2) calculations had inconsistencies, and (3) bases for capitation rate reductions were not explicit or well documented. The report also estimated that since MCOs would incur administrative costs, which are not reflected in the capitation payment, they would have to significantly reduce medical costs to succeed financially. Despite these criticisms, state officials maintain that the capitation rates were reasonable. For example, the former Assistant Commissioner in charge of the TennCare Bureau indicated to us his belief that the health costs for the uninsured averaged less than those for Medicaid beneficiaries. He also stated that Medicaid had had a lot of overutilized services and that he believed the minimum savings from managed care was 15 percent. He further stated that historical cost was only one piece of information used in setting the capitation rates. The state used several factors and knowledge of the health care system to develop the rates. While HCFA officials said that they believed that the capitation rates were low, they believed that the willingness of several MCOs to contract for the capitation rate indicated that the rates were adequate. (A detailed discussion of the TennCare capitation rates and their actuarial soundness appears in app. I.) Financial data reported by MCOs for the first year of TennCare show that 5 of the 12 MCOs, which cover 60 percent of beneficiaries, experienced losses. BlueCross BlueShield, the largest MCO, reported an $8.8 million loss. And although Access MedPLUS, the second largest MCO, reported a slight gain, its financial condition may be worse than reported. In addition, the reported net income for some PPOs does not reflect the impact of capitation taxes or substantial deficits incurred for medical services costs. (A detailed discussion of MCOs’ financial performances appears in app. II.) The MCOs’ reported financial conditions would have been worse except for supplemental payments, which are likely to be reduced in 1995. Without these payments, all of the HMOs would have incurred losses. The MCOs’ 1994 financial statements included more than $100 million in both actual and anticipated supplemental payments for (1) a supplement to capitation rates paid for 1994, (2) the first 30 days of care to formerly uninsured enrollees, and (3) adverse selection. As of May 1995, the TennCare Bureau had paid MCOs the capitation rate supplement and some payments for the first 30 days of care for the formerly uninsured. However, although one-half of the MCOs had included anticipated adverse selection payments in their 1994 financial results, the TennCare Bureau had made no such payments as of May 1995, almost 1 year and 6 months since the MCOs began participating in the program. Only one PPO included the 1.75-percent capitation tax expense in its computation of net income, which, according to state officials, PPOs are required to pay. Officials from two of the five PPOs said that they were not aware that they were liable for the tax until they received a February 1995 notice. The additional cost of the capitation tax would reduce these PPOs’ net income or the amount available to pay for medical services by approximately $4 million. Two PPO financial reports included only the results from administrative operations and not the surplus or deficit for medical service expenses. One of these PPOs has a contractual arrangement with providers that puts them at risk for deficits resulting from excess medical costs. Officials from both PPOs indicated that their plans experienced a medical operating deficit of over $5 million representing about 7 percent of total capitation payments received by each plan. However, these medical deficits did not reduce these MCOs’ net incomes. One plan established an accounts receivable of over $5 million due from providers, while the other PPO did not reflect the excess medical costs on its financial statement because officials said it was the providers’ liability. TennCare’s financial impact on providers—hospitals, health centers, and physicians—is uncertain. Although available analyses suggest that TennCare has negatively affected providers, these analyses are not conclusive because they do not (1) compare TennCare reimbursements received with Medicaid reimbursement, (2) consider all TennCare reimbursement, or (3) provide actual financial data on which to base a conclusion. In addition, comparing physician reimbursement rates under BlueCross BlueShield, the largest TennCare MCO, and under the prior Medicaid system yields mixed results: the rates are generally lower under BlueCross BlueShield, except for office visits and consultations. Analyses conducted by the Tennessee Office of the Comptroller of the Treasury and the Tennessee Hospital Association (THA) of hospitals’ and federally qualified health centers’ costs under TennCare are inconclusive. The two analyses of hospital finances indicate that hospitals incurred losses under TennCare, but neither analysis compared the TennCare experience with the hospitals’ experience under Medicaid. A comparison of federally qualified health center finances under TennCare and under Medicaid showed that most of the centers’ profits were reduced under TennCare, but the Comptroller’s office expressed concerns about the reliability of the data submitted. Tennessee’s Comptroller’s office analyzed whether TennCare payments to publicly funded, nonstate hospitals covered the cost of caring for TennCare enrollees from January 1, 1994, through June 30, 1994. Even accounting for supplemental payments, 27 of 34 hospitals incurred $34 million in estimated losses by treating TennCare patients. All 34 hospitals would have reported losses, and total losses would have been much greater if the analysis had not accounted for supplemental TennCare payments. THA claimed that TennCare payments did not cover hospitals’ estimated costs of treating TennCare patients. But this analysis did not compare TennCare hospital reimbursement with prior Medicaid reimbursement. In addition, the THA analysis did not include supplemental payments made to hospitals for caring for large numbers of TennCare and indigent persons because the payments had not been made at the time of the study. THA officials told us that hospitals subsequently received $50 million in such supplemental payments. However, this is only half of the $100 million that hospitals had expected to receive from the state. As part of the state’s waiver agreement with HCFA, the Comptroller’s office reviewed cost reports from participating federally qualified health centers for the first 6 months of TennCare and concluded that, “it appears the clinics are not performing as well under TennCare compared to Medicaid.” However, the Comptroller’s office said that its analysis was not conclusive because it could not be sure that changes in costs were caused solely by TennCare nor that health centers accurately reported revenues, particularly pending payments. Our review of the Comptroller summary of the health centers’ data shows that although 14 of 20 health centers had reduced total clinic profits during the TennCare period, only 3 reported an overall loss. An opinion survey conducted by the TMA in October 1994 found that, compared with Medicaid, more than three-quarters of the physicians reported that their practices were somewhat or much worse off financially under TennCare. Because the TMA survey was an opinion survey, it does not provide financial data on physicians’ TennCare and Medicaid experiences. Further, a TMA official said that the physicians’ financial situations may be worse than the survey reported because the physicians may have included in their assessments supplemental payments from the TennCare Bureau that had not been received as promised. In addition, physicians may have expected MCOs to return withheld reimbursements for 1994, but much of these have not been returned. At the time of the survey, no supplemental TennCare payments had been made to the physicians, and withholds of physician reimbursement by the largest MCO had not been settled. The TennCare Bureau accrued $15 million in supplemental funds for payments to physicians for January to June 1994 but had not made any payments. As of March 1995, payments had still not been made. For state fiscal year 1995, $15 million has again been budgeted for supplemental physician payments. At least six MCOs withhold part of their physician reimbursements, ranging from 5 to 25 percent. We talked to two MCOs that used such withholds to offset excess costs, as necessary. According to their physician contracts, these MCOs assess their plan’s performance for the year and decide how much of the withhold to return, if any. BlueCross BlueShield had a 5-percent withhold on physician reimbursement and kept the entire amount for most of the providers. John Deere has a withhold of up to 25 percent of physician reimbursement and paid back approximately one-fourth of the withheld funds and may make further distributions. A TMA physician survey indicated that the reimbursement levels offered under TennCare had the most negative impact on physician practices. A comparison of BlueCross BlueShield TennCare reimbursements for selected services to Medicaid reimbursements shows that TennCare rates are generally lower than Medicaid rates, except for visits and consultations. In comparing selected BlueCross BlueShield TennCare rates to Medicaid rates, BlueCross BlueShield pays at least slightly better for visits and consultations and significantly less for other services. For example, BlueCross BlueShield reimbursement rates for office, inpatient, and outpatient visits and consultations are higher than Medicaid rates; however, BlueCross BlueShield rates for other selected surgery and radiology services are significantly less than Medicaid rates, with differences for many services ranging from 20 to 50 percent less than Medicaid rates. The impact on a particular physician practice depends on the frequency and type of services provided. The success of TennCare will also depend on the continued participation of the MCOs and providers for the duration of the 5-year demonstration. MCO officials are hesitant about continuing to participate in TennCare, given their financial performance in the first year; and providers—disconcerted about low reimbursement rates, heavy administrative burdens, payment delays, and lack of involvement in developing TennCare—could withdraw in large numbers. Although all participating MCOs have renewed their contracts for state fiscal year 1996, concerns remain. We talked to officials from three MCOs about TennCare’s future, and they expressed several concerns about operating without supplemental TennCare revenues, compensating for 1994 operations shortfalls, and maintaining an adequate provider network. The TennCare Bureau budgeted less for MCO supplemental payments for 1995 than were paid and accrued for 1994. In 1994, TennCare supplemental payments designated for MCOs totaled $128 million. However, only $76 million had been paid as of May 1995, although the TennCare Bureau says it will make additional payments. For 1995, the TennCare Bureau has designated only $40 million in supplemental payments to MCOs and plans a 5-percent increase in capitation payments effective July 1, 1995. BlueCross BlueShield officials told us that they incurred a loss of $8.8 million in 1994, and they forecast a loss of $35 million for their 1995 TennCare operations, even though they plan to implement cost-control measures during the year. BlueCross BlueShield’s projected deficit increase reflects expected reduced supplemental payments from the TennCare Bureau and higher utilization, which officials believe was low in 1994 due to the initial confusion over TennCare. To control costs, BlueCross BlueShield plans to (1) retain reimbursement rates at initial 1994 levels, (2) increase the percentage withheld from providers in some areas of the state, (3) control utilization by emphasizing outpatient visits over hospital admissions, and (4) aggressively address billing of unnecessary services. BlueCross BlueShield officials have indicated that the company does not intend to continue to lose money. They have said that unless capitation rates are increased 10 percent retroactively to January 1, 1995, BlueCross BlueShield will face a decision about its participation. Since BlueCross BlueShield had enrolled nearly 50 percent of the beneficiaries and is one of only two statewide MCOs, changes in its participation could significantly affect TennCare. Officials from two other MCOs that are holding providers responsible for their plans’ 1994 medical services operating deficits expressed uncertainty about whether these deficits can be recouped. Officials said that efforts to reduce provider reimbursement would jeopardize their providers’ continued participation. An official from one MCO said that if cost- containment efforts fail, the MCO will simply make payments until it can no longer do so. In early 1995, officials from THA, as well as from several major hospitals, expressed concern because the TennCare Bureau had announced that hospitals would not receive supplemental payments in 1995. Supplemental payments to hospitals for graduate medical education, care for TennCare eligible but not enrolled persons, and special payments to hospitals that cared for large numbers of TennCare and indigent persons totaled approximately $220 million for 1994. Subsequently, on the basis of a June 27, 1995, agreement with HCFA, the TennCare Bureau announced that it intends to make $55 million in one-time payments to two hospitals and resume medical education payments to hospitals. In addition to low reimbursement rates, other MCO actions may affect physician participation. For example, at least two other MCOs did not return all withholds to physicians on reimbursements for the first year of operation, and at least two MCOs held physicians liable for medical services deficits. As MCOs try to further control and contain costs, their network providers may assume additional administrative burdens as well as reduced reimbursement. These pressures will add to the dissatisfaction that providers already have with the program. An October 1994 TMA satisfaction survey of TennCare physicians reported that 86 percent of respondents felt dissatisfied with the program, and 77 percent felt that TennCare reimbursement was worse than under Medicaid. Physician dissatisfaction was evident from TennCare’s inception, when many doctors reported feeling coerced to participate. To guarantee a sufficient network, BlueCross BlueShield implemented a policy requiring physicians who participated in an existing network that operated for state employees and others to participate in TennCare. The policy, which became known as the “cram down” provision, prompted about a third of the 6,500 physicians in the existing network to drop out. Although most physicians returned to the network, their dissatisfaction with the cram down policy has persisted, and stakeholders and policymakers continually discuss eliminating it. If the policy were eliminated, BlueCross BlueShield officials believe many network providers might choose to stop treating TennCare patients. Tennessee’s capitated managed care program has enabled the state to control costs and provide health care coverage to hundreds of thousands of uninsured persons. In addition, it has established a system that enables persons who lose their Medicaid eligibility to keep health care coverage. But serious questions exist about the program’s future. The quality and accessibility of medical care are largely unknown, but early indications are that quality and access could be improved. Moreover, the rates paid to MCOs were substantially below prior Medicaid per beneficiary costs. Overall, MCOs lost money in the first year, even after receiving substantial one-time supplemental payments. In the absence of these supplements, MCOs may need to cut payment rates for providers and/or pressure providers to hold down costs to remain in the program. Most providers have already indicated that their financial situations are worse off under TennCare than they were under Medicaid. MCO cost-control efforts and the termination of large supplemental payments to hospitals will only exacerbate their condition. If providers decide to reduce their TennCare participation or leave the program in significant numbers, the viability of the MCOs and TennCare could be threatened. Both HCFA and the TennCare Bureau said that recent actions by the new state administration to address some of the problems we identified should be included in our report. We recognize that the organizational change regarding MCO financial oversight, forums for discussion and input provided by the TennCare Roundtable, and the proposed plan to provide MCO performance-based incentive payments of up to 4.5 percent of the capitation payments are potentially significant. However, because of the recency of the changes, their impact on the problems we identify is uncertain at this time. HCFA and the TennCare Bureau also pointed out that MCOs have renewed their contracts to participate in TennCare for at least the next 12 months. As a result, the TennCare Bureau said that our concern about the uncertainty of continued MCO participation is inconsistent with the MCOs’ behavior. Our concern is that MCOs continue to participate for the duration of the 5-year demonstration project and that MCOs’ financial difficulties not threaten TennCare enrollees’ access to and quality of care. On the basis of our review of MCO financial information, discussions with MCO officials, and the uncertainty of supplemental funding from the TennCare Bureau, we remain concerned about the continued participation of MCOs and their ability to maintain adequate provider networks. The TennCare Bureau also wanted our report to recognize that MCOs incurred start-up costs during the first year, writing that “the profits and losses in any business situation during the first year do not typically reflect what may result during ongoing operations.” Although we recognize that start-up costs were incurred and that they do contribute to reduced profits or increased losses for the year, other factors should be considered. First, MCOs shared in an unexpected $54 million in additional capitation supplements for 1994 to address MCO financial difficulties, as well as additional payments of more than $20 million for the first 30 days of care provided to the uninsured. Similar payments are not planned in the future. Second, start-up costs were offset to some extent by lower utilization resulting from beneficiary and provider confusion during the first few months. Third, system development and start-up-like costs will continue to be incurred by some MCOs; for example,BlueCross BlueShield officials said that they will incur an additional cost in 1995 to purchase an HMO information system to operate as a gatekeeper. Fourth, MCO officials we talked to expected to experience financial difficulty in the second year, both because of the medical costs they expect to incur and reduced supplemental TennCare funding they expect to receive so they saw the need to act to mitigate future losses. On the issue of cost sharing, HCFA officials reiterated several times that HCFA has not changed the federal matching rate in the TennCare demonstration. We agree with HCFA that the federal matching rate applied to qualifying TennCare expenditures has not changed. However, a number of waiver provisions effectively increased the federal cost-sharing rate by reducing the net financial contribution required of the state. In particular, certain hospital losses are treated as qualifying TennCare expenditures, although the state does not pay the hospitals for those losses. The state can also recoup a share of both its and the federal government’s contribution to MCO capitation payments through a tax on the capitation payment and by retaining 90 percent of premium collections. How such arrangements can effectively increase federal cost sharing is fully described in Medicaid: States Use Illusory Approaches to Shift Program Costs to the Federal Government (GAO/HEHS-94-133, Aug. 1, 1994). HCFA officials described the difficulties of the state staff and MCOs due to their lack of experience and having to simultaneously address their financial and organizational problems. HCFA officials also said that the state is working with an external organization to help fully implement quality programs at the MCOs. HCFA indicated that the state’s progress in implementing its quality assurance monitoring plan is slow and that HCFA is requiring the state to develop interim monitoring strategies to ensure access and quality. We agree with HCFA’s assessment and attribute the magnitude of these problems to inadequate planning and TennCare’s rapid implementation. (See apps. IV and V for comment letters from HCFA and the TennCare Bureau, respectively.) 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 to the Secretary of Health and Human Services, Tennessee officials, and the chairmen and ranking minority members of congressional committees with an interest in these matters. We will make copies available to others on request. Please contact me on (202) 512-7123 if you or your staff have any questions. Major contributors to this report are listed in appendix VI. To control its health care costs, TennCare makes monthly capitation payments to MCOs for each of their enrollees. The state’s methodology for setting the capitation rates, however, has raised some concerns. For example, consultants to the state legislature reported that the aggregate capitation was understated by more than 25 percent. The capitation rates are based on historical Medicaid costs and set by enrollee type; the rates are then reduced by charity care deductions and enrollee cost sharing. Before the capitation rates were established, consultants to Tennessee’s Bureau of Medicaid reviewed the state’s historical Medicaid cost information. Although the consultants found this information to be generally acceptable, they recommended that the capitation rates (1) reflect historical costs for eligible months and (2) account for regional cost variations. The TennCare Bureau did not follow either recommendation. After the capitation rates were established, consultants to the state legislature reviewed the state’s rate-setting methodology and found it actuarially unsound. As a result, the consultants recommended that capitation rates be increased 20 percent, even when allowing for cost savings from potential utilization reductions. To set monthly capitation rates, Tennessee used 1992 Medicaid costs projected to 1994 for each enrollee type. These rates were then reduced for charity care, local government funding, and enrollee cost-sharing adjustments. The state also calculated an overall average capitation rate used for budgeting purposes and not for paying MCOs. The overall average rate for 1994 was $136.75 a month. After a reduction of $35.65 for charity care, local government expenditures, and coinsurance and deductibles, the rate was $101.10. Effective July 1, 1994, the TennCare Bureau increased capitation rates 5 percent. Tennessee set rates for eight categories of eligibles determined by factors such as age, gender, and whether the enrollee has a disability. Deductions to the capitation rates are based on various assumptions about charity care, local government funding, and medical costs incurred by the uninsured. The charity care deduction—meant to capture approximately one-half of the estimated cost of charity care provided in the state—was estimated at $595 million annually. The state assumed that Medicaid and other payers had been paying for charity care when medical providers shifted charity care costs to others. Because coverage of the uninsured would reduce charity care, the state reduced the capitation rate accordingly. On average, a monthly charity care deduction of $27.96 was applied to each monthly capitation rate on the basis of the state’s estimated upper limit of the total number of Medicaid and uninsured people. The deduction for local government funding—meant to capture an amount equal to the local government funding that would be expected to be provided without TennCare—was estimated at $50 million annually. On average, a local government deduction of $2.35 was applied to each monthly capitation on the basis of the state’s estimated upper limit of the total number of Medicaid and uninsured people. The third deduction, for copayments and deductibles, applies only for non-Medicaid eligible TennCare enrollees with incomes above the federal poverty level and is computed on an individual basis. For budget purposes, the state computed an average deductible and copayment deduction equal to $5.35 monthly. In calculating these deductions, the state assumes that everyone will exhaust their deductible and make copayments. For example, the monthly capitation rate for a non-Medicaid TennCare enrollee with income above the federal poverty level would be reduced for one-twelfth of the annual deductible and up to an additional 10 percent of the reduced capitation to account for expected copayments. Enrollees subject to cost sharing are required to pay the deductible and copayments to MCOs or providers as they incur medical costs. In May 1993, Peat Marwick, as consultants to the state’s Bureau of Medicaid, reviewed the historical Medicaid cost information on which the Bureau planned to base its capitation rates. Peat Marwick found that the data underlying the state’s cost projections were sound, except for an understatement of incurred claims. However, it made several recommendations on factors to include in setting rates. Among the recommendations was that claims data should be used to set monthly rates on the basis of eligible months rather than the number of eligibles participating in Medicaid for some period during the year. Peat Marwick also recommended that regional capitation rates be established. The state did recompute the capitation rates, but it used total number of eligibles to establish an annual cost regardless of eligible months, and it did not establish regional rates. When TennCare’s capitation rates were announced about 3 months after the Peat Marwick review, concerns were raised. To address these concerns, the Legislative Oversight Committee on TennCare contracted Milliman and Robertson, Inc. (in conjunction with Schubert & Associates) to review the TennCare Bureau’s capitation rate-setting methodology. In its November 1993 report, Milliman and Robertson stated that in the aggregate, the capitation rates were about 25 percent below projected 1994 fee-for-service Medicaid costs. Further, since MCOs would incur administrative costs not reflected in the capitation payment, Milliman and Robertson estimated that MCOs would have to significantly reduce medical costs to succeed financially. In addition, Milliman and Robertson agreed with Peat Marwick’s recommendation that rates should address regional variation and said that the variations were too significant to be ignored. According to Milliman and Robertson, the state’s analysis showed that costs by region were as low as 83 percent and as high as 122 percent of statewide average costs. The report made several conclusions: (1) the gross capitation rates were not based on commonly accepted actuarial methods, (2) inconsistencies existed between the Bureau’s reported methodology and the actual calculations, (3) no explicit assumptions existed on cost reductions in the gross capitation rate development, and (4) capitation rate reductions were not well documented. Milliman and Robertson found that the gross capitation rates were not based on commonly accepted actuarial methods because the state used the total number of people who received Medicaid during the year regardless of length of time on the program to determine capitation rates and ignored Medicaid cost variations by area. The state’s computation of capitation rates, in effect, assumed that every Medicaid recipient in 1992 was covered for the entire 12 months. Milliman and Robertson calculated that on average, Medicaid recipients were only enrolled for 8.72 months during 1992, which understated the aggregate capitation by 26.2 percent. Also, the state projected 1994 rates from 1992 data, on the basis of a 5.5 percent annual inflation rate. However, the state may have understated actual inflation increases since it had provided information in its TennCare application that showed an average annual increase of 8.7 percent from fiscal years 1988-1989 to 1991-1992. In addition, Milliman and Robertson said that the average gross capitation rate that TennCare used for budget purposes overstated the actual rates paid by eligibility category. This was due to an error in how Tennessee weighted the eligibility categories. In calculating each of the eight capitation rates, the state counted people equally regardless of how many months they had been in the program and whether they were in more than one capitation category. For example, a 9-month-old child qualifying for Medicaid halfway through the calendar year would be counted in determining the capitation rate for each of two categories—“less than one year of age” and “aged 1 to 13”—even though the child would have been in each category for only a few months. This understates the per capita costs because the child is treated, in effect, as having received services for an entire year in each capitation category. Milliman and Robertson calculated that the gross capitation rates by eligibility category were about 6.2 percent too low to achieve the TennCare Bureau’s reported average gross capitation rate because of this error. Milliman and Robertson also reported that no explicit assumptions existed about cost savings under TennCare. They said that the state’s utilization data indicated the potential for significant utilization reductions. Given this and other states’ experiences, Milliman and Robertson said that a 10-percent reduction assumption for 1994 would have been appropriate to apply to otherwise actuarially sound rates. Even when allowing for the utilization cost reduction, Milliman and Robertson said that an overall increase of 20 percent was still needed to address problems in the rate-setting methodology. Further, Milliman and Robertson noted that the Bureau did not provide them with the necessary information to evaluate the capitation reductions for charity care, local government funding, and enrollee cost-sharing adjustments. They also said that the data available to them suggested that the deductible reductions were too high because they are based on the assumption that all enrollees would incur costs exceeding the deductible. The overall financial performance of the five PPOs and seven HMOs that TennCare contracted with appears to have been weak for the first year of participation. According to its financial analysis, BlueCross BlueShield, the largest TennCare MCO, with almost half of the state’s TennCare enrollees, estimated that its losses on TennCare revenues total almost $9 million. These losses could be more than twice that amount if incurred claims expenses have been underestimated—even though the MCO withheld payments from providers and limited its administrative costs. The financial condition of Access MedPLUS, the second largest TennCare MCO, with nearly a quarter of the state’s TennCare enrollees, is unknown, but examiners of the HMO’s records have discovered weak controls in its financial reporting and have questioned its financial viability. For our review, we used the annual financial reports that HMOs submitted to the Tennessee Department of Commerce and Insurance, and we obtained financial reports from participating PPOs. Four PPOs provided us with unaudited information, and one PPO, BlueCross BlueShield, provided us with an audited report, although it contained little specific information on its TennCare operations and additional financial analyses. BlueCross BlueShield, the state’s largest PPO, estimated that it lost about $8.8 million on TennCare revenues of about $610 million even though it (1) retained about $17 million that it had withheld from providers to cover losses and (2) limited administrative costs to 7 percent of premiums plus the $9 million in premium taxes it paid. According to BlueCross BlueShield officials, the loss could be as much as $18.8 million if incurred claims expenses have been underestimated. In calculating its loss, BlueCross BlueShield included received and anticipated supplements to the capitation rate of $45.9 million. These consisted of a retroactive premium increase payment of $23.8 million, anticipated adverse selection payments of $9 million, and anticipated payments of $3 million for the first 30 days of care for formerly uninsured enrollees, as well as $10.1 million that had already been received for the first 30 days of care. Most of the data provided to us by the other four PPOs were unaudited or informally produced, and differences in their reporting methods preclude combining their results in a meaningful way. One PPO’s unaudited financial statements did not include income or expenses related to medical costs. Its income statement, which showed a net income of about $93,000, was limited to administrative costs because PPOs are not considered at risk for medical costs. The PPO’s financial statements only record the liabilities for medical services equal to the amount of available funds. A PPO official told us that approximately $5 million in excess medical services liabilities is not recorded because this is the medical providers’ liability. On the basis of discussions with a PPO official, the medical deficit could be reduced to less than $3 million if the PPO receives estimated adverse selection payments and additional payments for the first 30 days of care provided to uninsured enrollees. The PPO plans to recover the deficit through utilization reduction efforts during 1995; according to the official, providers would leave the network if the PPO reduced its fees. Officials from another PPO provided us with unaudited financial statements that showed a $77,212 loss for 1994, which did not account for the 1.75 percent state tax on capitation payments. However, the PPO’s deficit would have been $5.3 million higher had it not established a $5.3 million accounts receivable item for provider-shared risk. This item, which equals about 7 percent of the capitation payments received from the state, represents the amount of operating deficit to be recovered from future provider reimbursements. Officials from the first PPO gave several examples of plans to contain costs, but they were uncertain what impact their efforts would have. Officials from both PPOs expressed concern about maintaining their provider network. A third PPO reported a loss of over $2 million. However, according to the PPO TennCare contract, PPOs must account for their administrative and medical operations separately. Using the PPO’s unaudited financial statements, we computed that the PPO incurred about a $3 million loss, after taxes, even though it realized a gain of $1 million on its medical operations—of which 90 percent would have to be returned to the state and 5 percent distributed to providers, according to the contract provisions. Table II.1 shows the reported earnings for the first year of TennCare for the seven HMOs. John Deere Health Care/Heritage National Health Plan TLC Family Care Health Plan (1,016,839) ($4,301,614) Reports reviewed by the Department of Commerce and Insurance for the quarterly period ending June 30, 1994, indicated problems with the adequacy of reserves for three HMOs. The problem was eliminated for one HMO and largely eliminated for another when the Commissioner of Finance and Administration assured the Commissioner of Commerce and Insurance that the state would make adverse selection payments that would address the reserves question. However, financial problems of the third HMO—Access MedPLUS, which is one of the two statewide MCOs serving TennCare beneficiaries and about 2.3 times the size of all other HMOs combined—may not have been resolved. Examiners for the Department of Commerce and Insurance have raised questions about Access MedPLUS’ financial viability. They reported that a major asset—advance payments to medical providers—on the MCO’s financial statements, representing about half of Access MedPLUS assets, was questionable. They also could not reconcile the data in the financial statements to the MCO’s general ledger and noted that the MCO did not appear to have sufficient management and accounting controls to ensure that funds were available to pay claims. They recommended that the MCO be placed under the supervision of the Department of Commerce and Insurance. Further efforts to determine the financial performance of Access MedPLUS have been problematic. According to Department of Commerce and Insurance records, a Deloitte & Touche LLP review of the MCO, contracted through the state, included determining (1) claims processing ability, (2) amounts owed to providers, and (3) solvency or the degree of insolvency. We sought the results of this review, but the State Attorney General’s office would not release the report without a subpoena, maintaining that the documents are confidential in accordance with state law and that the report and its confidentiality were the subject of pending litigation. To avoid the delay and expense that could result from issuing and enforcing a subpoena, we decided not to use GAO’s statutory authority to subpoena such records and to proceed without them. State officials subsequently advised us that they were committed to ensuring that MCOs are in full compliance with all statutory and contractual requirements mandated by their participation in the TennCare program. They stated that if any MCO is found not in compliance, the state will either act to bring the MCO into compliance or pursue other remedies to protect TennCare. They noted that, at this point, the state has taken no action to place Access MedPLUS under supervision. Less than 7 months after submitting its waiver application to HCFA, Tennessee placed its entire Medicaid population in a statewide prepaid managed care program and opened enrollment to the uninsured. Before TennCare, the state Medicaid program had little capitated managed care experience nor a model to follow since Tennessee was the first state to place its Medicaid population into such a program. Rapid program implementation and lack of managed care experience led to several problems, such as confusion among enrollees, providers, and MCOs; provider resistance; and delays in enrollment, claims processing, and premium payments. Although many of these problems have been addressed to some degree, the Assistant Commissioner in charge of the TennCare Bureau testified in March 1995 that TennCare continues to experience several problems as does any program in its “infancy.” TennCare introduced a prepaid, capitated system, in which the TennCare Bureau makes monthly payments to MCOs for enrollee care, and the Bureau assumes responsibility for MCO oversight. The state Medicaid program had primarily operated a fee-for-service reimbursement system. As a result, state staff were inexperienced with the characteristics and complexities of MCOs, and the state’s relationship with physicians and hospitals changed dramatically under TennCare. Despite this lack of experience and the magnitude of these changes, Tennessee began operating its statewide program within 9 months of announcing it. According to TennCare Bureau officials, they met with parties interested in contracting as TennCare MCOs beginning in the summer of 1993. However, interested parties did not enter into TennCare contracts until late November, little more than a month before actual enrollment was to begin. Of the 12 contracted MCOs, only 1 had experience serving the Medicaid population before TennCare, and most of the MCOs developed their TennCare products in response to TennCare. This inexperience caused confusion for the contracted MCOs as well as TennCare beneficiaries and participating providers. TennCare reported that after program start-up, the state’s hotline averaged 50,000 calls a day, from beneficiaries, MCOs, and providers—compared with 9,000 calls a day in the following quarter. For all parties involved, the transition to TennCare was “traumatic,” according to a National Association of Public Hospitals (NAPH) report in April 1994. The state reported general start-up problems for MCOs, such as inability to handle the large volume of enrollee calls, adjusting to the increased enrollment, and claims processing problems. According to the NAPH report, the MCOs were unprepared to assume many of the contractual responsibilities for TennCare. One MCO’s enrollment grew overnight from 35,000 to over 260,000, and officials from the MCO reported receiving 2,000 calls each hour in the first days of implementation. In addition, HCFA Region IV’s 1994 Monitoring Report found that during the first months of TennCare, multiple changes to enrollment and eligibility—some retroactive—further burdened the MCOs. The president of one MCO said that enrollment changed by over a third in 1 week. Officials from the MCOs we visited found that verifying participant enrollment was nearly impossible in the first months of the program. In December 1993, the Tennessee Medical Association (TMA) filed an injunction to stop TennCare’s implementation. The court dismissed the case, but TMA appealed the ruling. TMA opposed TennCare in part because it had been implemented without opportunity for public comment on its development and payment rates for providers were inadequate. TMA also opposed BlueCross BlueShield’s “cram down” provision, which required physicians who participated in a network that operated for state employees and others to participate in TennCare. The provision prompted about a third of the 6,500 providers in the network to drop out in the early months of TennCare and providers in some parts of the state, particularly rural Western Tennessee, to boycott the program. The state, however, characterized initial problems with provider participation as the providers’ unwillingness to accept change. Several start-up problems have been attributed to poor communication and outreach, which affected providers and TennCare beneficiaries alike. HCFA reported that (1) provider directories were not available to enrollees, (2) information on operational guidelines for the general Medicaid population was insufficient, and (3) notifications of MCO enrollment were delayed. As a result, beneficiaries were confused about the number and type of plans and the available providers, and some families signed up with more than one MCO, exacerbating difficulties in managing enrollment. Some beneficiaries were further frustrated when they found that their primary care physicians were not participating in TennCare. A TMA satisfaction survey of physicians in October 1994 reported lack of patient understanding of TennCare as a major problem and recommended better efforts by MCOs to educate and manage patients. In its 1994 monitoring report, HCFA recommended expanding education and outreach efforts to raise awareness of the availability of services and the method of obtaining these services as well as frequent mailings to enrollees to explain benefits and services. Delays in signing providers with MCO networks and assigning patients to primary care providers also presented several problems. To complicate matters, providers—like the MCOs—had difficulty in obtaining information on patient eligibility and identifying with which TennCare MCO a patient was enrolled. Providers we talked to reported problems getting through by phone to the state and MCOs to verify patient information. As a result, providers needed to hire additional staff to manage the increased administrative burden in dealing with more than one MCO. Delays in claims processing and collecting premium payments have been a problem. According to the state, MCOs had difficulty fully developing their claims processing systems. For example, Access MedPLUS initially was processing claims manually, which delayed provider reimbursement. In addition, state external review organization reports from July to November 1994 reported that 5 of the 12 MCOs exceeded the state 30-day requirement to process claims. The largest discrepancy reported was a 76-day average from receipt of claim to the payment date. The state initially estimated that it would collect premiums from qualifying uninsured people of about $21 million during the first 6 months of TennCare; however, it collected only $2.4 million. Over the next 12 months (state fiscal year 1995), TennCare initially estimated collections of $101 million and subsequently reduced this estimate to $30 million. However, as of March 1995, with less than 4 months left in the state fiscal year, only $10 million had been collected. These collection shortfalls were due in part to the state’s delay in establishing its premium billing process. Although enrollment of uninsured people began in January 1994, the initial billings were not mailed until June 1994. In addition, enrollees were given two alternatives to reduce the burden of paying the full accumulated premiums for the prior months: (1) pay reduced premiums by retroactively changing from a low cost-sharing plan to a cost-sharing plan with a higher deductible and higher total out-of-pocket liability or (2) pay no premiums by changing their effective enrollment dates to June 1, 1994. Enrollees were to receive premium booklets and begin scheduled monthly payments in July 1994. However, the state contractor failed to mail some of the booklets, and this error was not discovered until November 1994. In February 1995, the TennCare Bureau sent letters to nearly 60,000 TennCare households notifying them of past due premiums totaling $31 million. As of June 1995, a TennCare Bureau official said it had terminated TennCare coverage of approximately 62,000 people for not paying premiums. In addition, 17,000 family units are now on a payment plan to pay past due premiums. Robert Hughes, Assistant Director Daniel S. Meyer, Evaluator-in-Charge, (312) 220-7683 Richard N. Jensen, (202) 512-7146 Karin A. Lennon Betty J. Kirksey Karen Sloan 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. 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Pursuant to a congressional request, GAO reviewed Tennessee's Medicaid capitated managed care program (TennCare), focusing on: (1) TennCare's basic design and objectives; (2) the degree to which the program is meeting these objectives; and (3) the experiences of TennCare insurers and medical providers and their implications for TennCare's future. GAO found that: (1) TennCare's objectives are to expand health care coverage to the state's uninsured and to control program costs by mandating that Medicaid participants enroll in managed care organizations (MCO) and covering certain uninsured, Medicaid-ineligible persons; (2) Tennessee has cut costs by setting its capitation rates below historical Medicaid costs, applying an additional discount based on the assumption that extensive insurance coverage would reduce charity care costs, and discontinuing certain supplemental payments; (3) in granting the Medicaid waiver, the Health Care Financing Administration has required Tennessee to implement measures to monitor and ensure access to quality care and has limited federal payments over the 5 years to ensure that federal costs do not exceed what they would have been without the waiver; (4) despite the increased number of participants, federal and state TennCare expenditures have increased much less than the national average for Medicaid programs and program costs have actually declined when uncapitated administrative and long-term care costs are excluded; (5) access to and quality of care could not be measured because Tennessee and MCO have not yet set up their monitoring systems, but a survey of beneficiaries revealed significant dissatisfaction with the new program because of the limited choice of doctors and difficulty in finding providers; (6) many MCO and providers lost money in 1994 despite receiving supplemental payments from TennCare; and (7) although TennCare has met its initial objectives, its long-term success is uncertain.

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The rapid and widespread increase in the use of crack—a smokable form of cocaine—in the 1980s has frequently been referred to as a drug epidemic. To identify emerging drug use problems, researchers and government agencies look for changing patterns in drug use, some of which may signal the onset of an epidemic. Primary among these patterns are the use of a new illicit drug; a change in how a drug is taken, such as smoking rather than inhaling—or “snorting”—cocaine; a change in the level of use of an existing drug among populations that routinely abuse drugs; and the use of a drug by a new population group or in a different geographic area. Some experts argue that national drug epidemics are rare, and many agree that local areas more frequently experience emerging drug crises or epidemics before they spread. Many federal agencies fund activities and programs that implement the nation’s drug control strategy (see app. II). According to ONDCP, about 25 percent of federal drug control resources are for grants-in-aid or other forms of assistance provided to state and local governments and private entities, which commingle such funds with resources from other sources. In fiscal year 1997, federal funding for drug control efforts was over $15 billion, and the fiscal year 1998 request was for $16 billion. The President has requested about $17 billion in funding for fiscal year 1999. About two-thirds of federal drug control funds are channeled into efforts to reduce the supply of illicit drugs; the remaining one-third supports efforts to reduce drug demand. The Department of Justice obtains the largest proportion—about 45 percent—and HHS gets about 16 percent. Within HHS, NIDA and SAMHSA currently have primary responsibility for health-related drug control problems. The Drug Abuse Office and Treatment Act of 1972 (P.L. 92-255) created NIDA (effective in 1974) and gave it broad responsibilities over most aspects of drug research, prevention, and treatment activities. Essentially, NIDA was responsible for planning and administering drug abuse prevention, treatment, and rehabilitation programs and for developing and conducting comprehensive research and research training (teaching professionals about conducting substance abuse research). The act also gave NIDA responsibility for creating a national community-based treatment system to respond to the drug abuse problem. In 1974, the same year NIDA was established, ADAMHA was created as an umbrella agency to oversee the functions and operations of NIDA and two other research institutes. In 1981, ADAMHA was given additional responsibility for (1) administering demonstration programs related to the prevention and treatment of alcohol and drug abuse and mental health disorders and (2) providing assistance and information about such disorders to other federal agencies, states, health care providers, and public and private organizations. The Alcohol, Drug Abuse, and Mental Health Services (ADMS) block grant program was also created in 1981 to provide funds to states for planning, establishing, and evaluating programs for the development of more effective prevention, treatment, and rehabilitation services. In 1992, the ADAMHA Reorganization Act (P.L. 102-321) created a new agency, SAMHSA, to replace ADAMHA and transferred NIDA and the two other research institutes to NIH. NIDA retained primary responsibility for substance abuse research activities, while SAMHSA assumed primary responsibility for the service programs and some drug use detection functions. SAMHSA also assumed responsibility for overseeing state administration of the block grant programs. In the 1970s, NIDA sponsored several surveys and convened a work group of epidemiologists from cities around the country to help identify and monitor changes in drug use patterns. Through these mechanisms, NIDA was able to detect that cocaine was being smoked as well as snorted—the more common method of cocaine use up to that time. This change was later associated with the emergence of the crack epidemic. NIDA was not able to collect information on the national prevalence of crack use in the general household population until the late 1980s because the survey NIDA used to collect these data was not conducted annually and did not allow for timely reporting of crack use. There also were other limitations in the drug detection mechanisms NIDA used. In the 1970s and 1980s, NIDA sponsored four major ongoing drug detection mechanisms: the National Household Survey on Drug Abuse (NHSDA), Monitoring the Future (MTF), the Drug Abuse Warning Network (DAWN), and the Community Epidemiology Work Group (CEWG). (For other drug use detection mechanisms sponsored by public health and law enforcement agencies before the mid-1980s, see app. III.) While the drug detection mechanisms were designed to collect information on the use of a variety of drugs, including cocaine, they generally targeted different populations and covered different geographic locations and time periods. A description of the drug detection mechanisms NIDA sponsored follows. NHSDA, a nationally representative household survey established in 1972, was used to estimate drug use in the general population on the basis of a sample of permanent household members aged 12 and older. The survey was administered periodically, generally every 2 to 3 years, and covered past-month, past-year, and lifetime use of more than 10 drug types. MTF, a nationally representative survey established in 1975 and administered annually to 12th-grade students, measured drug use, attitudes toward drugs, and perceptions about their availability and ability to harm. Like NHSDA, it covered past-month, past-year, and lifetime use of more than 10 drug types. DAWN, established in 1972 by the Drug Enforcement Agency (DEA) and transferred to NIDA in 1980, initially comprised a random sample of hospital emergency departments within selected metropolitan areas and medical examiners in metropolitan areas who volunteered to participate. Emergency department information captured types of drugs used, motives for use, and whether the patient was treated. Medical examiner data also captured drug type, as well as the form in which the drug was used and whether the use was accidental or intentional. CEWG, established in 1976, was originally composed of epidemiologists from 18 major metropolitan areas. Three other metropolitan areas were later added. The group was established to provide ongoing community-level surveillance of drug use through the collection and analysis of epidemiologic and ethnographic (culture-related) data. Changes in drug use patterns are often captured by CEWG through its use of law-enforcement surveillance data, street surveillance, and other local public health drug detection sources. Between the 1970s and early 1980s, NIDA tracked the change in cocaine use through information reported by DAWN and CEWG. This change in drug use pattern (from only snorting to also smoking cocaine) would later be recognized as an early warning sign of the emergence of crack cocaine. From DAWN data, NIDA found that, between 1976 and 1982, cocaine smoking accounted for about 2 percent of cocaine-related emergency department episodes; however, by 1985, cocaine smoking accounted for 8 percent of such episodes. It was not until the late 1980s, however, that adjustments were made to DAWN data that differentiated between freebasing—another form of cocaine smoking—and crack cocaine smoking. Moreover, CEWG began reporting increased use of smokable cocaine in three major cities as early as 1981. In 1985—when crack first became generally recognized as a specific form of smokable cocaine—crack use was reported to have spread to at least seven of the CEWG coverage areas. Just 1 year later, CEWG reported that crack use had spread to 17 of the metropolitan areas covered. Although NIDA was aware of the rapid spread of crack use from CEWG reports starting in the mid-1980s, the national prevalence of crack use in the general household population was not measured until the late 1980s. (Prevalence of use data are utilized, in part, by decisionmakers to establish drug control policy.) The 1985 NHSDA did not include questions specific to crack use. Because the survey is conducted generally every 2 to 3 years, questions about crack were not included until the 1988 survey. As a result, survey data on the national prevalence of crack use were not available until 1989—3 years after reports of the spread of crack to 17 major metropolitan areas. Results from NHSDA showed that about 1 percent of household populations had used crack in the past year. In two congressional hearings held in July 1986, a number of concerns were raised about the data that had been collected through the NIDA-sponsored drug detection mechanisms. Specifically, NHSDA data showed a leveling off of cocaine use nationally, while other sources were indicating that local areas were experiencing epidemic use of the drug. There was also a lack of data on crack use in the general population. In addition, the latest NHSDA data being reported had been collected 4 years earlier, in 1982. These and other concerns about the adequacy of drug use data reflected key limitations in each of the NIDA-sponsored mechanisms used to measure drug use. Specifically, there were gaps in populations surveyed that affected NIDA’s prevalence of drug use estimates. For example, NHSDA excluded institutionalized and homeless populations. Similarly, high school dropouts—another high-risk population—were excluded from MTF, thereby potentially lowering national drug use estimates. NHSDA and MTF also relied on self-reported drug use data, which were not validated. There were also potential limitations in DAWN—one of the mechanisms used to identify early warning signs of emerging drugs. For example, since DAWN relied on hospital emergency personnel to record patient mentions of substance abuse, there was concern about the accuracy of the data, given the typically fast pace in hospital emergency departments. In addition, there were concerns that, by the mid-1980s, DAWN no longer provided a representative sample of emergency departments, since many of the hospitals that had participated in DAWN had either merged, closed down, or dropped out of the study. Moreover, while CEWG was instrumental in reporting early warning signs of crack use in the metropolitan areas it covered, it did not collect and report information on rural areas or cities with smaller population bases. The federal public health response to crack in the 1980s primarily focused on cocaine in general instead of on crack specifically. NIDA’s research was aimed at developing “best practice” prevention and treatment approaches. The agency also launched several education and outreach efforts specific to cocaine. Up to the late 1980s, there was no significant change in block grant funding for state drug prevention and service delivery activities. Federal involvement in service delivery was through ADAMHA’s oversight of state administration of the ADMS block grant until congressional actions changed the organization within ADAMHA to focus more on administering prevention and treatment programs. NIDA’s research activities related to prevention and treatment practices did not make clear distinctions between powdered cocaine and its crystallized form, crack. According to NIDA officials, the agency did not see a need to differentiate treatment practices for powder cocaine and crack or to develop separate prevention approaches for each of these drugs. NIDA officials stated that results from later research on efficacy of treatment for cocaine and crack cocaine showed that similar treatments were effective for both forms of cocaine. NIDA’s research activities included testing medications for reducing cocaine craving and withdrawal symptoms. The agency also investigated approaches for treating cocaine abuse, such as family therapy, group psychotherapy, and therapeutic communities. As with its research efforts, NIDA did not initially target its education and outreach efforts to address the use of crack. In the 1980s, as concerns about cocaine use increased, NIDA developed several public education campaigns against drug use in general and cocaine use in particular. The Drug Abuse Prevention Media Campaign, launched in 1983, was targeted to people aged 18 to 35 and was intended to motivate parents to learn about drugs, talk to their children about problems associated with drug use, and join with other parents to fight drug abuse in their communities. The initiative also sought to help young people resist peer pressure and to just say “no” to drugs, which became the theme of the campaign. In 1985, NIDA introduced a second phase of this campaign that targeted inner-city youth aged 10 to 14 and their families. In 1986, NIDA launched “Cocaine: The Big Lie,” a public education campaign that focused on the dangers of cocaine and specifically targeted young adults, aged 18 to 35, in college and the workplace. The following year, the campaign targeted crack as well as cocaine, sponsoring discussions of the effects of crack on the brain and respiratory and cardiovascular systems, as well as available treatments. NIDA also established a national cocaine treatment hot line in 1985 to provide a toll-free referral service for people addicted to cocaine and their families who sought treatment or counseling as well as educational information about illicit drugs. Within the first year of operation, more than 50,000 calls were received. In addition, NIDA sponsored two national conferences, one in 1986 and one in 1987, that collectively included sessions on drug abuse prevention, research, and treatment. The purpose of these conferences was to share information with drug epidemiologists, health care providers, and the broader research community on the use of illicit drugs. In 1981, before crack cocaine use was considered an epidemic, the Congress consolidated its categorical and formula grant programs into a substance abuse and mental health block grant to give states greater flexibility in their use of funds for prevention and treatment activities. This ADMS block grant program in effect limited the federal role in service delivery to overseeing the administration of the program and providing less direct assistance to states. The 1982 initial appropriation for the ADMS block grant was $428 million—a decrease of about 26 percent from the prior year’s appropriation for the categorical programs. Total funding of the ADMS block grant program varied by less than 10 percent from fiscal years 1982 through 1988. However, starting in fiscal year 1989, a greater proportion of block grant funding began to shift to substance abuse. From fiscal year 1988 to fiscal year 1992, the allocation of ADMS block grant funds for substance abuse increased from 51 percent of the total ADMS funding to 80 percent, as the proportion for mental health decreased. Over this period, funding for substance abuse increased from $249 million to more than $1 billion. Some of the concerns raised at the July 1986 congressional hearings on crack cocaine focused on the adequacy of federal responsiveness to drug use problems. With the creation of the ADMS block grant program, NIDA no longer had a leadership role in deciding with the states what prevention and treatment activities to fund. While many in the research community welcomed this change, others felt it left a gap in federal leadership for prevention and treatment services. Under the previous categorical and formula grant programs, the federal government directly funded specific demonstration programs related to prevention and treatment services. With the creation of the ADMS block grant, however, states were given the flexibility to design and fund programs specific to the needs of their local communities. However, this change resulted in a smaller federal role in deciding which drug abuse services to fund in a given geographic area. Despite this shift, service-related constituency groups continued to look to ADAMHA, which had been given responsibility for overseeing state administration of the block grant, for national leadership on substance abuse policy issues. To focus more on service programs at the federal level, the Congress authorized additional demonstration and service programs for special populations to be administered by ADAMHA. ADAMHA’s Office of Substance Abuse Prevention (OSAP)—which was established by the Anti-Drug Abuse Act of 1986 to strengthen the federal role in effective drug abuse prevention—began awarding demonstration grants to community agencies to provide prevention services to youth at high risk of substance abuse. The Anti-Drug Abuse Act of 1988 (P.L. 100-690) raised OSAP to a status equal to ADAMHA’s institutes and authorized demonstrations that would support, among other efforts, a major prevention services program for substance-abusing pregnant women and improved treatment for substance abusers. The act also authorized, for the first time, a federal set-aside from the ADMS block grant program to be used by ADAMHA to conduct service demonstrations and health services research and to collect data and provide technical assistance to states. The 1988 legislation also resulted in the creation of the Office for Treatment Improvement (OTI) to administer many of these new programs as well as the ADMS block grant program. To better identify and monitor changes in drug use activity, including potential crises such as the crack cocaine epidemic experienced in the 1980s, NIDA modified its drug detection mechanisms, and new federal mechanisms were created. The modifications and additions aimed at addressing some of the coverage, timeliness, and methodological concerns raised by the Congress and others. The creation of ONDCP and organizational changes to HHS’ drug abuse agencies since the late 1980s were intended to strengthen the federal response to drug abuse problems. The Anti-Drug Abuse Act created ONDCP and charged it with, among other things, developing and coordinating a national drug control strategy. SAMHSA was created 4 years later and charged with establishing and implementing a comprehensive program to improve the provision of prevention- and treatment-related services for substance abuse. At the same time, NIDA was transferred to NIH to allow NIDA to concentrate on research, research training, and public health information dissemination related to the prevention and treatment of drug abuse. Recognizing the need to improve research on the infrastructure that delivers treatment, the Congress mandated in 1992 that NIDA obligate at least 15 percent of its budget to fund research that studies the impact of the organization, financing, and management of health services on issues such as access and quality of services. While these changes were intended to strengthen the federal ability to detect and respond to changing drug use patterns, the effectiveness of these changes will depend largely on how well the agencies carry out their roles and responsibilities. Under the Government Performance and Results Act of 1993 (the Results Act) federal agencies are required to set goals, measure performance, and report on the degree to which the goals are met. The legislation was enacted to increase program effectiveness and public accountability by having federal agencies focus on results and service quality. During the crack crisis of the 1980s, limitations in the drug detection system hampered the identification and monitoring of drug use activity in many geographic areas and for some high-risk populations. Timely analysis and dissemination of drug use prevalence data were also problems. Since the mid-1980s, a number of changes have been made to the drug use detection mechanisms to address some surveillance and monitoring limitations. New information sources have also been added. (For many of the drug detection mechanisms now available to the federal public health service agencies and others, see app. III.) The changes to the NIDA-sponsored drug use detection mechanisms were intended to improve geographic and population coverage and timeliness of drug use data. To obtain and help ensure a representative sample of hospital emergency departments in DAWN, a new representative sample was drawn and provisions were made for including new hospitals in the sampling frame each year. Adjustments for nonresponse patterns were also made. MTF was expanded to include a representative sample of 8th- and 10th-grade students in addition to the 12th-graders and young adults already being surveyed. NHSDA was expanded to include civilians living on military bases and people living in noninstitutional quarters, such as college dormitories, rooming houses, and shelters. NHSDA was also expanded to include Alaska and Hawaii. To provide more timely national data, since 1990 NHSDA has been conducted every year, instead of every 2 to 3 years. There are also plans, promoted by ONDCP, to expand NHSDA to collect state-level drug use prevalence data. This expansion is expected to provide annual estimates for each state’s household population and, specifically, for the population aged 12 to 17 and 18 to 25. Steps were also taken toward improving the reliability of data by correcting some of the problems with drug use prevalence estimates. Drug use prevalence estimates had been dramatically affected by an estimation technique known as “logical imputation” and by weighting the estimates for certain drugs. Logical imputation calls for revising a survey participant’s initially negative drug use response if one or more subsequent responses related to the same drug are positive. For example, in the 1990 NHSDA, 40 percent, or 53 of 131 past-month positive cocaine use responses, were imputed—changed from an initial response indicating no cocaine use. The initial “no drug use” response was changed because of an apparently conflicting response to another question in the survey. Although the problem with logical imputation is still a concern, the probability of a logical imputation error in estimating drug use has been lowered somewhat by reducing the number of questions being asked about the same drug on the survey, according to SAMHSA officials. Weighted estimates of the national prevalence of drug use have also been questioned in the past, given the limited number of surveyed cocaine and heroin users from which to make projections. For example, in a study in which the 1991 NHSDA age variable was weighted to account for subject sampling probabilities and nonresponse rates, it was discovered that, when projected to the nation, one 79-year-old woman accounted for an estimated 142,000 heroin users, or about 20 percent of all people who used heroin in the past year. SAMHSA officials said that they have taken steps to try to limit such effects of weighted estimates by assessing each outlier on a case-by-case basis and using their judgment to decide when to truncate or reduce the weights. In addition to changes in DAWN, MTF, and NHSDA, several new drug use detection mechanisms have been developed. SAMHSA has cited the particular importance of two of these mechanisms: the Arrestee Drug Abuse Monitoring (ADAM) program and the Treatment Episode Data Set (TEDS). ADAM, formerly the Drug Use Forecasting program, comprises an ongoing quarterly study of the drug use patterns of new arrestees at booking facilities in approximately 20 cities across the country. TEDS is a database of substance abuse client admissions to those publicly funded substance abuse treatment programs that receive some of their funding through a state alcohol and drug agency. In commenting on this report, SAMHSA officials stated that their Violence Data Exchange Teams (VDET) are in the process of creating a local-level system to track trends and changes in substance abuse-related violence. When fully operational, VDETs will assist local communities in the detection of drug abuse patterns as they are manifested through violence-related data. SAMHSA officials believe that such data can be used to serve as an early warning system. In 1992, ONDCP initiated “Pulse Check,” a telephone survey (as well as a report of the survey results), to provide a quick and current snapshot of drug use and drug markets across the country. According to ONDCP officials, “Pulse Check,” which was initially published quarterly but was changed to a biannual report, typically includes information on the availability of drugs, their purity, and their street prices; user demographics; methods of use; and user primary drug of choice. These data are obtained from different sources, including telephone interviews with drug ethnographers and epidemiologists, law enforcement agents, drug treatment providers across the nation, and CEWG reports. ONDCP officials said that surveillance data from “Pulse Check” and other sources have increased ONDCP’s capability to perform quick analyses and special studies of changing drug use patterns as well as to identify problems in certain population groups and geographic areas. Before the Anti-Drug Abuse Act of 1988, which created ONDCP, each federal agency involved with drug control had its own set of goals, objectives, targets, and measures, as well as congressional mandates. To coordinate the federal drug control effort, ONDCP was charged with developing an annual national drug control strategy. ONDCP’s 1997 strategy provided a common set of goals and objectives for drug control agencies to use in addressing drug use problems and included a 10-year federal commitment to reduce illicit drug use, which was supported by 5-year budgets of the participating agencies. ONDCP officials have pointed out that achieving the goals will depend not only on federal agencies but also on state, local, and foreign governments; private entities; and individuals. To assess the effectiveness of its national drug control strategy in limiting drug use, drug availability, and the consequences of drug use, ONDCP has established, in consultation with federal drug control agencies, a national performance measurement system to assess results. According to ONDCP officials, their approach to developing goals, objectives, and performance measures for the national drug control strategy is similar to the approach required by the Results Act for individual federal agencies. ONDCP has established a new program evaluation office to oversee the design and implementation of its performance measurement system over the next several years. Consistent with the Results Act, ONDCP’s fiscal year 1997 to 2002 strategic plan lists five long-range goals and objectives. Goals 1 and 3 are in part designed to reduce the demand for illegal drugs by educating and enabling youth to reject illegal drugs and to reduce the health and social costs of illegal drug use, respectively. While the objectives of goal 1 generally focus on prevention activities, a goal 3 objective is to support and promote effective, efficient, and accessible drug treatment to ensure the development of a system that is responsive to emerging trends in drug use. ONDCP’s performance targets and measures for these goals and objectives are discussed in Performance Measures of Effectiveness. Two of ONDCP’s programs focus on addressing the trend in drug use primarily among youth: a national media campaign and the Drug-Free Communities Support Program. Moreover, ONDCP has taken the initiative to help focus attention on some recent changes in drug use trends that have emerged as potentially problematic. For example, ONDCP responded to changes in methamphetamine use in certain geographic areas by publishing a special issue of “Pulse Check” on these trends and cosponsoring a methamphetamine conference. In addition, ONDCP is now developing a national methamphetamine strategy. ONDCP officials admit, however, that they have no systematic approach or strategy for specifically addressing emerging drug use problems. SAMHSA was created to address concerns related to the availability and quality of drug prevention and treatment services. Specifically, SAMHSA was to develop national goals and model programs; coordinate federal policy related to providing prevention and treatment services; and evaluate the process, outcomes, and community impact of prevention and treatment services. In addition, SAMHSA was to ensure, through coordination with NIDA, the dissemination of relevant research findings to service providers to improve the delivery and effectiveness of prevention and treatment services. To carry out these responsibilities, SAMHSA initially established demonstration grant programs that supported individual grants, cooperative agreements, and contracts. SAMHSA also assumed responsibility for administering the separate Substance Abuse Prevention and Treatment (SAPT) block grant program. In 1995, SAMHSA developed the Knowledge Development and Application (KD&A) program, consolidating SAMHSA’s individual demonstration grant programs. According to SAMHSA officials, the program offers improved ways of generating and disseminating knowledge on the prevention and treatment of problems related to drug use and how to apply that knowledge to delivering services. In fiscal year 1997, 17.4 percent of SAMHSA’s budget was devoted to KD&A program activities. Since fiscal year 1992 when the SAPT block grant was established, funding for substance abuse has continued to increase. SAPT block grant funds to states gradually increased from about $1.04 billion in fiscal year 1993 to more than $1.15 billion in fiscal year 1996. In fiscal year 1997, the funding increased by $126 million. According to SAMHSA officials, the agency is not yet adequately positioned to deter emerging drug use that might result in future epidemics. They told us that the SAPT block grant, which currently comprises 60 percent of SAMHSA’s funding, is not designed to provide a rapid response to emerging drug problems. They also stated that it is difficult to determine when an increase in a certain type of drug use warrants attention and the type of response needed. SAMHSA officials said, however, that they have planned several initiatives to address emerging drug use trends. For example, CSAP plans to continue its support of the HHS Secretary’s Youth Substance Abuse Prevention Initiative—including budgeting $5.0 million for two new State Incentive Grant (SIG) programs. SIGs are competitive grants to states to coordinate disparate funding streams and facilitate the development of effective local drug prevention strategies targeted to youth. These programs serve as an incentive for governors to examine and synchronize statewide prevention strategies with private and community-based organizations. Additionally, CSAT plans to test the feasibility of implementing new approaches in treatment settings. For example, more individuals— particularly on the West Coast and in the Southwest—are seeking treatment for methamphetamine dependence; but, according to CSAT, there are no well-established treatment approaches for this drug. CSAT’s Replicating Effective Treatment for Methamphetamine Dependence study is designed to develop knowledge of psychosocial treatment for methamphetamine dependence as well as to provide an opportunity to determine the problems involved in transferring this knowledge. To help states put the infrastructure in place to respond to emerging drug use trends, CSAT plans to further strengthen its partnerships with state and local governments as well as with community-based treatment providers and the private sector to solve common problems. For example, the Targeted Treatment Capacity Expansion Program is designed to award grants to states, cities, and other government entities to create and expand comprehensive substance abuse treatment services and promote accountability. CSAT plans to support states, cities, and other partners in their efforts to identify gaps in the delivery system and, where current capacity within a treatment modality is insufficient, provide for expanded access to treatment. In an effort to disseminate information to service providers and others, SAMHSA operates the National Clearinghouse for Alcohol and Drug Information. SAMHSA, NIDA, and other public health agencies provide posters, brochures, reports, booklets, audiotapes, and videotapes to aid in drug abuse prevention and awareness efforts. Under the Results Act, HHS is required to show that the use of federal funds is yielding results by measuring how well HHS’ programs and efforts are working. In HHS’ fiscal year 1999 Results Act performance plan, however, SAMHSA does not provide sufficient information about how it plans to meet some of its performance goals. For example, under the general goal of providing funding to states in support of the public sector substance abuse treatment system, one performance measure is to increase to 80 percent the proportion of block grant applications that include needs assessment data. However, SAMHSA provides no information about the strategies it will use to increase the proportion of states that will include needs assessment data or how the validity of the data will be assessed. Further, SAMHSA’s performance plan does not mention how it will address emerging drug use problems. With its transfer to NIH, NIDA was relieved of most of its direct service delivery functions with the intent of having it focus on conducting research on drug abuse and addiction. However, according to NIDA officials, the nature of research and the research grant approval process (which is often lengthy) limits the agency’s immediate response to emerging drug problems. That is, it takes time to generate grants in a new priority area, conduct the research, publicize the research findings, and move these findings from the “lab” into practice. NIDA has a key role to play both in generating research-based prevention and treatment approaches and in training research scientists who potentially can be useful to the public health community in addressing drug control problems. The move to NIH also gave NIDA the opportunity to focus more on developing initiatives in public education and research training. According to ONDCP’s National Drug Control Strategy, 1977, NIDA’s ongoing research portfolio supports more than 85 percent of the world’s research on the health aspects of drug abuse and addiction. Most of the NIDA-funded research is conducted through extramural research programs. However, a portion of NIDA’s resources is dedicated to its intramural program—that is, research conducted by NIDA researchers. Currently, NIDA’s research activities are organized into four extramural research divisions and an intramural research program, each of which plays a role in addressing issues relevant to emerging drug problems. For example, both the intramural research program and the Division of Clinical and Services Research are investigating the relationship of brain functions (through neuroimaging techniques) to drug craving. Results of such research may be useful in helping drug users reduce the craving or need for specific illicit drugs. NIDA’s Division of Medications Development has been investigating the utility of cocaine medications for the treatment of users of methamphetamine as well as examining the clinical utility of buprenorphine to reduce the spread of heroin use among youth and newly addicted individuals. The Division of Epidemiology and Prevention Research continues to sponsor both MTF and CEWG and funds promising treatment research in prevention. NIDA’s basic research division explores those behavioral and biomedical mechanisms associated with drug abuse and addiction. NIDA officials have indicated, however, that quickly focusing research on newly emerging drug problems is difficult, in part, because of the time it takes to generate grant applications and award grants in a new priority area. The extramural research grant application approval process has multiple stages and can take several months to complete. In some cases, NIDA can reduce the time consumed with the grant award process by administratively awarding supplements to existing grants. These supplements must not exceed 25 percent or $100,000 of a grantee’s base award, unless an exception is approved by the National Advisory Council on Drug Abuse. This approach was recently used to encourage research related to the rise in marijuana use among adolescents. In addition, NIH has made available a l-percent set-aside for special research initiatives. Using this set-aside, NIDA applied for and obtained an extra $2 million in funding to support additional methamphetamine activities directed at averting a crisis. NIDA also supports research training activities to help build a resource knowledge base for research on illicit drug use. Between 1986 and 1997, NIDA’s research training budget grew sharply, from a total of $1.43 million in 1986 to $11.7 million in 1997. However, NIDA’s research training budget, as a percentage of total extramural research funds, has consistently been lower than those of both NIMH and NIH throughout the 12-year period. In 1997, NIDA dedicated 2.6 percent of its extramural research budget to research training, as compared with NIMH’s 6.1 percent and NIH’s 4.1 percent. NIDA also conducts a number of public education activities to inform the general public, providers, and researchers about ongoing efforts to prevent and treat drug abuse. Moreover, NIDA provides research updates through various publications—such as the research monograph series, “NIDA Notes,” and information booklets on the various drugs. Recently, NIDA distributed more than 150,000 copies of a research-based guide on preventing drug use among children and adolescents to help control the rise in drug use among youth. NIDA has also presented its findings at national drug conferences, CEWG meetings, congressional hearings, and town meetings, as well as on the Internet. The agency recently released Assessing Drug Abuse Within and Across Communities, a science-based guide to helping communities detect, quantify, and categorize local drug abuse problems. In addition, as part of NIDA’s Treatment Initiative program, the agency intends to hold workshops with researchers, the treatment community, and the general public to exchange information about the treatment of drug abuse. The agency also plans to distribute research-based treatment manuals to community-based treatment providers. NIDA has the opportunity to evaluate the effectiveness of its activities under the Results Act. Because many of NIDA’s efforts to address changes in drug use patterns are research-oriented, however, the results of the agency’s performance could take a long time to materialize. Similarly, the impact that NIDA’s research efforts would have on an immediate response to newly emerging drug problems is questionable. On the basis of our work on implementing the Results Act in science agencies, we concluded that measuring the performance of science-related projects can be difficult because many factors determine whether research will result in benefits.Nevertheless, the Results Act provides a vehicle for NIDA to measure its performance and improve its effectiveness. Despite changes to federal drug detection mechanisms and congressional efforts to better position federal public health agencies to respond to emerging drug crises, concerns remain. While federal entities now have an array of tools to detect drug use, there is concern about the overall efficiency and effectiveness of these efforts. In addition, questions remain about when and how to best respond to emerging drug use trends. This is also an issue for state and local substance abuse authorities, who are challenged with allocating resources to address both current and emerging drug use problems. Given competing demands on federal, state, and local resources, it is important that the most appropriate drug prevention and treatment strategies are developed and effectively implemented. While a number of drug use detection mechanisms are now available, the ONDCP-established Subcommittee on Data, Evaluation, and Interagency Coordination of the Committee on Drug Control Research, Data, and Evaluation; our expert panel; and others have raised questions about the need for and quality of some of the data that are collected. Under the Violent Crime Control and Law Enforcement Act of 1994, ONDCP is required to assess the quality of mechanisms used to measure supply and demand reduction activities and to determine the adequacy of existing mechanisms to measure national drug use by the casual drug user population and populations at risk for drug use. The act also requires ONDCP to describe the actions it will take to correct any deficiencies and limitations identified. In 1995, ONDCP tasked the Subcommittee, composed of representatives from 19 federal agencies, with evaluating the adequacy and ability of federal drug-related data systems to inform the drug control policy planning process. In its July 1997 draft report, the Subcommittee concluded that a systematic approach for gathering drug-related data must be developed to ensure that policymakers and analysts have useful information for making public policy decisions. The Subcommittee recommended that duplication of effort in drug-related systems be identified and eliminated and that better use be made of regional-, state-, and local-level data. The Subcommittee saw a need for more accurate and complete information on chronic, hardcore drug users and for increased or enhanced information on illicit drug consumption and the risks and consequences of drug use, including expansion of such indicators beyond those obtained from hospital emergency departments, arrestees, and domestic violence records. The Subcommittee also recommended that data be made more available to researchers to encourage more in-depth analyses of existing data sets and broaden the dissemination of results. Our expert panel raised some of the same issues about the nation’s drug detection system that led to the Subcommittee’s recommendations. Moreover, officials in the several states and cities we visited raised similar—and additional—issues about the use of drug detection data, including the limited usefulness of federally generated drug detection information in monitoring most local changes in drug use patterns and the poor use of drug detection information generated by state and local substance abuse authorities. In commenting on this report, ONDCP officials stated that they have already begun implementing some of the “principles” in the Subcommittee’s draft report. Other assessments of the nation’s drug data collection efforts conducted in the early 1990s similarly concluded that drug-related data systems could be improved. For example, a RAND study found that policymakers have been handicapped by inconsistent and fragmented information. A University of California at Los Angeles Drug Abuse Research Center report concluded that the data systems were limited by inadequate coverage of people at high risk of drug use. In a 1993 report, we also raised concerns about gaps in coverage and methodological limitations of three major federal drug data collection mechanisms. Each of these three studies also questioned the validity of self-reported drug use information.Moreover, NIDA recently released a monograph that raises questions about the accuracy of some self-reported data on drug use. The usefulness of better and more timely information on emerging drug use problems is, in part, a function of the nation’s ability to respond to those problems, which itself is affected by demands on federal, state, and local resources to address ongoing substance abuse concerns. Still, a more defined strategy for responding is needed. While we learned of different approaches the federal government uses to respond to changing drug use patterns, some of which address emerging drugs, we found that no overall defined strategy for specifically addressing emerging drug use problems exists. Also, there is no agreed-upon set of operational definitions for key terms, such as “drug epidemic” or “drug crisis.” The experts we spoke with agree that determining an appropriate response to emerging drug use problems involves considering the timing of a response to a detected change in drug use patterns; the nature of the response—that is, the most effective prevention and treatment approaches to address a drug use problem at different stages; and the magnitude of the response, taking into account resource limitations and uncertainties about the potential scale of the problem. Determining the timing of a response is complicated by uncertainty about what point above the normative pattern of use warrants a response, either in a specific geographic area or nationwide. According to our expert panel, several factors—including availability of information, public opinion, and political sensitivity—play a role in determining the timing of a response to a detected change in drug use patterns. In addition, the most accurate and useful data are not always available for immediate decisions on when to respond to a particular change. Determining the nature of the response requires a better understanding of the extent to which various prevention and treatment approaches are effective in controlling specific drug use problems. A rise in marijuana use among youth and a shift in heroin use from injecting to smoking may require different approaches because of the drug, the population, or both. In a 1997 report, we highlighted the varying prevention approaches and limitations in our knowledge about the effectiveness of these strategies.Similarly, as we reported earlier this year, knowledge about the types of treatment interventions that are most effective for specific drugs and populations varies. Even with limited knowledge, decisions about the nature of a response must be made. Determining the magnitude of a response is complicated by the risk of misallocating scarce federal, state, and local resources to combat a problem that may not warrant the investment. There is also the risk of inadvertently promoting the use of a drug to risk-takers by creating too much publicity addressing its dangers. Consideration must also be given to the capacity of the system to treat those who currently seek or will seek treatment. Our expert panel told us that states and local communities barely have sufficient resources to meet the present demand for drug treatment and thus might devote less focused attention to addressing emerging drug use problems or potential future epidemics. Moreover, we heard from SAMHSA and officials in some of the cities we visited that there is a large demand for substance abuse treatment. In two of the three cities we visited, officials are trying to implement a treatment-on-demand program to provide services for drug users when they need them most and are most receptive to treatment; however, there is uncertainty about how many drug users will seek help and the cost of providing them treatment. Some researchers believe that to improve the chances of deterring the spread of emerging drug problems or epidemics, greater attention must be given to changes in drug use patterns at the local level, where such problems typically originate. Although SAMHSA has relationships with states through the block grant program, experts in the drug field describe less than adequate linkages between state and local communities and the three major federal agencies involved in drug abuse demand reduction efforts. ONDCP, SAMHSA, and NIDA do not currently have a well-established network with the many local entities associated with reducing drug use, and their relationships with states and local communities might not facilitate a response to an emerging drug problem at the local level. A defined strategy for addressing emerging drug problems would benefit from better linkages with state and local entities to capitalize on their experiences with local drug crises or epidemics. Although addressing drug use problems is not necessarily the same as addressing infectious diseases, the networks and linkages with state and local entities that have been established by CDC may be worth considering for detecting and responding to emerging drug use problems. CDC is responsible for detecting and responding to potential health crises, such as outbreaks of infectious and chronic diseases. The agency has established relationships with states and local entities through a number of efforts, some of which follow: CDC’s Epidemic Intelligence Service enables the agency to maximize its investigative capabilities. According to CDC officials, each year the Service trains approximately 75 epidemiological investigators and requires that they engage in at least one investigation at the state level and at headquarters during a 2-year follow-up period. At any given time, CDC has up to 150 epidemiologists to call on to assess a potential public health epidemic or crisis. Through direct on-site public health surveillance, CDC can gain rapid and in-depth understanding of the initiation and spread of a public health problem. These investigations enable CDC to target specific individuals and groups affected and likely to be affected, identify the circumstances under which infections take place and spread, track the movement of the problem across geographic areas, and establish the time parameters governing the infection of each subsequent target group. Through collaboration with the Council of State and Territorial Epidemiologists, CDC is able to ensure broad geographic coverage, since the group includes representatives from all 50 states and the U.S. territories. CDC has established procedures with states for quick responses to perceived health crises. If a state public health agency is experiencing a problem in either identifying or managing a public health problem, CDC can be called on to provide immediate guidance and support. According to a CDC official, if the problem is not one that can be handled over the telephone, CDC is able to quickly dispatch appropriate staff to the scene to provide on-site public health surveillance and response support. The public health agencies’ approach to addressing drug use problems in the United States has changed since the mid-1980s. Given changes made in the drug use detection mechanisms, organizational changes in HHS’ drug control agencies, and the creation of ONDCP, the federal capability to address emerging drug use problems has been enhanced. However, the benefits of these changes depend largely on how drug data are used and how well the agencies carry out their roles and responsibilities. For example, the complement of drug use detection mechanisms available to public health agencies and others now provides more timely data and broader geographic and population coverage. However, ONDCP’s Subcommittee on Data, Evaluation, and Interagency Coordination; our expert panel; and others have pointed out weaknesses that need to be addressed to improve the accuracy of drug data and to increase the efficiency and effectiveness of the nation’s drug data collection systems. ONDCP, NIDA, and SAMHSA officials report that some of their efforts are addressing emerging drug problems. However, these agencies have no overall defined strategy that addresses factors such as how to determine the timing, nature, and magnitude of a response to new patterns of drug use identified through the nation’s surveillance systems. In addition, maintaining ongoing mechanisms with the capacity to link surveillance knowledge from local and national sources with knowledge about effective demand reduction approaches should increase our nation’s capability to deter future drug crises. We recognize that developing a defined strategy for addressing emerging drug problems will be challenging because of data uncertainties and other factors, such as engaging federal, state, and local entities in collaborative response actions. However, the CDC approach to responding to emerging infectious diseases might offer some insights on establishing linkages with state and local entities and developing response protocols. Since ONDCP is responsible for developing and coordinating a national drug control strategy, it could take the lead in improving the nation’s drug data collection system and coordinating the development of a strategy to address future emerging drug use problems. To improve the nation’s drug use detection and response capability, we recommend that the Director of ONDCP implement any additional changes that would improve the completeness, accuracy, and overall usefulness of data generated by the nation’s drug data collection mechanisms; take action to further improve the federal drug data collection system by determining what data should be collected and developing a systematic approach for gathering, analyzing, and disseminating information; and develop a defined strategy for determining the timing, magnitude, and nature of actions needed to appropriately respond to potential drug crises or epidemics, taking into consideration that emerging drug problems surface as local phenomena. We obtained comments on a draft of this report from ONDCP, SAMHSA, NIDA, and CDC, as well as from most of our expert panel members. With the exceptions noted below, the reviewers generally agreed with the findings, conclusions, and recommendations in the report. Some of them provided additional information and clarification and suggested technical changes, which we incorporated where appropriate. While concurring with the report’s recommendations, ONDCP expressed concern about the way the report framed some issues. Specifically, the agency was concerned that the report and two of its recommendations suggested that no action had been taken on the ONDCP Subcommittee’s recommendations to improve the nation’s drug data collection system. ONDCP commented that it has begun taking some actions to change and evaluate certain drug use detection and monitoring mechanisms even though its Subcommittee’s report is still in draft form. We were unaware of specific actions taken on the Subcommittee’s recommendations at the time of our review, and we commend these initial steps. We continue to believe, however, that ONDCP should take additional actions as recommended to address the concerns raised about the accuracy and usefulness of the data and the overall effectiveness of the federal drug data collection system. ONDCP agreed with our recommendation that calls for a defined strategy for addressing emerging drug problems and said that its Performance Measures of Effectiveness system will possibly provide a framework for developing such a strategy. SAMHSA agreed with many of the findings in the report but raised a concern that our recommendation to improve the completeness and accuracy of drug data did not address the importance of maximizing the usefulness of the data. We agree that the overall usefulness of the data is important, and we modified our recommendation accordingly. SAMHSA also wanted to elaborate on its statement to us that the agency was not adequately positioned to deter emerging drug use that might result in future epidemics. We added the information the agency provided in the text of the report. SAMHSA disagreed with our statement that it had not provided sufficient information in HHS’ Results Act annual performance plan about how SAMHSA would meet its performance goals. However, the agency did not provide any information to support its contention. NIDA expressed some concern about issues that were not addressed in this report. For example, NIDA stated that the report did not sufficiently speculate on how the different entities involved in drug control enhance or impede addressing emergent issues or how law enforcement and interdiction agencies affect federal efforts to detect and respond to emerging drug use problems. The agency also stated that the report does not specify what the appropriate role of each level of government should be. Although these issues were beyond the scope of our review, we acknowledge that there are multiple entities involved in detecting and responding to emerging drug problems and that how their roles, responsibilities, and efforts play out in an overall strategy for addressing the problems is unclear. We recommended that ONDCP take the lead in developing a defined strategy for addressing emerging drug problems. This would give the entities involved in drug control activities an opportunity to determine the appropriate roles each should play. Both NIDA and SAMHSA reacted to our suggestion that CDC’s approach to addressing public health issues, which involves state and local entities, might be a useful approach to consider in developing a strategy for addressing emerging drug problems. NIDA thought that the suggestion was reasonable but that developing networks and linkages to deal with drug problems would not be quickly or easily accomplished. SAMHSA felt that the CDC approach would be very expensive to replicate and that there are factors associated with drug abuse that do not fit the CDC model. SAMHSA concluded that adopting the CDC approach would be an unwise expenditure of funds, although it did not provide any cost analysis or other data to support its statements. While we agree that the cost and other implications, such as differences between drug abuse and other disease models, should be taken into account, we continue to believe that the CDC approach serves as a useful example of how linkages among federal, state, and local entities can facilitate the detection of and response to a problem. We are sending copies of this report to appropriate congressional committees, the Director of ONDCP, the Secretary of HHS, and other interested parties. We will also make copies available to others on request. Please contact me on (202) 512-7119 or James O. McClyde, Assistant Director, on (202) 512-7152 if you or your staff have any questions. Other major contributors to this report include Thomas J. Laetz, Jared A. Hermalin, Andrea K. Kamargo, and Karen M. Sloan. Erwin W. Bedarf contributed to the design of the project. An essential component of our research effort was an expert panel that provided advice and offered opinions on the nation’s preparedness to address changing drug use patterns. The following experts composed the panel: M. Douglas Anglin, Ph.D., Director UCLA Drug Abuse Research Center John S. Gustafson, Executive Director National Association of State Alcohol and Drug Abuse Directors James Hall, Executive Director Up Front Drug Information Center Bruce Johnson, Ph.D., Director Institute for Special Populations Research National Development and Research Institutes Henrick Harwood The Lewin Group Herbert Kleber, M.D. Executive Vice President and Medical Director Center on Addiction and Substance Abuse, Columbia University, and Professor of Psychiatry, Columbia University College of Physicians and Surgeons A. Thomas McLellan, Ph.D., Scientific Director DeltaMetrics in Association With Treatment Research Institute University of Pennsylvania Before convening the panel, we sent each panelist a discussion paper containing a brief description of the current array of detection mechanisms used by the public health service agencies and the Office of National Drug Control Policy (ONDCP); the legislative responsibilities of the National Institute on Drug Abuse (NIDA), the Substance Abuse and Mental Health Services Administration (SAMHSA), and ONDCP to address illicit drug use problems; and information these agencies gave us about how they implement their responsibilities and respond to changes in drug use patterns. During the session, we asked the panelists to discuss the effectiveness of the current detection mechanisms—that is, whether new or modified mechanisms and data information sources are needed to detect changes in illicit drug use patterns more quickly and accurately. We also asked the panelists to discuss whether NIDA, SAMHSA, and ONDCP were individually, and in conjunction, responding appropriately to detected drug use patterns to prevent, deter, or better manage potential drug epidemics and crises. Next, we asked the panelists to comment on the extent to which past legislative changes had improved or hampered federal response capacity and whether additional legislative or mission statement changes were needed to guide the activities of these agencies. Finally, we asked the panelists to review a synthesis of the comments made during the session and to offer any additional suggestions and recommendations to improve the nation’s drug detection and response system. Federal Bureau of Investigation (FBI) Bureau of Justice Statistics (BJS) Drug Enforcement Agency (DEA) Department of Defense (DOD) Bureau of Labor Statistics (BLS) Centers for Disease Control and Prevention (CDC) Prisoners entering and leaving prison and parolees (continued) Bureau of Prisons (BOP) 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. 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Pursuant to a congressional request, GAO reviewed the efforts of the federal public health agencies to detect the spread of drug use in the United States and their ability to respond to potential drug crises, focusing on: (1) how the public health service agencies have detected and responded to the crack cocaine epidemic; (2) any changes made to improve the nation's drug detection and response capability; and (3) any remaining issues that could compromise the nation's ability to detect and respond to emerging drug problems. GAO noted that: (1) despite certain limitations in its sources of information, the National Institute on Drug Abuse (NIDA) was able to track the use of a number of illicit drugs, including cocaine, during the late 1970s and early 1980s; (2) two drug detection mechanisms NIDA used as a part of that effort helped detect the emergence of crack--a smokable form of cocaine; (3) NIDA had become aware of the rapid spread of crack in 17 metropolitan areas by 1986, but the prevalence of crack use in the national household population was not known until the late 1980s; (4) federal public health agencies primarily directed their response efforts to the problem of cocaine and drug abuse in general, rather than to crack specifically; (5) the response, orchestrated largely by NIDA, focused primarily on drug abuse research and education; (6) the Alcohol, Drug Abuse, and Mental Health Administration provided funding to state and local entities for substance abuse prevention and treatment services through the federal block grant program during the 1980s; (7) following the height of the crack epidemic around 1985, concerns were raised in Congress about efforts to detect and respond to the problem--in particular about the timeliness and accuracy of drug use data, lack of data on certain populations and geographic areas, limited availability of certain treatment programs, limited monitoring of the block grant program, and lack of a coordinated national drug control strategy; (8) in response, the responsible federal agencies made changes to improve drug detection capability--changes that included adding new detection mechanisms; (9) also, to help strengthen the federal response to drug problems, Congress legislated changes in the organization of the Department of Health and Human Services' major drug control agencies: the Substance Abuse and Mental Health Services Administration was created as a separate agency to focus on prevention and treatment services, and, to emphasize its research focus, NIDA was moved to the National Institutes of Health; (10) in addition, Congress created the Office of National Drug Control Policy (ONDCP) to develop a national drug control strategy and coordinate the national drug control effort; (11) despite these changes, concerns remain about the nation's ability to detect and respond to emerging drug problems; (12) ONDCP established a group to study the use of drug data that has recommended ways to improve the nation's drug data collection system; and (13) in addition, experts agree on the need for an overall strategy among key drug control agencies for managing emerging drug problems.

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Beginning in the mid-1970s, major structural changes took place in the American economy, as advances in technology, international competition, plant closings, and corporate streamlining resulted in the dislocation of thousands of workers from their jobs. Some of these individuals possessed skills that were no longer in demand; others suffered from a lack of job search skills. In the 1980s and early 1990s, demonstration projects were conducted in New Jersey, Nevada, Minnesota, and Washington. The New Jersey and Minnesota projects showed the efficacy of using statistical methods and administrative data to identify those who are likely to experience long periods of joblessness. For example, the New Jersey demonstration project screened claimants with various eligibility requirements and found that the screening allowed the state to direct services to those who generally faced reemployment difficulties. Further, results from all four states showed that providing more intensive job search assistance to this population reduced the duration of insured unemployment and UI expenditures. In response to these events, the Clinton administration proposed legislation to implement worker profiling in 1993. In the same year, Congress enacted the Unemployment Compensation Amendments, amending the Unemployment Insurance program legislation. The law requires that states establish and utilize a system of profiling all new claimants for UI regular compensation. The system must identify those claimants that will be likely to exhaust regular compensation and refer them to reemployment services, such as job search assistance services. Typically, such claimants receive services at one of the local “one-stop” employment services centers that exist throughout the nation. States are required to collect information on the type of services claimants receive, their participation, and their subsequent employment outcomes. The last could include such information as whether referred claimants obtained new jobs and the related wage levels. In 1994, Labor issued guidance to help states establish profiling tools and provide necessary reemployment services. In profiling claimants, Labor required that states consider factors that include whether the claimant has a date for being recalled to work, union status, first unemployment benefit payment, and previous industry or occupation of employment. Labor recommended also considering some additional factors such as claimants’ education, tenure at previous job, and the state unemployment rate. Labor outlined recommended processes for providing reemployment services to referred claimants, including (1) an orientation session for claimants that would, among other things, explain the availability and benefit of reemployment services; (2) an assessment of the specific needs of each claimant, if appropriate; and (3) based on the assessment, development of an individual plan for services that would guide a claimant’s further services. (See fig. 1.) Under the law, states must also require that claimants who have been referred to reemployment services participate in those services as a condition of eligibility for receiving compensation. Labor may withhold UI administrative grants from a state if Labor finds, after notice and an opportunity for a hearing, that a state has failed to comply with worker-profiling requirements. These include identifying claimants most likely to exhaust benefits, referring claimants to reemployment services, and collecting follow-up information on services received and subsequent employment outcomes. The law required that Labor report to Congress on the operation and effectiveness of the profiling system within three years of its enactment. Labor issued a report to Congress in March 1997, and published a final report in 1999 on the program’s implementation and operation nationwide and the effectiveness in six early implementation states. Labor has published no studies on the effectiveness of the initiative since then. The agency’s strategic plan for fiscal years 2006 through 2011, in providing an overview of program evaluation, includes no ongoing or future research topics addressing the impact of the worker-profiling initiative. Labor has conducted impact evaluations as part of its program evaluations in the past. In fiscal year 2007, Labor was appropriated $17.7 million for pilots, demonstrations, and research. Funding for the worker-profiling program is provided from a variety of sources. Federal funding for the creation and maintenance of profiling models can come from UI administrative funds, which are financed by a federal UI tax on employers. Reemployment services can be funded through a variety of sources. For example, states can use Wagner-Peyser Employment Services grants as well as other state sources of funding to provide reemployment services to profiled UI claimants. From 2001 to 2005, Labor also provided Reemployment Services grants to all states in order to enhance and target services to claimants through the nation’s network of one-stop employment service centers. The large majority of states use statistical models to identify unemployment recipients who are most likely to exhaust benefits. However, many states have not recently adjusted their models, risking the possibility that these models may lose predictive accuracy over time. Forty-five states use statistical models to identify and rank clients by their likelihood to exhaust benefits, while 7 states use characteristic screens that do not rank claimants. One state—Florida—allows the local areas to decide whether to use statistical models or screening tools. Among the states using statistical models, the detailed specifications of these models vary considerably from state to state. Further, many states do not regularly update their models, a fact that can lead to a loss of predictive accuracy over time. A survey of the states reveals that many have not revised or updated their models in many years. Officials in states we contacted explained that they face a number of impediments to doing so. Under worker profiling, state UI agencies are to identify claimants who are most likely to exhaust benefits in two steps. States screen claimants in order to eliminate claimants who are unemployed but job-attached or would otherwise not qualify for referral to services from the profiling process. After the initial screening, states profile remaining claimants— that is, they consider a range of personal and economic variables related to a claimant and determine whether or not he or she is likely to exhaust benefits. Although states have considerable flexibility in determining what variables to use, Labor has recommended the use of five variables, as outlined in table 1. We found that states used one of two methods to identify claimants who are most likely to exhaust benefits—the statistical model or characteristics screening. Both of these look at a range of personal and economic factors that help predict exhaustion. Forty-five of the 53 states and territories use statistical models to identify clients likely to exhaust benefits. (See fig. 2.) Using various statistical techniques, these models consider the combined quantitative influence of various personal and labor market characteristics and produce a measurement of a claimant’s likelihood to exhaust. In statistical models, each characteristic—commonly referred to as a variable—is associated with a specific mathematical weight that quantifies the variable’s contribution to the claimant’s probability of exhaustion. If, for example, a claimant’s last job was in a steeply declining industry, the industry variable would have a positive effect on the score, indicating a claimant’s likelihood to exhaust. Conversely, if a claimant’s last job was in an expanding industry, it would have the opposite effect. Essentially a statistical model produces a weighted average of the effect of all the variables combined. As a result, states that use statistical models can rank claimants from greatest to least likelihood of exhaustion, and target reemployment services to claimants with the greatest likelihood of exhausting. According to an official of the Upjohn Institute for Employment Research, such models, if properly developed and maintained, are a powerful and effective means of identifying particular populations for a range of social service programs. Seven of the 8 remaining states use characteristic screens that do not allow them to rank claimants. One state, Florida, delegates the selection of profiling tools to the local areas because state officials believe profiling can be done more accurately at that level. Like statistical models, characteristic screens may consider various factors associated with the likelihood to exhaust benefits, but treat them as yes-no decision points. Either the claimant has the attribute or does not. The relative importance of any one variable in relation to others is not considered. Claimants selected through this process must have each of the screening criteria. For example, the characteristic screen used by Delaware considers whether or not a claimant meets specific criteria relating to industry, occupation, and job tenure. In Delaware, a claimant passes the job tenure screen if he or she has 2 or more years of tenure with his or her last employer. However, since claimants cannot be ranked, states using screens must develop a method, such as random assignment, to refer identified claimants to services if they are unable to serve all claimants that pass the screens. For example, Delaware used to refer claimants who passed the screen on a random basis, but now refers all claimants who pass the screen. Labor encourages the use of statistical models over characteristic screens because they are more efficient and precise in identifying claimants likely to exhaust. Although all statistical models are supposed to identify claimants who are likely to exhaust benefits, the states can vary in how they specifically define this exhaustion. The model originally proposed by Labor is designed to predict the probability of exhaustion as a yes-or-no outcome— exhaustion or no exhaustion—and the claimant’s profiling score would reflect the probability of the yes outcome. Most states have adopted this definition. However, as Labor explained in 1998 guidance, this approach does not distinguish between claimants who almost exhaust benefits and those who do not come close to exhausting benefits. This is significant, because the claimant with nearly exhausted benefits may be in greater need of reemployment services than the clamant who uses a comparatively small portion of his or her benefits. Consequently, some states predict exhaustion as the amount of benefits a claimant will potentially use. For example, the profiling score produced by Kentucky’s model produces a number between 1 and 20. A claimant with a score of 20 is likely to use 95 to 100 percent of benefits; a claimant with a score of 19 is likely to use 90 to 95 percent of benefits, and so on. State models can differ considerably in how they define similar variables, including those corresponding to the factors recommended by Labor. For example, California uses six categories to measure the job tenure variable, ranging from 1 year or less on the low end to more than 15 years on the high end. In contrast, Texas uses only two categories—job tenure of less than 1 year on the low side and tenure of more than 10 years on the high end. The Kentucky model, on the other hand, measures job tenure on a continuous scale—specifically, the length of time that a claimant held his or her last job. The definitions of variables associated with education, industry, and other variables can also differ among state models. For example, Kentucky includes “completed vocational education” as part of its education variable, while Wisconsin does not. The number and nature of the additional variables can also differ significantly by state. The large majority of states using statistical models (34 of 45) use models that consider factors in addition to the five factors recommended by Labor, while about one-quarter do not. (See fig. 2.) Among the 6 states that we contacted that use statistical models, the number of additional variables used ranged from 1 in California to over 50 in Kentucky. For example, 2 of the 7 states we contacted—Texas and Illinois—consider the time lapse between the loss of a job and the application for UI benefits. According to Texas officials and Labor, delays in filing a claim are indicative of a difficult job search, thus increasing the likelihood of benefit exhaustion. While Labor has recommended that states update models periodically to reflect changes in economic conditions, many states have not done so in many years. If not periodically updated, statistical models can lose predictive accuracy over time because of changes in the labor market, the general economy, or other factors. Labor has emphasized the importance of updating models, and noted in 1998 guidance that models represent the historical period in which they were developed, and that old models become increasingly unrealistic and less useful over time. Labor has further recommended that models be assessed, and if necessary adjusted, approximately every 3 years. Officials in some of the 7 states we contacted also stressed the importance of updating models from time to time. For example, Washington officials noted that although a 2002 analysis of their model update showed that it accurately identified the majority of claimants who exhausted, this adjustment of their model was based on data collected in 1999 and 2000, and subsequent changes in their labor market and the general economy have made the model outdated. Also, a 2003 California study found that the state’s model underestimated benefit exhaustion and recommended an update to the model. Similarly, an official of the Upjohn Institute for Employment Research told us that the institute’s analysis of 1 state’s model found that before the model was updated, its results were little better than random selection of claimants. Officials in Washington and California told GAO that the models would be updated in the next year. Models can be adjusted by modifying the mathematical weights associated with specific variables, and by adding, deleting, or redefining variables to enhance a model’s predictive power. This is necessary over time because, although a particular variable—such as a claimant’s industry—can remain an important predictor of exhaustion, its relative importance in the model can change significantly. For example, if a variable’s weight was estimated based on data from a historical period of large changes of employment levels in a particular industry or industries, the model might produce misleading results if used in a period of greater industrial and employment stability. Similarly, a variable that once served as an important predictor in a model may lose predictive value as the labor market and economic circumstances change, and conversely, other variables that may not have been relevant in one time period may become important at another time. For example, Texas deleted education as a variable from the model used in that state. According to a Texas official, statistical work performed for the model update revealed that the education variable did not measurably add to its predictive power. Factors other than the labor market and general economy can affect the reliability of models as well. For example, in the past 10 years standardized coding used to identify both industries and occupations has changed, and some of the states we contacted had not updated their model to reflect this change. Illinois’ analysis of its model showed that while the model had generally retained predictive accuracy, areas of concern existed. For example, as a result of outdated occupational codes, certain occupations associated with greater likelihood of exhaustion were no longer being targeted, while others not associated with exhaustion were. Although Labor has taken a number of actions to encourage and assist states in updating their profiling models, some states have not done so for many years. Labor has noted the importance of updating models in written guidance, sponsored occasional seminars where best modeling practices are shared with state staff, and provides on-demand technical assistance to states. However, Labor has not established requirements for updating models, and has not undertaken ongoing monitoring of state models. A recent Labor-commissioned survey revealed that many states have not updated their profiling models in recent years. (See figs. 3 and 4.) For example, although 21 states reported taking actions such as adjusting variable weights since 2003, many others have not. Specifically, 18 states have not done so since 1999 or before, and 12 of these reported never having done so. According to Labor’s survey results, states have been even less inclined to adjust their models by taking actions such as changing or redefining variables in the models. As figure 4 shows, 30 states reported that they had not made such changes since implementation, and 23 states reported having done so. Only 11 of these 23 states reported having done so since 2003. Labor’s survey did not inquire about factors influencing the frequency with which states update their models, but our contacts with 7 states reveal a variety of reasons that some states have not updated their models. Officials in California said that they had more pressing priorities for UI administrative funds, and thus would have difficulty funding model updates. Wisconsin officials said that revising the models required expertise that they did not have, either in-house or from other sources, such as a state university. Although Labor provides technical guidance and advice, and has offered seminars on updating models, state officials indicated they still need more continuous access to expertise in order to keep models updated. A Texas official said that sometimes historical data needed to determine a variable’s impact on exhaustion of benefits are not available, and so the variable cannot be included in the model. Relatedly, if the necessary data on claimants are not collected, or cannot be transmitted and used by the model, the related variable cannot be used. For example, a Texas official told us that certain variables, such as the number of a claimant’s dependents or spousal income, might be good predictive variables. However, the standard Texas application form for UI benefits does not ask about the number of dependents or spousal income, so these variables cannot be used. Labor data provide a limited picture of states’ implementation of worker profiling, and some aspects of these data were not reliable. Further, 6 of our 7 study states did not offer the in-depth approach to services prescribed by Labor. These states generally referred claimants to services, held them accountable for attending the services, and provided them with an orientation and some instruction on job search skills. However, 6 of the 7 states did not adhere to Labor’s guidance recommending an in-depth individual needs assessment and a tailored reemployment service plan for referred UI claimants. Between 2002 and 2006, about 94 percent of the UI claimants who received a first payment were profiled. To the extent that reemployment services are available, Labor requires that states refer profiled claimants to these services. Of those profiled, an average of 15 percent were referred to services, with states ranging from 5-year averages of 1 percent (Wyoming) to 52 percent (Washington) (See fig. 5.) While 3 states referred between 29 and 52 percent of profiled claimants to services, 28 states referred 14 percent or fewer. Further, of those claimants profiled, an average of 11 percent completed services, with states ranging from 1 percent (Arkansas, Colorado, Idaho, Michigan, and Wyoming) to 39 percent (Texas). (See fig. 6.) In 2 states, more than 27 percent of profiled claimants completed services. However, in 33 states, 13 percent or fewer of claimants did so. See appendix II for the average percentages of profiled claimants referred to and completing services by state from 2002 to 2006. Labor’s data are not sufficiently reliable to provide any information on the specific services provided to claimants—such as orientation, counseling, job search workshops, or job clubs. Specifically, Labor and state officials told us that definitions of these services can vary across states and within states over time as they change the content of their programs. For example, California officials told us that the state’s definitions of services provided were established over 10 years ago and that the nature of the services may have changed since then. We found that 6 of the 7 study states had, as required by Labor, referred profiled claimants to services and made claimants ineligible for benefits if they failed to attend reemployment services. In contrast, officials in 1 state told us that referrals had been delegated to local workforce areas, and that they did not know whether claimants were being referred to services statewide. We subsequently contacted some local workforce development offices in this state and learned that several had not been referring UI profilees to reemployment services for years. In addition, officials in this state told us that there are no consequences for those who fail to attend reemployment services. They further said they do not track information at the state level on whether claimants attend services. While Labor requires that states hold claimants ineligible for benefits for any week in which they fail to attend services, Delaware goes further and holds the UI benefits of claimants who do not attend services until they reschedule. Some of the study states took additional steps to ensure compliance with service referrals, while others did not. Of the states that referred claimants to services, Delaware and Washington required that claimants reschedule if they failed to attend required services, while Texas and Wisconsin attempted to reschedule claimants in some cases and the remaining states did not do so. Officials in Delaware reported that they go so far as to have staff call claimants early during the week of their scheduled orientation to remind them to attend; officials in Washington said that some local workforce centers do this. Officials cited the large flow of claimants into the program, the complexity of the rescheduling process, and the scarcity of staff resources as reasons they did not reschedule referred claimants. The reemployment services offered in the states we contacted generally did not conform to the robust service process originally outlined by Labor. Labor’s 1994 guidance states that after initial orientation, the service provider should determine the specific needs of each worker through an assessment process, such as vocational testing. Only one of our study states, Delaware, required that case managers conduct an initial assessment to determine what services claimants might need, such as Workforce Investment Act (WIA) training, depending on their job readiness level. Washington and Wisconsin required that claimants complete a self-assessment. For example, claimants at one one-stop center were expected to complete a one-page self-assessment that asks questions, including what educational level they attained, whether they had a current résumé, and whether they had difficulty filling out a job application. The 4 other states we studied required no assessment of any kind. According to state officials, our study states also generally did not require, as recommended by Labor, that local offices develop or document a reemployment services plan that could serve as the basis for determining satisfactory participation. Only Delaware required case managers to develop service plans and meet with claimants on a monthly basis after each claimant’s assessment. In California and Wisconsin, claimants developed their own plans, which involved selecting an additional service session on a topic the claimants felt would be most helpful. For example, California required that UI claimants attend an orientation and choose an additional service, such as a WIA service or job club, that would constitute their individual reemployment plan. All 7 study states cited lack of or declining funding as an issue that affected the provision of reemployment services. Specifically, some states mentioned the loss of Labor’s Reemployment Services grants, which had been awarded to all states between 2001 and 2005 to enhance and target integrated core services to claimants through the one-stop centers and were used by some states to fund program-related services. A Wisconsin official said that when the grant funds end in summer 2007, the state would only be providing worker profiling services in 6 to 12 of its 75 local workforce development offices. State officials also mentioned continuing declines in Wagner-Peyser, or Employment Services, funding. A local workforce manager in Washington said that there is a vast gap between the need for services and the resources and that the state only has resources for about 5 percent of the 50,000 to 60,000 UI claimant population. In order to help address this issue, officials in Washington told us that a special surtax is applied to UI taxes, and a small portion of this is diverted to worker-profiling service activities. While state officials were concerned with the availability of funding, Labor officials said that the purpose of the worker-profiling initiative is to target the funding that does exist to those claimants who need it most and that the program does not mandate that states serve any claimants they did not serve prior to its implementation. Officials also cited various day-to-day challenges in providing effective reemployment services. A single services session can include claimants ranging from former upper management employees to construction and factory production workers, according to a Kentucky official. The same official said that pitching the class so that it is effective for both types of claimants can be difficult. Claimants’ language skills also can be a challenge. However, California addresses this by excusing non-English speakers from the session, and directing them to job service centers or community-based partners that provide reemployment services in their own language, unless the orientation is available in their native language. Little is known about the current effectiveness of the worker-profiling initiative. Research studies, while generally finding that profiling and a referral to services had a positive impact on claimants, used data from the early implementation of the initiative—1994 to 1996. Although Labor collects data on the outcomes of those profiled and referred to services, we found portions of it to be unreliable. In addition, state officials said they do not use Labor’s data for evaluation purposes. Five methodologically sound studies looking at the impacts of the worker- profiling initiative after it was first implemented found that the program had some desired effects. Examining data from 1994 to 1996, the studies generally indicated that a referral to services under worker profiling led to a reduction in claimants’ duration on UI, a reduction in the amount of UI benefits that were paid out, and an increase in subsequent employment earnings. Though the methodologies varied, all the studies evaluated the impacts of the referral to services using statistical analyses to compare the outcomes of claimants who were referred to services against those of claimants who were not. As table 3 indicates, these studies cover a total of only 7 states, and no national study exists. Further, no study using current data exists. Labor sponsored the two multistate studies published in 1997 and 1999, but has not published any subsequent studies. According to Labor officials, the agency has no current plans to study the effects of profiling. Because data in all the studies were from the period when worker profiling was first implemented, the profiling process and reemployment services provided then may not reflect what states are currently offering. While these early studies showed positive impacts for referred claimants with regard to reducing duration, reducing amount of UI benefits, and increasing employment earnings, there were mixed results for whether the program reduced the percentage of claimants who exhausted their benefits or improved subsequent employment rates (See table 4.) According to the studies, claimants who were referred to services had a decreased UI duration and received lower total amounts of UI benefits. Most of the studies found that claimants who were referred to services increased earnings in the year following the UI claim. However, the largest multistate study was unable to draw any conclusions about the impact on earnings because of contradictory data. Evidence that a referral to services reduced the percentage of claimants who exhausted their UI benefits was mixed. For example, one study showed a decrease in the percentage of claimants who exhausted their UI benefits in 3 states, but an increase in 2 states. The effect of a referral to services on employment rates was also inconclusive. According to the two multistate studies, the effect was minimally positive for one state, but the other 6 states showed insignificant or contradictory results. Most of the studies, however, did not examine subsequent employment rates. Research studies of other work search programs corroborate the generally favorable results found in the impact evaluation studies of the worker- profiling initiative. Though the methodologies varied, these studies demonstrated that work search assistance reduced the duration claimants received UI benefits, among other beneficial impacts. In two demonstration projects, UI claimants who received job search assistance received fewer weeks of UI benefits. The reemployment services offered in these demonstration projects, however, were more robust; for example, in one study, claimants were required to attend an orientation, testing, a job search workshop, and a one-on-one assessment interview. As such, they may not reflect what is offered through the states’ worker-profiling programs currently. Even though they were unable to provide supporting data, officials from our study states said that worker profiling was a useful program for UI claimants. They said it had enabled states to advertise their job search and training services and target claimants who are most likely to exhaust their UI benefits. In the process of referring claimants to services, states are also educating the community on the many services and resources available at the one-stop service centers. They also said the initiative was a way to focus resources on those who would benefit from job search assistance the most. Due to reliability issues, Labor’s claimant outcomes data are of limited value. Labor’s claimant outcomes data were sufficiently reliable for us to report only certain outcomes, including benefits exhaustion, weeks of benefit receipt, and reemployment. Those data showed that less than half of profiled claimants exhausted benefits, that on average they received benefits for about two-thirds of the typical maximum time allowed, and that about half found employment within 1 year of the referral to services (see table 5). In addition to reliability issues, other characteristics, such as the lack of a comparison group and long time lags, limit the usefulness of both the reemployment services data and claimant outcomes data for states. First, the outcomes data reflected only the experience of those who were referred to services, and did not include an adequate point of comparison. It was therefore impossible to know if these outcomes were different than they would have been had the claimants not been referred to or completed reemployment services. Second, according to Labor officials, the data were originally intended for states to evaluate the effectiveness of the worker-profiling initiative. However, we found that neither Labor nor the states used the data for this purpose. Several state officials said the time lag and aggregated nature of the data were insufficient for program management purposes. The claimant outcomes data were not reported for more than a year after claimants were referred to services, and some state officials said they needed more timely data. Both the reemployment services and claimant outcomes data were aggregated to the state level, and some state officials said that local-level data would better meet their management needs. Four of our seven study states indicated that they did not utilize the reemployment services data or claimant outcomes data, and some only reported them because it was required by Labor; the remaining states said they used the reemployment services data for nonevaluative purposes, such as determining how many services were provided to claimants or the volume of claimants served under the worker-profiling program. In light of these data limitations, several state officials said they developed their own program performance measures and reports instead of using the reemployment services data and claimant outcomes data. For example, Washington developed its own data warehouse system that links data on UI benefits, reemployment services, and claimant wages. According to officials, on a monthly basis they review performance indicators, such as the number of UI claimants that find employment and the amount of time it takes before finding employment. Our findings suggest that although states continue to profile and refer claimants to reemployment services, the worker-profiling initiative is not a high priority at the federal level or in many states. In the past Labor has set out broad guidelines for states on the design and maintenance of profiling models. However, our analyses indicate that these have been inadequate. Labor’s 2006 survey of state profiling techniques revealed that many states had not updated their profiling models for many years. As a result, it is possible that many models have lost predictive accuracy, and are referring claimants to services who are not in need of them, or failing to refer claimants that are in need of them. However, the worker-profiling program is required by law, and if there is to be a continued federal mandate, it may be that a more assertive federal role is necessary to ensure the integrity of those models. A long time has passed since Labor articulated its vision of reemployment services, and our review of seven states indicates that what is being practiced is a diminished version of that vision. While the states we studied indicated they provided orientation sessions that seemed to convey important information, including job search skills, Labor’s guidance implies a more tailored and in-depth approach to services. It may be that the original vision is no longer realistic or perhaps, in the states’ experience, necessary. Absent clarification at the federal level, it will remain unclear what Labor expects from the states. The national data on the worker-profiling initiative is of very limited usefulness as a measure of program activity, outcomes, and effectiveness. Many of the data are not usable because of inconsistent or incorrect reporting, and neither Labor nor the states we contacted use the data for evaluating the worker-profiling initiative. Further, even if all the outcomes data were reported consistently and accurately, these data cannot, by themselves, be used to measure the impact of the program. In the end, by requiring the submittal of data that are of such limited reliability and value, Labor is potentially wasting both its own and the states’ resources. Finally, absent information about the program’s current impact, Labor may find it more difficult to make decisions regarding the best means for returning the unemployed to work more quickly. To better ensure that claimants who need and could benefit from reemployment services are referred, and to ensure that resources are not unnecessarily expended on claimants not needing them, we recommend that the Secretary of Labor: 1. Reevaluate the agency’s worker-profiling data collection to determine whether it is sufficient for its intended purpose. The agency might assess gaps in data, evaluate data consistency, confer with states on what data would be beneficial to them, determine the purpose of the data collection and for whose benefit the data are collected, and modify what Labor requires states to collect. 2. Ensure that the Employment and Training Administration takes a more active role to help ensure the accuracy of the state profiling models. The agency might track states’ management of their models and actively encourage review and updating of models in specific states where there have been no efforts to adjust the model for a number of years. The agency could also assess whether an expanded technical assistance effort is needed, and, if so, take the lead in developing one. 3. Encourage states to adhere to Labor’s vision for in-depth reemployment services, such as conducting individualized needs assessments and developing individual service plans, or issue updated guidance if this original vision would be too burdensome for the states. 4. Evaluate the impact of the worker-profiling program on the reemployment of UI recipients to ensure the benefits are commensurate with the resources invested. We provided a draft of this report to Labor for review and comment. In general, Labor agreed with our findings and recommendations. Labor’s formal comments are reproduced in appendix V. Labor also provided technical comments on the draft report, which we have incorporated where appropriate. We are sending copies of the report to interested congressional committees and members, and the Secretary of Labor. We will also make copies available to others upon request. In addition, our report will be available at no charge on GAO’s Web site at http://www.gao.gov. A list of related GAO products is included at the end of the report. If you or your staff has any questions about this report, please contact me at (202) 512-7215. You may also reach me by e-mail at [email protected]. Key contributors to this report are listed in appendix VI. Our objectives were to answer the following questions: 1. How do states identify unemployment claimants who are most likely to exhaust benefits? 2. To what extent do states provide reemployment services as recommended by Labor? 3. What is known about the effectiveness of the worker-profiling initiative in accelerating the reemployment of unemployment insurance claimants? To answer the first question, we reviewed Labor’s guidance about the worker-profiling initiative, and reviewed literature and interviewed experts with the Department of Labor and the Upjohn Institute for Employment Research regarding profiling techniques. We also obtained and analyzed the results of a 2006 Department of Labor-sponsored survey of the 53 states and territories. This survey made numerous inquiries about the structural and operational aspects of the profiling tools—such as statistical models or characteristic screens—in use in the states. Finally, we contacted officials in 7 states—California, Delaware, Illinois, Kentucky, Texas, Washington, and Wisconsin. We selected some states to ensure that we included certain aspects of worker profiling; for example, we selected Kentucky because it had a very complex statistical model with numerous variables, and we selected Delaware because it was one of the few states that profiled claimants using a characteristic screen instead of a statistical model. We also selected these states because they ensured geographic dispersion and a range of populations sizes. In each of these states, we reviewed documents describing the profiling model that the state uses, and interviewed knowledgeable officials about the variables used in the model, the degree to which the model has been assessed and updated, and other matters. To answer the second question, we reviewed Labor guidance regarding reemployment services provided to Unemployment Insurance (UI) claimants referred through the worker-profiling initiative, and obtained and analyzed national data collected by the Department of Labor from states on the Employment and Training Administration (ETA) 9048 Worker Profiling and Reemployment Services Activity report. In this report, states submit to Labor, by quarter, information such as the number of UI claimants profiled, referred to services, and completing services. During our contacts with the 7 states mentioned above, we also obtained and reviewed state documents describing policies about referral and reemployment services for claimants profiled under the worker-profiling initiative. We also interviewed knowledgeable state officials about these policies, including referral and notification of claimants, enforcement of participation requirements, and the type of reemployment services that are offered to claimants. In 6 of these states, we also contacted officials at local one-stop offices or regional offices to discuss how reemployment services are managed and delivered. In 4 of these states, we also attended the initial reemployment services session for claimants referred through the worker-profiling initiative and recorded our observations on a standard template. To answer the third question, we identified and reviewed six research studies that evaluated the impact of profiling and the referral to services on claimant outcomes. All the studies used regression techniques to estimate the impact of a referral to services on a claimant’s UI claims experience or the subsequent earnings and employment activities. A GAO economist reviewed these studies and determined whether each study's findings were generally reliable by evaluating the methodological soundness of the studies and validity of the results and conclusions that were drawn. On the basis of this assessment, we determined that five of the six studies were methodologically rigorous enough to use in this report. We confirmed with Labor and national experts on unemployment insurance that these remaining five studies constituted the definitive work done to date on the impact of the worker-profiling initiative. Additionally, we reviewed these studies to assess the reemployment services offered under the worker-profiling initiative. Finally, we reviewed several studies on other work search programs that also evaluated impacts on claimant outcomes. We also obtained and analyzed national data collected by Labor from states via the ETA 9049 Worker Profiling and Reemployment Services Outcomes report. In this report, states report to Labor on a quarterly basis information on the outcomes of referred claimants, such as the average duration claimants received UI benefits and the number of claimants that found employment in the year following referral. Finally, in our contacts with the 7 states mentioned above, we interviewed knowledgeable officials regarding the data collected by Labor and their general views about the worker-profiling initiative, and in particular whether they believed the initiative was having the intended outcomes. We conducted a data reliability assessment on the ETA 9048 and ETA 9049 reports data, which included electronically checking the data and interviewing Labor and state officials on the reliability of the data. On the basis of our reliability assessment and interviews, we found that some of the ETA 9048 and ETA 9049 reports had missing or inaccurate data. As a result, we took the following actions to ensure the accuracy of the data. First, because Labor instituted data edit checks starting in 2002, we limited the time frame of our analysis to 2002 to the most recent available, September 2006 and March 2005 for the ETA 9048 and ETA 9049, respectively. Second, we disregarded data from states that had excessive amounts of missing data reports. Specifically, from the ETA 9048, we excluded Louisiana, New Mexico, Puerto Rico, and the Virgin Islands, and for the ETA 9049, we also excluded Idaho and New Jersey, in addition to those states dropped for the ETA 9048. Third, we estimated data values, if possible, for states that had sporadically missing reports or data that were anomalous or illogical, for example, when the number of claimants who found employment exceeded the number referred to services. Of the data we reported from the ETA 9048 and ETA 9049, we estimated approximately 1 percent of these data; because of this small proportion, we believe that any errors arising from our estimation process did not significantly affect the state and national averages we reported. Some possible issues resulting from our estimation process were the following: We utilized logical relationships between data to estimate values, and at times, these values were based on other estimated data. Any errors resulting from the previous estimation would be carried over to the following estimated value. Some states had volatile data, and as our estimation process was based on the existing state data, it is uncertain how accurate our estimates were. At times, our estimated values were the highest or the lowest in the data series, and it is possible that the estimation procedure resulted in an inaccurate value. Fourth, we excluded data from states that we confirmed were reported incorrectly. Specifically, for the ETA 9049, California and Georgia were excluded from calculations using the number of claimants who become employed, and Illinois was dropped from all analyses of both the ETA 9048 and ETA 9049 data. Last, we did not use any of the detailed reemployment services data, such as the number of claimants that completed an orientation, assessment, and so forth, because both Labor and state officials said these data were not comparable within and between states. Length of time referred claimants receive UI benefits (2002-2006) (2002-2006) (2002-2005) Referred claimants who become employed (2002-2005) Length of time referred claimants receive UI benefits (2002-2006) (2002-2006) (2002-2005) Referred claimants who become employed (2002-2005) (weeks) (2002- 2005) GAO analysis based on 47 states and the District of Columbia. Black, Dan A., Jeffrey A. Smith, Mark C. Berger, and Brett J. Noel. “Is the Threat of Reemployment Services More Effective than the Services Themselves? Evidence from Random Assignment in the UI System.” The American Economic Review, Vol. 93, No. 4 (November 2003). Black, Dan A., Jose Galdo, and Jeffrey A. Smith. “Evaluating the Worker Profiling and Reemployment Services System Using a Regression Discontinuity Approach.” Paper presented at the American Economic Association conference in January 2007. Submitted to The American Economic Review for the May 2007 Papers and Proceedings Issue. Dickinson, Katherine P., Suzanne D. Kreutzer, and Paul T. Decker. “Evaluation of Worker Profiling and Reemployment Services Systems: Report to Congress.” U.S. Department of Labor, Employment and Training Administration (March 1997). Dickinson, Katherine P., Suzanne D. Kreutzer, Richard W. West, and Paul T. Decker. “Evaluation of Worker Profiling and Reemployment Services: Final Report.” U.S. Department of Labor, Employment and Training Administration Research and Evaluation Report Series 99-D (1999). Noel, Brett J. “Two Essays on Unemployment Insurance: Claimant Responses to Policy Changes.” Dissertation submitted for the degree of Doctor of Philosophy at the Graduate School of the University of Kentucky, UMI Number: 9922624 (1998). CT, ME, NJ: Reduced by 1.4 to 4.3 percentage points SC, KY: Increased by 1.1 to 4.1 percentage points Dates indicate when claimants filed their UI claim or received their first UI benefit payment. Unpublished dissertation. Delaware was included in this study, but its sample size was too small to detect any significant impacts. Patrick di Battista, Assistant Director, and Michael Hartnett, managed this engagement. Shannon Groff, Rosemary Torres Lerma, and Winchee Lin also made significant contributions throughout the engagement. Susan Bernstein helped develop the report’s message. Jay Smale, Stuart Kaufman, Rhiannon Patterson, Robert Dinkelmeyer, and Greg Dybalski contributed to the analysis of Labor data and reviews of external studies. Jessica Botsford provided legal support. Workforce Investment Act: Employers Found One-Stop Centers Useful in Hiring Low-Skilled Workers; Performance Information Could Help Gauge Employer Involvement. GAO-07-167. Washington, D.C.: December 22, 2006. Unemployment Insurance: States’ Tax Financing Systems Allow Costs to Be Shared among Industries. GAO-06-769. Washington, D.C.: July 26, 2006. Unemployment Insurance: Enhancing Program Performance by Focusing on Improper Payments and Reemployment Services. GAO-06-696T. Washington, D.C.: May 4, 2006. Unemployment Insurance: Factors Associated with Benefit Receipt and Linkages with Reemployment Services for Claimants. GAO-06-484T. Washington, D.C.: March, 15, 2006. Unemployment Insurance: Factors Associated with Benefit Receipt. GAO-06-341. Washington, D.C.: March 7, 2006. Workforce Investment Act: Labor and States Have Taken Actions to Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. Washington, D.C.: November 14, 2005. Unemployment Insurance: Better Data Needed to Assess Reemployment Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. Workforce Investment Act: Labor Should Consider Alternative Approaches to Implement New Performance and Reporting Requirements. GAO-05-539. Washington, D.C.: May 27, 2005. Unemployment Insurance: Information on Benefit Receipt. GAO-05-291. Washington, D.C. March 17, 2005. Workforce Investment Act: Employers Are Aware of, Using, and Satisfied with One-Stop Services, but More Data Could Help Labor Better Address Employers’ Needs. GAO-05-259. Washington, D.C.: February 18, 2005. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725. Washington, D.C.: June 18, 2003.

Changes to the U.S. economy have led to longer-term unemployment. Many unemployed workers receive Unemployment Insurance (UI), which provided about $30 billion in benefits in 2006. In 1993, Congress established requirements--now known as the Worker Profiling and Reemployment Services (WPRS) initiative--for state UI agencies to identify claimants who are most likely to exhaust their benefits, and then refer such claimants to reemployment services. To assess the implementation and effect of the initiative, GAO examined (1) how states identify claimants who are most likely to exhaust benefits, (2) to what extent states provide reemployment services as recommended by the Department of Labor (Labor), and (3) what is known about the effectiveness of the initiative in accelerating reemployment. To answer these questions, we used a combination of national data; review of seven states, including visits to local service providers in four states; and existing studies and interviews with Labor and subject matter experts. Forty-five of the 53 states and territories use statistical models that facilitate the ranking of claimants by their likelihood to exhaust benefits, while 7 states use more limited screening tools that do not facilitate a ranking. Florida delegates the selection of profiling tools to local areas in the state. Factors used to determine the probability of exhaustion include a claimant's education, occupation, and job tenure. Many states have not regularly maintained their models, and as a result, the models in some states may not be accurately identifying claimants who are likely to exhaust benefits. Although Labor data provide a limited picture of states' implementation of the worker-profiling initiative, 6 of the 7 states we studied did not provide the in-depth approach to services as recommended by Labor. Overall, an average of 15 percent of profiled UI claimants were referred to reemployment services, and 11 percent completed these services between 2002 and 2006. Six of the 7 states we contacted referred claimants to services, held them accountable for attending the services, and provided an orientation. However, only 1 of the 7 states provided individualized needs assessments, and developed service plans, as recommended. Little is known about the effectiveness of the worker-profiling initiative as it is currently operating. Although studies using data from the 1990s generally indicated that claimants who were referred to services had reduced reliance on UI, there are no more up-to-date studies. Further, some of the program data collected by Labor are not reliable, and the data are not being used by Labor or states to evaluate the initiative.

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The military health system has three missions: (1) maintaining the health of active-duty service members; (2) maintaining readinessthe capability to treat wartime casualties; and (3) providing care to the dependents of active-duty personnel, retirees and their families, and survivors of military personnel. In fiscal year 1999, DOD’s annual appropriations included about $16 billion for health care, of which over $1 billion funded the care of seniors. In the mid-1990s, DOD implemented the TRICARE framework for military health care in response to rapidly rising costs and beneficiary concerns about access to military care. Its goals were to improve beneficiary access and quality while containing costs. TRICARE provides care through over 600 MTFs and a network of civilian providers managed by outside contractors. TRICARE offers three options: TRICARE Prime, a managed care option; TRICARE Extra, a preferred provider option; and TRICARE Standard, a fee-for-service option. TRICARE covers inpatient services, outpatient services such as physician visits and lab tests, and skilled nursing facility and other post-acute care. TRICARE also covers prescription drugs, which are available at MTFs, through DOD’s national mail order pharmacy (NMOP), and at civilian pharmacies. Medicare is a federally financed health insurance program that covers health care expenses of the elderly, some people with disabilities, and people with end-stage kidney disease. Military retirees aged 65 or older are eligible for Medicare on the same basis as civilian retirees. Medicare enrollees receive part A benefits and are eligible for optional part B benefits if they pay a monthly premium. Under traditional Medicare, beneficiaries choose their own providers, and Medicare reimburses those providers on a fee-for-service basis. Beneficiaries who receive care through traditional Medicare are responsible for paying a share of the costs for services. Most beneficiaries have supplemental coverage that pays for many of the costs not covered by Medicare. Major sources of this coverage include employer-sponsored health insurance, “Medigap” policies sold by private insurers to individuals, and state Medicaid programs. Beneficiaries have an alternative to traditional Medicare, the Medicare+Choice option. Medicare+Choice allows beneficiaries to enroll in private managed care plans and other types of health plans. Managed care plans provide all traditional Medicare benefits and typically offer additional benefits, such as prescription drug coverage. Plan members generally pay less out-of-pocket than under traditional Medicare. When choosing a plan, beneficiaries must weigh these benefits against other features of managed care. For example, beneficiaries enrolled in Medicare managed care plans generally must use the physicians in a plan’s network and often must obtain plan approval before they can see a specialist. Older military retirees who enroll in Medicare+Choice plans may choose to supplement the care they receive through the plan with space-available care provided by MTFs in their areas. The space-available care they receive saves the plan money if it otherwise would have provided the care. Similarly, MTF care provided to older retirees who are in traditional Medicare reduces Medicare spending. Today, there are about 1.5 million retired military personnel, dependents, and survivors aged 65 or older residing in the United States who are eligible for certain military health care services. About 600,000 of these seniors live within about 40 miles of an MTF. Retirees have access to all MTF and network services through TRICARE until they turn age 65 and become eligible for Medicare. Subsequently, they can only use military health care on a space-available basis, that is, when MTFs have unused capacity after caring for younger beneficiaries. In the 1990s, downsizing and changes in access policies led to reduced space-available care throughout the military health system. Some retirees aged 65 or older rely heavily on military facilities for their health care, but most do not, and over 60 percent do not use military health care facilities at all. Sweeping changes in retiree benefits and military health care are occurring in 2001 as a result of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001. This legislation gave older retirees two major benefits: Pharmacy benefit. Beginning April 1, 2001, military retirees from the uniformed services aged 65 or older have access to prescription drugs through TRICARE’s NMOP and at civilian pharmacies, as well as through pharmacies at MTFs. TRICARE eligibility. On October 1, 2001, older retirees enrolled in Medicare part B became eligible for TRICARE coveragecommonly termed TRICARE For Life. As a result, TRICARE is now a secondary payer for these retirees’ Medicare-covered servicespaying most of the required cost-sharing. In addition, older retirees can enroll in TRICARE Plusa program that provides MTF primary care. The Medicare subvention demonstration permitted DOD to create managed care organizations that participate in the Medicare+Choice program and enroll older retirees. Medicare may pay DOD for enrollees’ care, but only after DOD has spent an amount equal to what it has spent historically on care for all older retirees. Under the demonstration, enrolled retirees receive their Medicare-covered benefits and additional TRICARE benefits (notably prescription drugs) through TRICARE Senior Prime, the DOD-run managed care organizations set up by the demonstration. To be eligible for Senior Prime, retirees must reside in one of the six geographic areas covered by the demonstration, be enrolled in both Medicare part A and part B, and be eligible for military health care benefits. They also must have either (1) used a military treatment facility before July 1, 1997, or (2) turned age 65 on or after July 1, 1997. Senior Prime is based on TRICARE Prime, DOD’s managed care program for active-duty personnel, family members, and retirees under age 65. Although DOD could charge enrollees a premium for Senior Prime, as any Medicare+Choice organization can, it has chosen not to do so. Services can be provided, at Senior Prime’s option, at an MTF or by a civilian network provider. Copayments differ by where the service was provided. For example, inpatient care is free at the MTF, but a copayment is charged for care at a civilian hospital. Senior Prime gives its members priority for treatment at MTFs over other older military retirees (that is, nonenrollees). Like enrollees in private Medicare managed care plans, Senior Prime enrollees agree that the plan will be the sole source of their Medicare benefits. Enrollees who use civilian providers without authorization are responsible for the full charge. Senior Prime began delivering care at its first site in September 1998 and was delivering care at all sites by January 1999. Sites differ in the numbers of older retirees in their area and enrollment (see table 1), as well as by geographic region, size of military health facility, and managed care penetration in the local Medicare market. The demonstration sites were not representative of all military health care service areas. This was because sites’ ability to support the demonstration was a factor in site selection. Military health care resources were greater in demonstration areas than in other military health care service areas. At the start of the demonstration, about 80 percent of older retirees in the demonstration areas lived near a military medical center—a teaching hospital with multiple specialty clinics—whereas in service areas that were not in the demonstration, only 30 percent of older retirees were served by a nearby medical center. The BBA authorized the demonstration for a 3-year period beginning on January 1, 1998, and ending on December 31, 2000. The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 extended the demonstration for another year—through 2001. DOD has announced that Senior Prime will end on December 31, 2001, because the new TRICARE For Life program will provide expanded health care coverage to older military retirees. In establishing the demonstration, the BBA also established rules for Medicare to follow in paying DOD. The monthly Senior Prime capitation rate was set at 95 percent of the Medicare+Choice capitation rate, consistent with a belief that DOD could provide care at lower cost than the private sector. The rate was further adjusted by excluding the part of the Medicare+Choice rate that reflects graduate medical education (GME) and disproportionate share hospital (DSH) payments, as well as a percentage of payments made for hospitals’ capital costs. The GME and capital costs exclusions took into account the fact that GME and capital costs in the military health system are funded by DOD appropriations, and the DSH exclusion recognizes that DOD medical facilities do not treat the low- income patients for whom DSH payments compensate hospitals. The law directed the Health Care Financing Administration (HCFA) and DOD to determine the amount of the capital adjustment, and the two agencies agreed to exclude two-thirds of the capital costs reflected in the Medicare+Choice rate. The total amount that Medicare could pay DOD for the demonstration was capped at $50 million in 1998, $60 million in 1999, and $65 million in 2000. The BBA also required that participating MTFs maintain their “level of effort” (LOE). That is, they had to spend as much on care for older retirees as they did prior to the demonstration before Medicare could make any payment. This provision ensured that the government would not pay for the same care twice—through both the DOD appropriations and Medicare. (Appendix III explains how LOE works in practice and how Medicare’s final payment to DOD is determined.) DOD’s costs of providing care to Senior Prime enrollees were considerably higher in 1999 than what Medicare could pay Senior Prime or any other managed care organization. This difference was not because Senior Prime enrollees were sicker than other Medicare beneficiaries. Instead, it was mostly due to Senior Prime enrollees’ heavy use of services. A smaller part of the difference reflected DOD’s coverage of prescription drugs. Contrary to initial expectations, DOD was unable to provide care to enrollees within the capitated rate. In 1999 DOD’s monthly costs for Senior Prime members were $586 per person. Senior Prime’s monthly capitated rate was $320 per person—a difference of $266. (See fig. 1.) Even if DOD had been paid the full Medicare+Choice rate, the monthly difference would still have been over $200 per person. Although part of the difference was due to DOD’s coverage of prescription drugs, the main reason for the difference was Senior Prime enrollees’ higher utilization. Compared to similar Medicare fee-for-service beneficiaries, enrollees were hospitalized 41 percent more often and had 58 percent more outpatient visits. (See table 2.) If Senior Prime had matched Medicare fee-for-service utilization, its monthly costs would have dropped by more than $150 per person. The higher utilization probably had several sources, including lower cost-sharing by Senior Prime enrollees and weak incentives to limit inappropriate utilization. However, their separate impacts cannot be quantified. Officials at several demonstration sites stated that Senior Prime enrollees had high utilization because they were less healthy than other patient groups. Although some sites had sicker enrollees than others, overall the demonstration’s enrollees were not in poorer health than comparable Medicare beneficiaries. In fact, they were somewhat healthier. In contrast to the high utilization of services by Senior Prime enrollees, Senior Prime’s drug coverage played a small role. Prescription drugs for enrollees—not included in the Medicare benefit package—cost DOD on average $55 per month per enrollee. Without the demonstration, Medicare in 1999 would have spent 55 percent of the Senior Prime capitation rate on retirees enrolled in Senior Prime. In part, this was because Senior Prime enrollees were somewhat healthier— and therefore somewhat less costly—than other Medicare beneficiaries with the same demographic characteristics. However, the primary reason was that Medicare would have paid for only part of their care. Much of their care would have been provided by MTFs and would have been free to Medicare. We estimate that, without the demonstration, Medicare would have spent on the average enrollee $144 per month less than the Senior Prime rate. Most of this difference reflects the care that fee-for-service beneficiaries would have received from MTFs—care that was free to Medicare. Enrollees who before they enrolled in Senior Prime had been fee-for- service beneficiaries would have cost Medicare $91 per month—$229 less than the Senior Prime rate. By contrast, enrollees who were former health maintenance organizations (HMO) beneficiaries would have cost Medicare, on average, the full Medicare+Choice capitation rate—$63 per month more than the Senior Prime rate. The BBA payment rules for the demonstration limited what Medicare could pay DOD for care rendered to Senior Prime enrollees, reflecting the fact that DOD had an additional source of funds for retiree health care—its appropriations. Contrary to expectations, however, these rules resulted in Medicare owing DOD nothing for the care provided to enrollees during 1999. The BBA set a ceiling on Medicare’s payment to DOD, consistent with the expectation that the payment might be sizable. In 1999 Medicare’s payment to DOD was capped at $60 million for enrollee care. Because DOD allowed 30,228 retirees to enroll and provided them over 305,000 months of care in 1999, the most that DOD could have been paid was $196 per enrollee per month, or 61 percent of the Senior Prime capitation rate which was $320 per month. Any Medicare payment would have supplemented DOD’s appropriated funds. The BBA payment rules resulted in Medicare actually paying DOD nothing for care provided to Senior Prime enrollees during 1999. Under these rules, DOD was required to spend as much as it had historically spent on all seniors in the demonstration areas before it could be paid by Medicare. Otherwise, the government would have paid twice for the same care— both through Medicare and the DOD appropriations. The rules also required that the payment be adjusted upward or downward according to whether Senior Prime enrollees were sicker or healthier than comparable Medicare beneficiaries. Together, these two requirements resulted in Medicare owing DOD nothing. DOD expenditures on care for all retirees (enrolled and not enrolled) in the demonstration areas exceeded its level of effort requirement by $79 million. These additional expenditures, which reflect DOD’s high utilization and high costs, were paid with appropriated health care funds. Using these funds for Senior Prime meant that less was available for other purposes. Under the demonstration, Senior Prime enrollees’ utilization of care was substantially higher than that of comparable Medicare beneficiaries. As a result, DOD’s costs were so high that the full Senior Prime capitation rate could not have covered its costs. Without the demonstration, Medicare would have spent less than the Senior Prime capitation rate on enrollees. This would have occurred because military retirees who used fee-for-service providers would have obtained much of their care for free from MTFs and therefore would have cost Medicare substantially less than the capitation rate. The BBA rules prevented the government from paying twice for the same care and protected the Medicare program from a large increase in its spending for Senior Prime enrollees. However, DOD incurred greater costs for seniors due to the demonstration and covered these costs by redirecting funds from other uses. DOD and CMS reviewed a draft of this report. DOD said that the report adequately described the financial complexities it faced in implementing, administering, and managing the Medicare subvention demonstration. However, DOD found that the report addressed neither the details of the agreement with CMS concerning LOE nor the annual reconciliation process that determined the amount of Medicare’s final payment for Senior Prime care. According to DOD, these features resulted in an extremely complicated payment mechanism that was difficult for DOD managers to understand and execute. In response to our reference to the high cost of DOD’s care, DOD stated that a contributing factor to the high cost of care was the design of the health care benefit provided by Senior Prime. The agency cited an estimate by an actuarial consulting firm that the Senior Prime benefit was worth $105 more per member per month than the typical Medicare+Choice plan. It stated that the burden of providing this benefit and the requirement to maintain fiscal year 1996 Indirect Medical Education (IME) rules made it difficult for DOD to attain its LOE target. In response to our discussion of the effect of risk adjustment on the final Medicare payment, DOD noted that the latest risk adjustment calculation shows that the Senior Prime enrollee population is healthier than the fee-for-service Medicare populations in the demonstration areas. As a result, DOD received no payment from CMS for Senior Prime care provided in 1999. Regarding our concluding observation that DOD incurred greater costs to support Senior Prime and had to cover the shortfall, the agency observed that the report does not state whether the federal government as a whole spent more or less as a result of the demonstration. Finally, DOD suggested that the Hierarchical Coexisting Conditions (HCC) method for determining beneficiaries’ costliness may have resulted in risk scores that overstated the health of the enrollees, due to the HCC method’s use of ambulatory data, which in DOD’s case may be incomplete and may also contain data coding errors. In an earlier report, we described in detail the LOE mechanism and the annual reconciliation process that determines Medicare’s final payment. We also noted in that report that the payment mechanism created uncertainty for DOD managers. Concerning the burden placed on DOD in meeting the LOE requirement, we observe that the Senior Prime benefit included both Medicare-covered services and non-Medicare-covered services. The LOE requirement applied only to Medicare-covered services, for which DOD incurred high costs. We agree that maintaining the fiscal year 1996 IME rules made it more difficult for DOD to meet its LOE requirement, but the effect was very small. Regarding the 1999 final payment by Medicare to DOD, the estimate in our draft report was based on preliminary information from CMS and DOD. We have incorporated into the published report information from the final accounting recently completed by the agencies that shows that there was no payment by Medicare for DOD’s 1999 Senior Prime care. Although the issue of whether the federal government as a whole spent more or less as a result of the demonstration is outside of the scope of this report, our analyses indicate that the demonstration’s impact on total federal costs for the demonstration population was negligible. We share DOD’s concern about the completeness and reliability of ambulatory care data, but doubt that these data weaknesses had any substantial effect on the risk adjustment calculation. We performed the risk adjustment calculation using a method based only on inpatient data and obtained a result comparable to that obtained using the HCC method. CMS found the conclusions of the report to be appropriate. The agency noted that our findings pertained to the initial phase of the demonstration. CMS observed that start-up conditions in the first year of a demonstration may affect the findings. The agency therefore recommended that we include a statement noting that our results are from the initial phase of the demonstration. We make a statement to this effect in the beginning of the report. In addition, CMS noted that there were considerable problems encountered with the DOD cost and use data. We were aware of the limitations of DOD data during our analysis and have described them in appendix I. CMS also suggested technical changes to the report, which we incorporated where appropriate. DOD’s and CMS’s comments appear in appendixes IV and V, respectively. We are sending copies of this report to the Secretary of Defense and the Administrator of the Centers for Medicare and Medicaid Services. We will make copies available to others upon request. If you or your staffs have questions about this report, please contact me at (202) 512-7114. Other GAO contacts and staff acknowledgments are listed in appendix VI. This appendix summarizes the methods and data underlying our analysis of Senior Prime financial issues. Specifically, we analyzed the effect of the Medicare subvention demonstration on DOD’s total costs for enrolled and nonenrolled retirees at the demonstration sites. In addition, we analyzed DOD’s costs per Senior Prime enrollee because, under the demonstration’s rules, the size of these costs has implications for the size of the payment that DOD receives. The total costs of the demonstration to DOD—its actual costs of caring for enrollees and nonenrollees in the demonstration areas—have four components: MTF care. Most hospital stays and outpatient visits by Senior Prime enrollees occurred in MTFs. We based our MTF cost calculations on DOD’s allocation of the costs for an entire facility to the enrolled retirees. This allocation of MTF costs is necessary because DOD’s cost accounting systems do not record or generate cost data for each MTF patient. For the demonstration MTFs, DOD extracted the facility costs from its accounting system for MTF costs (the Medical Expense and Performance Reporting System). Using an elaborate set of cost-allocation rules it had developed,DOD split an MTF’s costs of caring for all users—whether in Prime, Senior Prime, or space-available care—between Senior Prime enrollees and all other users. Civilian network care. Senior Prime also paid for enrollees’ admissions to civilian hospitals and visits to civilian physicians in the Senior Prime network. These network providers submitted claims to TRICARE, which DOD summed to obtain network costs of inpatient care and of outpatient care for enrollees. Pharmacy. For enrollee prescriptions filled at civilian pharmacies, DOD’s costs were recorded like other network claims. For prescriptions filled at MTF pharmacies, DOD reported its costs based on data from local MTF pharmacy information systems. For enrollees’ prescriptions from DOD’s national mail order pharmacy system, DOD extracted cost information from NMOP’s separate information system. Administrative overhead. We used DOD’s figures for Senior Prime’s administrative costs associated with its managed care support contractors. DOD officials told us that DOD does not have a central system for collecting and reporting the administrative costs of MTF care. As a result, our estimate somewhat understates Senior Prime’s total overhead costs. We calculated total costs to DOD of the demonstration for enrollees, nonenrollees, and all older retirees. For enrollees, we calculated DOD’s total costs by summing the MTF, network, pharmacy, and overhead costs reported by DOD for 1999. For nonenrollees, we used the total cost estimates reported by DOD for 1999. To determine DOD’s total costs for all older retirees, we summed the total costs of enrollees and nonenrollees at the demonstration sites. To calculate the change in total cost for older retirees (enrolled and nonenrolled) due to the demonstration, we compared DOD’s 1999 health care costs for older retirees in the demonstration areas to its historical LOE. We analyzed DOD’s per-enrollee costs because they affect the size of Medicare’s final payment to DOD even though they are not an explicit factor in the calculation of this payment. We calculated monthly costs per Senior Prime enrollee for 1999 as total Senior Prime costs—MTF, civilian network, pharmacy, and administrative overhead—divided by total member months in 1999. Total monthly costs per enrollee for Senior Prime were $586. This represents the cost to DOD of providing the combined Medicare and TRICARE Prime benefit package to Senior Prime enrollees. In contrast, under the demonstration’s payment rules, in 1999 DOD was credited for Senior Prime enrollment at a Medicare capitation rate of $320 per month per enrollee. We found that DOD’s costs for delivering the Senior Prime benefit package (which includes prescription drug coverage) to enrollees were over 80 percent higher than the Senior Prime capitation rate. DOD’s higher costs partly reflected Senior Prime’s coverage of prescription drugs, but even net of drug expenses Senior Prime’s costs still were high. Table 3 presents Senior Prime costs in three ways: the first (total costs) is comprehensive and measures DOD’s costs of providing the Senior Prime benefit package; the second measures DOD’s costs of providing the Medicare benefit package, which does not include prescription drug coverage; and the third (in effect, medical claims) measures DOD’s costs of providing the Medicare benefit package, net of the overhead costs associated with DOD’s managed care support contractors for Senior Prime. Even if one of the less comprehensive measures is selected, DOD’s costs for Senior Prime enrollees were much higher than the Senior Prime capitation rate. For example, the difference between the narrowest view of Senior Prime costs (net of drugs and overhead) and the capitation rate is $1,964 annually. We examined the relative health status of enrollees because people with higher medical care costs are usually less healthy. Our analysis showed that Senior Prime enrollees were healthier on average than their fee-for- service counterparts. We used the HCC method to determine the costliness of each beneficiary, based on that person’s clinical diagnoses and demographic traits, relative to the average Medicare fee-for-service beneficiary in the United States. Beneficiaries with lower scores are healthier than beneficiaries with higher scores, and the average Medicare fee-for-service beneficiary in the United States has an HCC score of 1.00. In 1999, Senior Prime enrollees had an average HCC score of 0.94 while Medicare fee-for-service beneficiaries in the demonstration areas had an average HCC score of 1.19. We analyzed enrollees’ relative utilization of services because people who use more services generally have higher costs. In 1999, Senior Prime enrollees averaged 0.367 inpatient stays per person and 16.7 outpatient visits per person. To control for differences by age, sex, and health status, we estimated a statistical model of inpatient utilization for Medicare fee- for-service beneficiaries in the demonstration areas. Using the coefficients from this model, we projected the inpatient utilization for fee-for-service beneficiaries with the same demographic and health traits as Senior Prime enrollees. We also estimated a similar model for outpatient utilization, which we used to project outpatient utilization for fee-for-service beneficiaries with the same characteristics as Senior Prime enrollees. Our analysis showed that Medicare fee-for-service beneficiaries similar to the Senior Prime enrollees would have averaged 0.261 inpatient stays per person and 10.6 outpatient visits per person in 1999. Consequently, we found that Senior Prime enrollees were hospitalized 41 percent more often than similar Medicare fee-for-service beneficiaries and had 58 percent more physician and other outpatient visits than similar Medicare fee-for- service beneficiaries. This appendix summarizes the data and methods used in our analysis of Medicare spending during the demonstration. We estimated what Medicare would have spent without the demonstration for beneficiaries who—before they enrolled in Senior Prime—were covered by Medicare fee-for-service. We did this by projecting historical spending patterns of this population into the demonstration period. We also calculated what Medicare would have spent on Senior Prime enrollees who were previously members of managed care plans. We constructed a database of monthly spending for Medicare beneficiaries spanning January 1994 through December 1999. It included variables that made it possible to aggregate the data for each month by demonstration site, age, and sex, or any combination of these characteristics. We also included data on (1) older military retirees at the eight control sites used in the RAND evaluation of the demonstration and (2) a sample of nondual eligibles—Medicare beneficiaries not eligible for military health care—at both the demonstration and RAND control sites. Constructing the database involved four major steps: 1. Identifying the Populations. To identify the population of Medicare- eligible military retirees, we obtained quarterly files from DOD for the period 1994 through 1999 that included all military retirees and their dependents aged 65 or older who were eligible for military health care. We matched a master list of these individuals to Medicare’s Enrollment Data Base to produce a national file of all Medicare-eligible military retirees. This file was used to create separate lists for the demonstration and RAND control sites using Medicare data on beneficiaries’ current and previous residences. To select comparison samples of Medicare beneficiaries not eligible for military health care, we created a master list of all nondual eligibles for each site. To do this, we matched a list of zip codes for the demonstration and RAND control sites to Medicare’s annual master lists of beneficiary characteristics and excluded the dual eligibles. Finally, we selected a random sample of 30,000 beneficiaries for each site.2. Determining Monthly Medicare Payments for Several Populations. We used the list of older retirees and the sample of nondual eligibles at both the demonstration and RAND control sites to extract all Medicare fee-for-service claims for these individuals in the years spanning 1993 through 1999. The payment amount of each claim was prorated among the months spanning the beginning and end dates of the period during which the service was provided. The prorated claims were then summed by month for each beneficiary. From the same lists of beneficiaries we also identified all former Medicare HMO enrollees. For each year spanning 1994 through 1999, we used HCFA’s HMO rate calculation methodology to calculate the capitation rate for every month during which a beneficiary was enrolled in a Medicare HMO. These data were then merged with the monthly fee-for-service payments to create a file of all Medicare payments by month. 3. Creating Variables That Describe Beneficiaries’ Characteristics. We created a separate file of monthly beneficiary characteristics from Medicare and DOD data. These included age, sex, Medicare part A and part B enrollment status, eligibility for DOD health care, and residence at a demonstration or RAND control site. For Senior Prime enrollees we also added variables indicating their monthly enrollment status, their Senior Prime capitation rate, and the final Medicare payments to DOD per enrollee for 1998 and 1999. 4. Creating the Master File and Time-Series Variables. We created the master file by merging the monthly beneficiary characteristics file with the monthly Medicare payments file. We used the master file to create two time-series variables—average real monthly Medicare payments and the number of beneficiaries. For demonstration sites, these segments included all enrollees, enrollees who were fee-for- service beneficiaries before the demonstration, nonenrollees, and nondual eligibles. For the RAND control sites, these segments included all older retirees and nondual eligibles. We used a standard statistical method (ordinary least-squares regression) to estimate forecasting equations of average monthly real Medicare spending for the population segments included in the database. A common feature of time-series data is that each period’s value is likely to be correlated with previous periods’ values. We therefore used a standard correction in our estimates to counteract the forecasting error that would otherwise be introduced. We assessed the forecasting accuracy of several alternative forecasting equations. To do this, we estimated an equation for a shortened version of the average spending series that omitted the 12 months preceding the demonstration. This equation was then used to forecast the spending variable for the omitted months. Finally, the actual spending during those months was compared to the forecast. The equation with the best forecasting accuracy has two independent variables—a time trend and average monthly real Medicare payments for nondual eligibles. We used this equation to estimate spending during the predemonstration period for 1999 Senior Prime enrollees and nonenrollees. We tested the forecasting accuracy of the equation using data from the RAND control sites. In this case, the forecast period was the demonstration period itself (September 1998 through December 1999). The resulting forecast error was 1.9 percent, indicating that the equation produces reasonable forecasts for a comparable set of sites. We used the forecasting equation to project the 1999 monthly average Medicare spending for enrollees who were former fee-for-service beneficiaries. We defined this population as enrollees who were not HMO enrollees at any time during the 6-month period preceding their enrollment in Senior Prime. The BBA required DOD to maintain its level of effort (LOE) in providing care to older military retirees. That is, DOD must spend as much on care for older retirees as it did historically before it could receive any payment from Medicare. This provision ensured that the government would not pay for the same care twice—through both the DOD appropriations and Medicare. In establishing the LOE requirement, DOD and HCFA defined LOE as the amount DOD spent on space-available care for retirees 65 and over in 1996—the most recent year for which complete data were available. To receive Medicare payments, DOD must exceed the 1996 LOE, which was approximately $172 million for all the demonstration sites combined. The LOE threshold remained constant throughout the demonstration with no adjustment for inflation. In measuring DOD’s spending for the LOE test, care provided to Senior Prime enrollees and to nonenrolled retirees are valued differently. According to rules that DOD and HCFA agreed to, for each month a retiree is enrolled, DOD is credited with the Senior Prime capitation rate regardless of the services the retiree received. In 1999 this rule magnified the effect of the LOE requirement because the Senior Prime rate was much less than what enrollees’ care cost DOD. The capitation rates are adjusted if there is “compelling” evidence that enrollees are healthier or sicker than their fee-for-service Medicare counterparts. Nonenrollees’ care is credited at DOD’s estimated cost of the actual Medicare-covered services they receive. In each year Senior Prime enrollees’ care must account for a minimum percentage of LOE—30 percent in 1998, 35 percent in 1999, and 47.5 percent in 2000. In principle, the entire LOE could be met by care provided to enrollees; there is no required minimum amount for space- available care provided to nonenrollees. If DOD meets its LOE and enrolled care requirements it receives a Medicare payment equal to the difference between the amount credited for care provided to all older retirees and the LOE requirement. If this amount is less than the spending cap specified in the BBA—$60 million for 1999— then DOD gets the full amount; otherwise it gets the cap. The payment rules resulted in Medicare owing DOD nothing for care provided in 1999. Table 4 shows how this amount was calculated. DOD was credited $98 million for care provided to enrollees. This included an adjustment for the health status of enrollees, who were found to be significantly healthier than Medicare fee-for-service beneficiaries with the same demographic characteristics. DOD was also credited $72 million for care provided to nonenrollees, so the total credited amount of care provided to older retirees was $170 million. This amount was then compared to the LOE requirement of $172 million. Since DOD fell short of this target, the final payment from Medicare was zero. Contributors to this report were Eric Wedum, Martha Wood, Dae Park, Jessica Farb, Robert DeRoy, Wayne Turowski, and Judy Chesley. Medicare Subvention Demonstration: Greater Access Improved Enrollee Satisfaction but Raised DOD Costs (GAO-02-68, October 31, 2001). Medicare Subvention Demonstration: DOD’s Pilot Appealed to Seniors, Underscored Management Complexities (GAO-01-671, June 14, 2001). Medicare Subvention Demonstration: Enrollment in DOD Pilot Reflects Retiree Experiences and Local Markets (GAO/HEHS-00-35, Jan. 31, 2000). Medicare Subvention Demonstration: DOD Start-up Overcame Obstacles, Yields Lessons, and Raises Issues (GAO/GGD/HEHS-99-161, Sept. 28, 1999). Medicare Subvention Demonstration: DOD Data Limitations May Require Adjustments and Raise Broader Concerns (GAO/HEHS-99-39, May 28, 1999).

The Balanced Budget Act of 1997 authorized the Department of Defense (DOD) to conduct the Medicare subvention demonstration for a three-year period. Under this demonstration, DOD formed Medicare managed care organizations--collectively called TRICARE Senior Prime--at six sites that provided the full range of Medicare-covered services as well as additional DOD-covered services, notably prescription drugs. The Medicare program was to pay DOD for Medicare-covered care of the enrolled military retirees if DOD continued to spend on all aged military retirees at least as much as it had historically. Under the subvention demonstration, Senior Prime enrollees' care in 1999 cost DOD far more than the Medicare capitation rate that was established for the demonstration. This mainly resulted from enrollees' heavy use of medical services, but DOD coverage of prescription drugs--not included in the Medicare benefit package--also contributed to its high costs. Without the demonstration, Medicare spending in 1999 for retirees who enrolled in Senior Prime would have been, on average, about 55 percent of the Senior capitation rate. The Balanced Budget Act's payment rules resulted in no Medicare payment to DOD in 1999. This was because they were designed to prevent the government from paying twice for the same care--once through DOD appropriations and again through Medicare. The rules also required that the payment be adjusted to account for Senior Prime enrollees' health status.

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Overall, NTSB has fully implemented or made significant progress in following leading management practices in all eight areas that our recommendations addressed in 2006 and 2008—communication, strategic planning, IT, knowledge management, organizational structure, human capital management, training, and financial management. We made 15 management recommendations in these areas based on leading agency management practices that we identified through our governmentwide work. Although NTSB is a relatively small agency, such practices remain relevant. Figure 1 summarizes NTSB’s progress in implementing our management recommendations. NTSB had fully implemented three of our management recommendations as of our report in April 2008—our recommendations to (1) facilitate communication from staff to management, (2) align organizational structure to implement a strategic plan, and (3) correct an Antideficiency Act violation related to purchasing accidental death and dismemberment insurance for employees on official travel. In addition, NTSB has made further progress on eight of our management recommendations since 2008. First, it fully implemented our recommendations on communication by reporting to Congress on the status of our recommendations by including the actions it has taken to address them in its Annual Report to Congress. In addition, it has fully implemented our recommendation on strategic planning by linking all five mission areas in its goals and objectives and seeking external stakeholder comments. NTSB has also taken steps to implement all three of our IT-related recommendations: NTSB has fully implemented an IT strategic plan that addresses our comments. Moreover, in compliance with the Federal Information Security Management Act of 2002 (FISMA), NTSB has undergone annual independent audits, hiring outside contractors to perform security testing and evaluation of its computer systems. We performed limited testing to verify that NTSB has implemented our recommendation to install encryption software. Agency officials confirmed, however, that while encryption software is operational on 410 of the agency’s approximately 420 laptop computers, the remaining laptops do not have encryption software installed because they do not include sensitive information and are not removed from the headquarters building. NTSB has made significant progress in limiting local administrator privileges while allowing for employees to add software and print from offsite locations as necessary. NTSB has also drafted a strategic training plan that, when finalized, would address GAO guidance on federal strategic training and development efforts and establish the core competencies needed for investigators and other staff. In addition, two modal offices have developed core curricula that relate specifically to their investigators. In addition, NTSB obligated $1.3 million in September 2009 to the National Business Center—an arm of the Department of the Interior that provides for-fee payroll services to federal agencies—to develop a full cost accounting system for NTSB based on a statement of work. NTSB officials said that the first phase of the cost accounting system will be implemented late in fiscal year 2010. When the system is completed to permit recording of the time and costs of investigations and other activities, including training, this action will fully implement our recommendation. The remaining four management recommendations have not yet been fully implemented. However, NTSB has initiated actions that could lead to their full implementation. For example, NTSB has continued to improve its knowledge management by developing a plan to capture, create, share, and revise knowledge, and the agency is deploying Microsoft SharePoint® to facilitate the sharing of useful information within NTSB. In April 2008, we reported that NTSB had made significant progress in implementing our human capital planning recommendation by issuing a human capital plan that incorporated several strategies on enhancing the recruitment process. However, we also said the plan was limited in some areas of diversity management. As we have previously reported, diversity management is a key aspect of strategic human capital management. Developing a workforce that includes and takes advantage of the nation’s diversity is a significant part of an agency’s transformation of its organization to meet the challenges of the 21st century. The most recent version of NTSB’s human capital plan establishes goals for recruiting, developing, and retaining a diverse workforce, and NTSB provided diversity training to 32 of its senior managers and office directors in May 2009. Table 1 compares the diversity of NTSB’s fiscal year 2008 workforce with that of the federal government and the civilian labor force. As the table shows, the percentages of NTSB’s fiscal year 2008 workforce that were women and minorities were lower than those of the federal government. Under the Office of Personnel Management’s regulations implementing the Federal Equal Opportunity Recruitment Program, agencies are required to determine where representation levels for covered groups are lower than for the civilian labor force and take steps to address those differences. Additionally, as of fiscal year 2008, 9 percent of NSTB’s managers and supervisors were minorities and 24 percent were women (see fig. 2). Furthermore, according to NTSB, none of its current 15-member career Senior Executive Service (SES) personnel were members of a minority group, and only 2 of them were women. As we have previously reported, diversity in the SES corps, which generally represents the most experienced segment of the federal workforce, can strengthen an organization by bringing a wider variety of perspectives and approaches to policy development and decision making. NTSB has undertaken several initiatives to create a stronger, more diverse pool of candidates for external positions. These initiatives include the establishment of a Management Candidate Program that has attracted a diverse pool of minority and female candidates at the GS 13/14 level. NTSB’s Executive Development Program focuses on identifying candidates for current and future SES positions at the agency. Despite these efforts, NTSB has not been able to appreciably change the diversity profile of its senior management. NTSB’s current workforce demographics may present the agency with an opportunity to increase the diversity of its workforce and management. According to NTSB, in 3 years, more than 50 percent of its current supervisors and managers will be eligible to retire, as will over 25 percent of its general workforce. Furthermore, 53 percent of its investigators and 71 percent of those filling critical leadership positions are at least 50 years old. Although actual retirement rates may be lower than retirement eligibility rates, especially in the present economic environment, consideration of retirement eligibility is important to workforce planning. We previously made four recommendations to NTSB to improve the efficiency of its activities related to investigating accidents, such as identifying criteria for selecting which accidents to investigate and tracking the status of its recommendations, and increasing its use of safety studies (see fig. 3). NTSB is required by statute to investigate all civil aviation accidents and selected accidents in other modes—highway, marine, railroad, pipeline, and hazardous materials. Since our April 2008 report, NTSB has fully implemented our recommendation to develop transparent policies containing risk-based criteria for selecting which accidents to investigate. The recently completed highway policy assigns priority to accidents based on the number of fatalities, whether the accident conditions are on NTSB’s “Watch List,” or whether the accidents might have significant safety issues, among other factors (see fig. 4). For marine accidents, NTSB has a memorandum of understanding (MOU) with the U.S. Coast Guard that includes criteria for selecting which accidents to investigate. In addition, NTSB has now developed an internal policy on selecting marine accidents for investigation. This policy enhances the MOU by providing criteria to assess whether to launch an investigation when the Coast Guard, not NTSB, would have the lead. In April 2008, we reported that NTSB had also developed a transparent, risk-based policy explaining which aviation, rail, pipeline, and hazardous materials accidents to investigate. The remaining three recommendations have not yet been fully implemented. However, NTSB has initiated actions that could lead to closure of two of the recommendations. NTSB’s deployment of an agencywide electronic information system based on Microsoft SharePoint will allow NTSB to streamline and increase its use of technology in closing out recommendations and in developing reports. When fully implemented, this system should serve to close these two recommendations. NTSB has also made significant progress in implementing our recommendation to increase its use of safety studies, which are multiyear efforts that result in recommendations. They are intended to improve transportation safety by effecting changes to policies, programs, and activities of agencies that regulate transportation safety. While we, the Department of Transportation, and nongovernmental groups, like universities, also conduct research designed to improve transportation safety, NTSB is mandated to carry out special studies and investigations about transportation safety, including studies about how to avoid personal injury. Although NTSB has not completed any safety studies since we made our recommendation in 2006, it has three studies in progress, one of which is in final draft, and it has established a goal of developing two safety study proposals and submitting them to its board for approval each year. NTSB officials told us that because the agency has a small number of staff, it has difficulty producing large studies in addition to processing many other reports and data inquiries. NTSB officials told us they would like to broaden the term “safety studies” to include not only the current studies of multiple accidents, but also the research done for the other, smaller safety-related reports and data inquiries. Such a term, they said, would better characterize the scope of their efforts to report safety information to the public. NTSB also developed new guidelines to address its completion of safety studies. We made two recommendations for NTSB to increase its own and other agencies’ use of the Training Center and to decrease the center’s overall operating deficit (see fig. 5). The agency increased use of the center’s classroom space from 10 percent in fiscal year 2006 to 80 percent in fiscal year 2009. According to NTSB, it has sublease agreements with agencies of the Department of Homeland Security (DHS) to rent approximately three- quarters of the classroom space located on the first and second floors. The warehouse portion of the Training Center houses reconstructed wreckage from TWA Flight 800, damaged aircraft, and other wreckage. The Training Center provides core training for NTSB investigators and trains others from the transportation community to improve their practice of accident investigation. Furthermore, NTSB has hired a Management Support Specialist whose job duties include maximizing the Training Center’s use and marketing its use to other agencies or organizations. The agency’s actions to increase the center’s use also helped increase Training Center revenues from about $635,000 in fiscal year 2005 to about $1,771,000 in fiscal year 2009. By reducing the center’s leasing expenses—for example, by subleasing classrooms and office space at the center to other agencies—NTSB reduced the Training Center’s annual deficit from about $3.9 million to about $1.9 million over the same time period. NTSB has made significant progress in achieving the intent of our recommendation to maximize the delivery of its core investigator curriculum at the Training Center by increasing the number of NTSB- related courses taught at the Training Center (fig. 6). For example in 2008, 49 of the 68 courses offered at the Training Center were solely for NTSB employees. NTSB has fully implemented our recommendation to increase use of the Training Center. NTSB subleased all available office space at its Training Center to the Federal Air Marshal Service (a DHS agency) at an annual fee of $479,000. NTSB also increased use of the Training Center’s classroom space and thereby increased the revenues it receives from course fees and rents for classroom and conference space. From fiscal year 2006 through fiscal year 2009, NTSB increased other agencies’ and its own use of classroom space from 10 to 80 percent, and increased revenues by over $1.1 million. For example, according to NTSB, it has a sublease agreement with DHS to rent approximately one-third of the classroom space. NTSB considered moving certain staff from headquarters to the Training Center, but halted these considerations after subleasing all of the Training Center’s available office space. NTSB decreased personnel expenses related to the Training Center from about $980,000 in fiscal year 2005 to $507,000 in fiscal year 2009 by reducing the center’s full-time-equivalent positions from 8.5 to 3.0 over the same period. As a result of these efforts, from fiscal year 2005 through fiscal year 2009, Training Center revenues increased by 179 percent while the center’s overall deficit decreased by 51 percent. (Table 2 shows direct expenses and revenues for the Training Center in fiscal years 2004 through 2009.) However, the salaries and other personnel-related expenses associated with NTSB investigators and managers teaching at the Training Center, which would be appropriate to include in the Training Center’s costs, are not included. NTSB officials told us that they believe the investigators and managers teaching at the Training Center would be teaching at another location even if the Training Center did not exist. Once NTSB has fully implemented its cost accounting system, it should be able to track and report these expenses. As part of the reauthorization process, NTSB has proposed both substantive and technical changes to its existing authorizing legislation. Among the substantive changes sought by NTSB are the statutory authority to investigate incidents in addition to its current authority to investigate accidents in all transportation modes and to reduce its current requirements for investigating rail and maritime accidents. Figure 7 illustrates the five transportation modes for which NTSB has investigative authority. The proposed technical changes would serve various purposes, including clarifying particular provisions contained in NTSB’s current authorizing legislation. The proposed substantive change that would allow NTSB to investigate incidents would affect all modes by providing explicit authority to investigate not only accidents, as currently prescribed, but also “incidents not involving destruction or damage, but affecting transportation safety, as the Board may prescribe or Congress may direct.” This addition does not set forth specific criteria for selecting incidents to investigate, thereby increasing the agency’s discretion. According to NTSB, this change would codify the agency’s current practice in all modes. For example, NTSB investigated and reported the facts of the Northwest Airlines overflight of Minneapolis, Minnesota, on October 21, 2009, even though it did not meet the statutory definition of an accident. Other proposed substantive changes would reduce NTSB’s current requirements for investigating maritime and rail accidents. Specifically, one change would eliminate the current requirement for NTSB or the Coast Guard to investigate all accidents involving public vessels or any other vessel and would provide discretion to determine whether and which of these accidents to investigate. Similarly, another proposed change would limit NTSB’s responsibility for investigating rail accidents by establishing more stringent criteria for triggering the requirement to investigate. However, the proposed criteria do not include definitions of certain terminology and would thus effectively give NTSB the discretion to decide which rail accidents to investigate. Giving NTSB expanded investigatory discretion with the explicit authority to investigate incidents without specific criteria, while simultaneously limiting requirements for rail and maritime investigations, would allow the agency to use its professional judgment to determine which investigations would have the greatest potential to improve safety and make the most effective use of its resources. At the same time, however, it is important that NTSB be transparent in providing information about investigation criteria in order to assure Congress and the public that the agency’s resources are being used to address priorities in accordance with its mission. Striking the right balance between discretionary and criteria based investigations will be important to ensure that NTSB’s resources can be used for the work with the greatest potential to enhance transportation safety. Other proposed substantive changes are intended to more clearly define NTSB’s and the U.S. Coast Guard’s respective roles and responsibilities for maritime accident investigations, which are currently governed by a December 2008 MOU with the Coast Guard and jointly issued regulations. These changes could affect a number of existing agreements and the current governing framework, as well as the agencies involved. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D. at (202) 512-2834 or by e-mail at [email protected] or Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Individuals making key contributions to this testimony include Keith Cunningham, Assistant Director; Lauren Calhoun; Peter Del Toro; George Depaoli; Elizabeth Eisenstadt; Fred Evans; Steven Lozano; Mary Marshall; Charles Vrable; Jack Warner; and Sarah Wood. National Transportation Safety Board: Reauthorization Provides an Opportunity to Focus on Implementing Leading Management Practices and Addressing Human Capital and Training Center Issues. GAO-10-183T. Washington, D.C.: October 29, 2009. National Transportation Safety Board—Application of Section 1072 of the Federal Acquisition Streamlining Act (41 U.S.C. 254) to Real Property Leases. B-316860. Washington, D.C.: April 29, 2009. National Transportation Safety Board: Progress Made in Management Practices, Investigation Priorities, Training Center Use, and Information Security, but These Areas Continue to Need Improvement. GAO-08-652T. Washington, D.C.: April 23, 2008. National Transportation Safety Board—Insurance for Employees Traveling on Official Business. B-309715. Washington, D.C.: September 25, 2007. National Transportation Safety Board: Observations on the Draft Business Plan for NTSB’s Training Center. GAO-07-866R. Washington, D.C.: June 14, 2007. National Transportation Safety Board: Progress Made, Yet Management Practices, Investigation Priorities, and Training Center Use Should Be Improved. GAO-07-118. Washington, D.C.: November 22, 2006. National Transportation Safety Board: Preliminary Observations on the Value of Comprehensive Planning, and Greater Use of Leading Practices and the Training Academy. GAO-06-801T. Washington, D.C.: May 24, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The National Transportation Safety Board (NTSB), whose reauthorization is the subject of today's hearing, plays a vital role in advancing transportation safety by investigating accidents, determining their causes, issuing safety recommendations, and conducting safety studies. To support the agency's mission, NTSB's Training Center provides training to NTSB investigators and others. NTSB's 2006 reauthorization legislation mandates an annual review by GAO, and from 2006 through 2008, GAO made 21 recommendations to NTSB that address its management, information technology (IT), accident investigation criteria, safety studies, and Training Center use. This testimony addresses NTSB's progress in implementing GAO's recommendations that it (1) follow leading management practices, (2) conduct aspects of its accident investigations and safety studies more efficiently, and (3) increase the use of its Training Center. The testimony also discusses (4) changes NTSB seeks in its 2010 reauthorization proposal. This testimony is based on GAO's assessment from July 2009 to January 2010 of plans and procedures NTSB developed to address these recommendations. NTSB provided technical comments that GAO incorporated as appropriate. NTSB has fully implemented or made significant progress in adopting leading management practices in all areas where GAO made prior recommendations. Since 2008, NTSB has revised several of its planning documents, including its agencywide strategic plan; improved information security; and obligated money to implement a full cost accounting system. NTSB has also taken steps to improve the diversity of its workforce and management. However, women and minorities were less well represented in NTSB's fiscal year 2008 workforce than in the federal government, and no minorities are among NTSB's 15 senior executives. A lack of diversity among top managers can limit the variety of perspectives and approaches to policy development and decision making at an agency. With the adoption of criteria for selecting highway and marine accidents to investigate, NTSB has established criteria for all transportation modes. NTSB is also streamlining and increasing its use of technology in closing out recommendations. NTSB has three safety studies in progress and would like to broaden the term "safety studies" to include not only its current studies of multiple accidents, but also the research it does for other, smaller safety-related reports and data inquiries. NTSB has continued to increase the use of its Training Center--from 10 percent in fiscal year 2006 to 80 percent in fiscal year 2009. As a result, revenues have increased and the center's overall deficit has declined from about $3.9 million in fiscal year 2005 to about $1.9 million in fiscal year 2009. In its 2010 reauthorization proposal, NTSB seeks substantive changes to its existing authorizing legislation, including explicit statutory authority to investigate incidents in all modes and reduced statutory requirements for investigating rail and maritime accidents. Both changes would increase NTSB's investigatory discretion. Such discretion would allow NTSB to select incidents with the greatest potential to improve safety, yet decisions based on discretion may be less transparent than those based on criteria. Striking the right balance between discretionary and criteria-based investigations will be important to ensure that NTSB's resources can be used for the work with the greatest potential to enhance transportation safety.

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GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the president’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance, and reduce costs in the future. With over 18,000 employees and an annual budget of approximately $7 billion, EPA funds diverse regulatory, research, enforcement, and technical assistance programs and activities that are directed toward controlling pollution of the air, land, and water. The nation’s annual costs to comply with environmental regulations are substantial and have been growing, and costs were estimated at about $148 billion in 2000. A key aspect of EPA’s performance management involves working cooperatively with its state partners in managing environmental programs. As authorized by environmental statutes, the agency has delegated to the states the responsibility for day-to-day implementation of most federal environmental programs; thus, EPA’s working relationships with the states can directly affect the achievement of many of the agency’s strategic goals. Over the past few years, we have identified weaknesses and made a number of recommendations designed to improve EPA’s working relationships with the states. This section discusses our analysis of the EPA’s performance in achieving its selected key outcomes and the strategies the agency has in place, particularly strategic human capital management and information technology, for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information that it is reporting is credible. EPA reported making progress toward achieving its long-term goal of safe and healthy air in communities. Specifically, the agency reported achieving its goals of improving air quality in areas that do not meet the National Ambient Air Quality Standards (NAAQS) established by EPA under the Clean Air Act. For example, the number of areas attaining air quality standards for carbon monoxide, sulfur dioxide, nitrogen dioxide, and lead pollutants increased from 46 to 56, affecting 27.7 to 31.1 million people, respectively. EPA reported progress in reducing airborne toxic emissions that pose serious adverse health effects, including cancer, and expected to exceed its goal for fiscal year 2000. The agency also reported that it was on schedule to reach its goals for reductions of sulfur dioxide and nitrogen oxide emissions from utility sources under the Acid Rain Program. The performance report acknowledges that there are some data limitations with the Aerometric Information Retrieval System for reporting NAAQS progress. For example, the report states that data demonstrating improvement in national ambient air quality standards may be limited by inaccuracies due to imprecise measurement and recording and inconsistent or nonstandard methods of data collection and processing. On the other hand, the report states that monitoring stations providing data must meet certain requirements for accurate data gathering and reporting, and reviews are conducted to ensure requirements are met. (In commenting on a draft of this report, an official of EPA’s Office of Air and Radiation stressed that the agency has quality assurance and control procedures so that legal determinations can be made about areas’ attainment status.) Further, EPA’s reported progress for its annual performance goal related to toxic air pollutant emissions relies on calculations and estimates. The performance report notes that the data to confirm reductions in toxic emissions will not be available until 2004 because of time lags associated with reporting and analysis. Similarly, for reductions in sulfur dioxide and nitrogen oxide from utility sources, the data to confirm the reported progress will not be available until the end of calendar year 2001. Speeding the collection and verification of emissions data would enhance the agency’s ability to report its actual performance and to support its claims of progress toward these goals by the required date for annual reports. However, according to EPA, the time taken to perform data quality assurance for both the toxic air pollutants and Acid Rain Program will result in continued data-reporting lags. EPA’s strategy for achieving its goal of improving air quality is to work with states, tribes, and local governments to achieve compliance with NAAQS for six principal pollutants—carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and sulfur dioxide. Specifically, EPA required selected states to develop implementation plans to reduce nitrogen oxide emissions and is working with states to collect information on particulate matter. For toxic air pollutants, EPA has developed a monitoring strategy with the assistance of states and local regulators and is beginning to implement this strategy. The agency is also conducting a national assessment focusing on 33 air toxics that present the greatest threat to human health in urban areas, and is planning to establish a monitoring network for toxic pollutants similar to the network for the NAAQS pollutants. EPA’s strategy for achieving its goal of improving air quality appears clear and reasonable. One of the agency’s strategies for clean air is the continued implementation of the Acid Rain Program, which is focused on reducing sulfur dioxide and nitrogen oxide emissions at the highest-emitting power plants in the nation. In a March 2000 report, we observed that trends in nitrate levels in lakes affected by acid rain highlighted the significance of nitrogen oxide emissions and that because the Acid Rain Program (as authorized by the Clean Air Act) requires relatively little reduction in nitrogen oxide emissions, the prospects are uncertain for the recovery of already acidified lakes and for preventing further acidification. As noted above, EPA has taken other action, outside of the Acid Rain Program, to reduce nitrogen oxide emissions. EPA reported that it is making strides in achieving its goal of safe and clean drinking water. The agency reported that it achieved its goal of having 91 percent of the population, served by community drinking water systems, receiving drinking water that meets all health-based standards that were in effect as of 1994. The agency further reported that it achieved its goal of reducing exposure to contaminated recreational waters by increasing information available to the public and decisionmakers. For example, the agency made electronic information available on the condition of 1,981 beaches, which enabled the public to locate beach closings and reduce its exposure to contaminated recreational waters. Concluding that both of these goals have been achieved, however, relies on information from sources with data limitations acknowledged by EPA. For example, the Safe Drinking Water Information System is the main data source for states’ implementation of and compliance with drinking water regulations. EPA notes that there are recurrent reports of discrepancies between national and state databases and misidentifications, resulting in EPA designating the system data as an agency weakness in 1999 under the Federal Managers’ Financial Integrity Act. To help correct these discrepancies, EPA developed and implemented state-specific training for data entry and developed transaction processing and tracking reports. Similarly, beach condition information is voluntarily reported into a database for public access. EPA notes that there are no rigorous quality checks on data quality and, because reporting is voluntary, data are incomplete. However, EPA officials stated that data are checked for completeness and questions about missing data are resolved with state or local officials. EPA’s strategy for ensuring that water is safe for drinking involves several approaches, and relies heavily on actions by the states. (Under the Safe Drinking Water Act Amendments of 1996, the states are responsible for implementing programs to help ensure that drinking water systems have the financial, technical, and managerial ability to comply with regulations and for overseeing water systems’ compliance with regulations on specific contaminants.) While these are reasonable strategies to accomplish EPA’s goals, we have identified opportunities for the agency to implement them more effectively. For example: First, the agency uses a regulatory approach by issuing standards that address acceptable levels of contaminants in drinking water. For example, within the past year the agency established a new standard for arsenic in drinking water. (The agency recently delayed the effective date of the arsenic standard until February 2002.) EPA conducts research to support these standards. We have recommended, and EPA subsequently concurred, that the agency improve its planning for this research to ensure that it will be adequately funded and research results will be available when needed. Second, the agency provides funding to states for drinking water revolving funds. While the state revolving funds are primarily directed at financing local infrastructure, the states, at their option, may reserve up to 31 percent of their annual allotments for related program activities, such as training water system operators. In an August 2000 report, we observed that, even with the funding available from EPA, state-level spending constraints could impair the states’ ability to meet future program requirements, and concluded that it will become imperative to address the factors that have thus far affected the states’ ability to implement their programs. Finally, the agency addresses state drinking water sources through the Source Water Assessment and Prevention Program. Under this program states conduct assessments of public water supplies in helping to determine the susceptibility of contamination. While we have not specifically evaluated the source water assessment program, we have identified difficulties EPA and the states have faced in assessing the quality of surface waters. EPA reported that it made progress in cleaning up hazardous waste sites and that most long-term commitments for the Superfund program were on track or ahead of schedule. The agency reported that it exceeded its fiscal year 2000 goal of completing construction cleanup at 85 Superfund sites by having 87 sites with construction cleanup complete, which the agency defines as the point at which a cleanup remedy is in place. While reaching this point may take many years, more time may be needed before all cleanup standards are achieved and some remaining long-term threats are addressed at the site. Therefore, we have reported that “construction complete” should not be construed as an indicator that all cleanup work is completed and the sites can be returned to economic use. Accordingly, while EPA attained its goal, this should not be construed that the sites are cleaned up and no further actions are necessary. The agency fell short of its annual performance goal for reaching interagency agreements with other federal agencies that are responsible for site contamination and clean up. Of the six agreements targeted for completion in fiscal year 2000, only two were completed but the agency reported that two more were completed since the beginning of fiscal year 2001. For nonfederal sites, the agency reported that it nearly attained its goal for securing cleanup commitments from responsible parties for 70 percent of the new construction starts and for recovering costs from responsible parties when EPA spends $200,000 or more for site cleanups. EPA works in partnership with state and tribal governments to clean up Superfund sites and ensure that parties responsible for the site contamination pay a fair share of the cleanup costs. EPA may compel parties responsible for the contamination to perform the cleanup, or it may pay for the cleanup and attempt to recover the costs. EPA may also enter into settlements with responsible parties to clean up sites or recover costs. The agency must initiate cost recovery actions within time periods specified in the statute of limitations, and EPA’s goal is to take action on all cases with cleanup costs of $200,000 or more within those timeframes. We previously found that EPA had excluded certain indirect cost items in recovering amounts from responsible parties; however, in October 2000, EPA adopted a new indirect cost rate that should increase recoveries and make more funds available for the program. EPA’s strategy for reaching interagency agreements for site cleanups with other federal agencies is less clear without more specific information in the performance report. The agency reported that it will continue to compel federal parties to complete the agreements but did not elaborate on a strategy for achieving this goal in the performance report. Without more specific information on interagency activities it is unclear how EPA will accomplish this performance goal. EPA reported making progress in ensuring that food is free from unsafe pesticide residues, especially where children are concerned. The agency continues to register new pesticides for use that pose lower risk to human health and the environment than some older pesticides. For example, the agency reported that it met its goal of approving 6 new chemicals that are safe for use in pesticides; exceeded its goal for reduced risk chemicals by approving 16; and approved 427 new uses in fiscal year 2000. EPA also reported on its efforts to reassess the safety of existing allowable pesticide residue levels (tolerances) to ensure that they are safe as required in the 1996 Food Quality Protection Act. EPA reassessed 121 tolerances, well short of its goal of 1,250 for fiscal year 2000. As of September 2000, the agency reported that it had completed reassessments for 3,551 tolerances and that it was on track to complete 6,415 tolerances by August 2002, and 9,721 by August 2006, as mandated by the act. As we noted in a September 2000 report, however, the only tolerances that EPA counted as “reassessed” for the high-risk organophosphate pesticides—which account for more than half of all food crop insecticides used in this country—were ones that were canceled voluntarily by the manufacturers, without the need for extensive EPA work. EPA’s reported strategies to accomplish the agency’s goal that food does not have unsafe pesticide residues appear clear and reasonable, and involve EPA evaluating test data on pesticide ingredients before it registers a product for sale and use. The test data include studies on the effects products will have on humans, animals, and plants. The agency is also developing and evaluating improved methods to estimate human exposure risk from pesticides. For example, the agency sought public comment on 14 guidelines or policy papers on evaluating pesticide topics and consulted with stakeholders through the Tolerance Reassessment Advisory Committee. To reassess tolerances as required under the Food Quality Protection Act, the agency has focused on tolerance assessments involving high-risk organophosphate pesticides. EPA views this activity as a major step in risk reduction and we believe this is a reasonable approach. Because this class of chemical has a common method of toxicity, EPA must also perform a cumulative risk assessment as required by the Food Quality and Protection Act. EPA reports that when a cumulative risk policy is issued by the end of fiscal year 2001, the number of completed reassessments will surge. The agency’s report mentions, but does not elaborate on, difficulties in developing a cumulative risk policy as planned and steps that are needed to attain completion of the policy by the end of fiscal year 2001. While the agency reports that it is making progress in attaining the future reassessment goals, the uncertainty surrounding the development of a cumulative risk policy raises questions as to whether the goals will be ultimately achieved. For the selected key outcomes, this section describes major improvements or remaining weaknesses in EPA’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report, and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan addresses concerns and recommendations by the Congress, GAO, the EPA’s OIG, and others. EPA has made several improvements to its fiscal year 2000 report from the prior year. Some of these changes are in direct response to concerns that we raised in our June 2000 report on EPA’s fiscal year 1999 performance report. These concerns included the need for the performance report to discuss the prior fiscal year’s performance, actions taken by other organizations to attain goals, and actions taken to validate data on performance. In its fiscal year 2000 report, EPA made the following improvements: Included relevant information on actual performance under the fiscal year 1999 plan, in addition to performance relative to the goals for fiscal year 2000. Identified actions by other federal, state, and local agencies that affect attainment of its goals, as well as the type of automated systems and databases that were used to capture information and measure performance towards meeting the stated goals. Identified actions taken to identify or validate the quality of data being provided by the agency along with data limitations, and audits or reviews of the data. Presented tables of results by individual strategic goal, rather than a consolidated table for all goals. The 2000 performance report could also be easily compared to the fiscal year 2002 performance plan because the report was organized by goal and objective. EPA’s performance report states that in setting future annual performance goals and targets, it will focus on developing outcome-based program goals where possible. The agency has heretofore relied more on output- oriented performance measures, rather than end outcome measures directly related to environmental conditions. In analyzing EPA’s performance plan for fiscal year 2000, for example, we found that 16 percent of the agency’s performance goals and measures focused on end- outcomes. EPA’s fiscal year 2002 performance plan reflects numerous changes to the performance goals and the related objectives from the 2001 performance plan. EPA notes in the fiscal year 2002 plan that strategic goals and objectives are based on the strategic plan as revised in fiscal year 2000 and may differ from those associated with the previous strategic plan. While the agency has maintained the titles of goals for the key outcomes we reviewed, the definition of the safe food goal was changed in the fiscal year 2002 plan by emphasizing all subpopulations that are particularly susceptible to pesticides (the fiscal year 2001 plan emphasized only children even though the program addressed the vulnerability of all susceptible subpopulations). “By 2005, EPA and its partners will reduce or control the risk to human health and the environment at over 375,000 contaminated Superfund, Resource Conservation and Recovery Act (RCRA), Underground Storage Tank (UST), and brownfield sites.” “By 2005, EPA and its federal, state, tribal, and local partners will reduce or control the risk to human health and the environment at more than 374,000 contaminated Superfund, RCRA, and UST and brownfields sites and have the planning and preparedness capabilities to respond successfully to all known emergencies to reduce the risk to human health and the environment.” EPA’s revised strategic plan does not indicate why changes were made to various goals and objectives. In our report on EPA’s fiscal year 2001 performance plan, we concluded that the plan fell short on providing specifics on crosscutting goals and measures. For example, we reported that EPA did not describe how other federal agencies’ goals complement or supplement EPA’s goals. The agency’s fiscal year 2002 performance plan also falls short in this regard. For example, the section of the plan describing coordination with other agencies on safe drinking water is virtually the same as in the prior year’s plan and does not discuss other federal agency goals that complement or supplement EPA’s goals. GAO has identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that the agency’s performance report did describe its progress in resolving human capital challenges and EPA’s performance plan did have a goal and measures related to human capital. For example, the report identifies human capital strategy implementation as a management challenge and states that it has a blueprint in place for initial and long-term steps needed to address the weakness. However, we found in a January 2001 report that the strategy did not contain information on specific steps to address human capital issues related to each of EPA’s 10 strategic goals. We also reported that while the agency has developed a strategy for assessing its human capital needs, it has not yet implemented the strategy. EPA’s performance plan sets forth human capital performance measures, but does not clearly convey the rationale for specific measures or relate them to program-related goals such as those for clean air or safe drinking water. For example, one performance measure is to have 40 participants in the SES Candidate Program, but it is unclear how this measure relates to the growing number of individuals eligible for retirement or to the needs of any particular program area. With respect to information security, we found that the agency’s performance report does describe its progress in resolving its information security challenges and EPA’s performance plan does have goals and measures related to information security. We have identified four major management challenges facing EPA. Two of these involved the governmentwide high-risk areas of human capital and information security. The third challenge involves EPA-state working relationships and the fourth challenge involves environmental and performance information management. EPA’s performance report discusses the agency’s progress in resolving all of these challenges. For example, the report discusses EPA’s working relationships with the states and the need to establish a central authority for its National Environmental Performance Partnership System. Of the four major management challenges that we identified, EPA’s performance plan has four goals and seven measures that are directly related to three of the challenges—human capital, information security, and environmental and performance information management. For example, in the area of information security, the agency has a goal for improving the quality of environmental information and under that goal is an objective to improve agency information infrastructure and security. The performance measure for this objective is directed at completion of risk assessments for information systems. There are no specific goals or measures related to the major management challenge of improving working relationships with the states. We provided copies of a draft of this report to EPA for its review and comment. The agency generally agreed with the findings in the report and suggested several technical clarifications, which we incorporated, as appropriate, into the report. These comments were provided by EPA officials from the Office of Air and Radiation, Office of Water, Office of Solid Waste and Emergency Response, Office of Pollution Prevention, Pesticides, and Toxic Substances, and Office of the Chief Financial Officer. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of EPA’s operations and programs, our identification of best practices concerning performance planning and reporting, and our observations on EPA’s other GPRA-related efforts. We also discussed our review with agency officials in various EPA headquarters offices. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Governmental Affairs Committee as important mission areas for the agency. The major management challenges confronting EPA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by GAO in our January 2001 performance and accountability series and high risk update, and were identified by EPA’s Office of Inspector General in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of EPA’s performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Administrator, Environmental Protection Agency, and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report were Willie Bailey, Bernice Dawson, Alice London, Ron Parker, Colleen Phillips, John Wanska, and Greg Wilshusen. The following table identifies the major management challenges confronting the Environmental Protection Agency (EPA), which includes the governmentwide high-risk areas of human capital and information security. The first column of the table lists the management challenges that we and/or EPA’s Office of Inspector General (OIG) have identified. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, EPA made in resolving its challenges. The third column discusses the extent to which EPA’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the EPA’s OIG identified. We found that EPA’s performance report discussed the agency’s progress in resolving its challenges. Of the agency’s nine major management challenges, its performance plan had (1) four that were directly related to goals and measures, (2) three that were indirectly applicable to goals and measures, and (3) two that had no related goals and measure but discussed strategies to address them.

This report reviews the Environmental Protection Agency's (EPA) fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 (GPRA) to assess the agency's progress in achieving selected key outcomes that are important to EPA's mission. EPA reported reasonable progress in achieving its key outcomes. Specifically, EPA reported (1) attaining air quality standards in more areas of the country and reducing emissions of toxic pollutants, (2) making strides in achieving its goal of safe and clean drinking water, (3) making progress in cleaning up hazardous waste sites, and (4) making progress in ensuring that food is free from unsafe pesticide residues. Although EPA made several improvements to its fiscal year 2000 performance report, it still falls short in providing information on crosscutting goals and measures. EPA's 2002 performance plan's goals and performance measures address some, but not all, major management challenges.

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The Department of Defense (DOD), faced with constraints on its budget, is seeking ways to improve operations and manage resources more efficiently. The Corporate Information Management (CIM) initiative is a major part of that effort. DOD launched CIM in 1989 as a way to improve business practices, make better use of information technology, and eliminate duplicative information systems across seven administrative areas, including civilian payroll, materiel management, and medical. Initial DOD efforts to implement CIM focused on eliminating separate service systems and providing integrated systems across DOD. Since that time, the CIM scope has broadened dramatically to include all DOD functional areas, including procurement, logistics, finance, and command and control. Today, its primary objective is to significantly improve business processes of all functional areas through such techniques as business process reengineering and continuous process improvements. Nevertheless, standardization and improvement of DOD’s supporting information systems remains a major CIM objective. CIM has its origins in the recommendations of the President’s Blue Ribbon Commission on Defense Management (the Packard Commission). The Commission’s overall objectives were to identify ways to streamline and restructure DOD business operations. In July 1989, the Secretary of Defense issued the Defense Management Report (DMR) to implement the Commission’s recommendations. DMR estimated that DOD could save about $70 billion by improving its management and organization. In October 1989, DOD initiated CIM as a management method for achieving DMR objectives. In November 1989, the Deputy Secretary of Defense issued the DMR Decision 925, which announced the initiative. He said, “Corporate Information Management (CIM) will enhance the availability and standardization of information in common areas and provide for the development of integrated management information systems.” He characterized CIM activities as a unique opportunity to capture savings while at the same time dramatically improving efficiency and effectiveness of operations. By eliminating separate service information systems and providing integrated systems across DOD, it expected to avoid the cost of developing and supporting redundant systems designed to perform the same basic functions. For example, each service had developed its own process and system for paying active military personnel. While there were procedural differences that had evolved among the services, there was no justification for the multiple systems that perform the same function. On February 26, 1990, the Deputy Secretary of Defense convened the Executive Level Group of high-level industry and DOD officials to evaluate DOD’s business practices and suggest an overall direction for the DOD. The group noted that government agencies had traditionally viewed information management as merely automating existing business methods in order to cut costs. Little effort was made to improve the methods, themselves. The group recommended that DOD adopt a management philosophy that emphasized continuous improvement of business methods before identifying specific computing and communication technologies. It stated, “Forward-looking organizations took a path which put primary emphasis on continuously improved business methods. Computing and communication technology played a subordinate role, and only now is being applied to the superior business methods that have evolved.” In January 1991, the Deputy Secretary of Defense endorsed a plan where DOD would “reengineer,” or thoroughly study and redesign, its business processes before it standardized its information systems. DOD believed this CIM implementation concept would emphasize the importance of improving the way it does business rather than merely standardizing old, inefficient business processes. DOD expected this new focus on business improvement to offer opportunities for substantial savings. In April 1992, DOD projected that these efficiency and productivity improvements would account for $36 billion of the more than $70 billion in anticipated DMR savings. A number of studies have since found that these DMR and CIM projections were overly optimistic. DOD now acknowledges that this $36 billion estimate is obsolete and no longer projects CIM savings. There is agreement, however, that CIM improvements can save DOD tens of billions of dollars over the next 10 years. In November 1992, DOD shifted CIM’s implementation emphasis back to information systems. Looking for ways to offset significant defense budget reductions, the DOD Comptroller recommended that CIM implementation efforts in the logistics functional area focus on selecting standard, or “migrating,” information systems that could be used departmentwide. Under this new implementation strategy, business process improvements would be done concurrently with the selection and implementation of the migration systems. DOD has since implemented this CIM migration strategy across all CIM efforts. The Assistant Secretary of Defense for Command, Control, Communication, and Intelligence (C3I) is responsible for providing overall technical direction for the CIM effort. Principal Staff Assistants (PSA) are responsible for providing guidance and oversight for implementing the initiative within their assigned functional areas. PSAs are to develop a “corporate” view of their areas and identify major changes to improve business processes. DOD believes that this top-down review offers the best opportunity for innovative improvements that have the greatest potential for significant cost savings. Meanwhile, under the DOD enterprise model, service and Defense Logistics Agency (DLA) managers are taking a bottom-up look at their organizations to identify and implement business process improvements that have service or agencywide application. While such improvements have smaller cost savings potential, they usually can be achieved sooner. They also help achieve acceptance of CIM changes by actively involving more managers and staff in the change process. In November 1991, the PSA for logistics established the Joint Logistics System Center (JLSC) to achieve CIM goals for the materiel management and depot maintenance business areas. Simply stated, JLSC’s charter is to work with the services and DLA to identify business process improvements and the appropriate application of information systems. Under this concept, JLSC serves primarily as a facilitator; the services and DLA design, develop, integrate, and implement the new corporate logistics systems. Recognizing the importance of active participation by the services and DLA in the CIM process, the PSA staffed JLSC with about 250 personnel from all four military services and DLA. In addition, the services and DLA provide experts to ensure JLSC fully addresses mission requirements. JLSC expects that improvements to DOD’s logistics functions will provide most of the CIM-related cost savings. Logistics is the acquisition, management, movement, and maintenance of the material in the DOD inventory. This report focuses on two logistics functions: materiel management and depot maintenance. Materiel management includes deciding what supply items to stock, determining how many of each are needed, purchasing needed items from private vendors or manufacturing agencies within DOD, storing the items, and tracking them from the time they are ordered until they are used. Depot maintenance includes manufacturing, overhauling, and repairing parts, assemblies, subassemblies, and end items such as aircraft, ships, and tanks. The Chairman of the Senate Committee on Governmental Affairs asked us to review DOD’s implementation of the CIM initiative. In response to his request, we focused our review on the logistics functions of materiel management and depot maintenance because the Committee had expressed particular interest in materiel management and because one organization, JLSC, had been established to oversee the implementation of CIM in these two areas. Our specific objectives were to identify (1) CIM improvements made to business processes and supporting information systems and (2) impediments, if any, to achieving expected CIM results. To identify CIM improvements in materiel management and depot maintenance, we analyzed implementation plans, project information maintained by JLSC managers, and progress briefings given to senior DOD officials. Further, we interviewed DOD officials who are implementing CIM across DOD, officials who are managing CIM efforts in the logistics areas, and project managers responsible for specific efforts under the initiative. We also examined analyses that JLSC used to establish cost and benefit projections, budget documents, and updates of cost and benefit estimates. We did not independently validate JLSC’s savings estimates for its initiatives. To identify major impediments to achieving expected CIM results, we reviewed guidance provided by the Deputy Under Secretary of Defense (Logistics), including DOD’s logistics objectives, strategic business plans, the Logistics CIM Migration Master Plan, and DOD memorandums establishing and implementing the initiative. Also, we interviewed JLSC officials responsible for the overall progress of the implementation and reviewed correspondence and briefings concerning delays. We also reviewed independent studies and prior audits and held discussions with DOD officials responsible for overall CIM implementation, as well as those responsible for logistics processes. We performed our work at the Office of the Assistant Secretary of Defense for C3I, Washington, D.C.; the Office of the Assistant Secretary of Defense for Production and Logistics, Alexandria, Virginia; and the Joint Logistics Systems Center, Wright-Patterson Air Force Base, Ohio. We conducted our work between October 1992 and July 1994 in accordance with generally accepted government auditing standards. When activated, JLSC took actions to achieve quick, identifiable cost savings through CIM, primarily by facilitating the deployment of business processes and supporting information systems from one of the services or DLA—where they had been successfully implemented—to the others. JLSC identified 20 of these near-term projects during late 1992 and early 1993 and had begun implementing 7 of them before it was directed by DOD to refocus its efforts. As directed by DOD, JLSC focused its CIM implementation efforts on selecting and testing migration information systems for materiel management and depot maintenance. This strategy runs counter to expert advice received by DOD concerning how to best improve its business practices. DOD believes the selection and implementation of migration systems is necessary to achieve quick cost savings and critical to forming a foundation upon which major business process improvements can be made. While we have no basis to question the need for migration systems, we are concerned that the implementation strategy may delay significant improvement of the logistics processes, result in the deployment of information systems that do not meet services’ and DLA’s operational requirements, and divert funds from ongoing improvement projects. In March 1992, JLSC identified 20 improvement projects—15 in materiel management and 5 in depot maintenance—that it termed near-term initiatives. JLSC selected these projects because they could make current business processes more efficient and effective and because they were doable; that is, they could be quickly implemented at a few service and DLA sites to achieve quick cost savings. According to JLSC, it was also important to have some early successes to get the services and DLA to accept the CIM concept. These projects primarily involved the expanded deployment of business processes and supporting information systems that were used successfully by one service or DLA. Overall, JLSC projected that implementation of the 20 projects would save the services more than $2 billion over time periods ranging from 5 to 20 years. As of October 1992, JLSC had begun implementing seven of the near-term initiatives (five materiel management and two depot maintenance). Before JLSC could implement the remaining 13 near-term initiatives, however, DOD officials questioned the viability of the near-term strategy and redirected JLSC’s implementation approach to CIM. According to JLSC, the initiatives had saved at least $7.7 million and located previously lost or unaccounted government assets worth about $12.7 million by October 1993. Although additional savings may have accrued, JLSC had not validated all cost and benefit projections. Following are two examples of the seven near-term initiatives that have been implemented. (App. I describes all seven initiatives.) This initiative is a materiel management productivity aid for DOD catalogers. When DOD introduces a new supply item into its inventory, the item is listed in a catalog provided to the services and DLA. Currently, catalogers use paper technical drawings, specifications, vendor catalogs, guidebooks, procedural manuals, and regulations to complete cataloging steps such as writing a brief description of the supply item, using drawings, and assigning it a stock number. Cataloging Tools On-Line, a DLA system, enables the cataloger to electronically access reference documents, simultaneously compare technical data with drafted descriptions, and automatically check for errors. Catalogers using this automated aid are expected to create catalog entries much faster and more accurately than is currently done. JLSC projects that the 10 new sites receiving the Cataloging Tools On-Line system will save about $71.7 million over the next 8 years through the elimination of manual processes, reduced rejection rates of transactions, and better availability of and access to cataloging information. This depot maintenance initiative is intended to reduce the amount of money maintenance depots spend for hazardous materials such as paint thinner, oils, and chlorine. Currently, the depots spend more than $300 million each year to buy hazardous materials used in the repair and maintenance of end items. Officials acknowledge that a significant portion of these materials is wasted. In 1992, the Air Force implemented the Depot Maintenance—Hazardous Material Management System at its Ogden Air Logistics Center to provide information about who received hazardous materials; which and how much they received; and when, where, and how the materials were used. With this information, Ogden managers identified wasteful practices, such as workers receiving more material than needed for the job. In addition, they found that workers were storing excess material in their lockers and that stored materials were being improperly sealed. Depot management subsequently changed the methods for handling hazardous materials. For example, materials are now issued only in the amount needed. As a result, Ogden reduced the amount of hazardous materials purchased in 1992 by nearly 39 percent, or a $7.7 million net cost savings. JLSC plans to install the Depot Maintenance—Hazardous Material Management System at 27 maintenance depots and projects that they will save between $83.3 million and $202.3 million over a 6-year period. As of September 1993, the system had been installed at seven sites. In October 1992, the Acting DOD Comptroller (responsible for reviewing the justification for any requests for capital budget funding) expressed concern that JLSC’s CIM approach would not produce the cost savings needed to help offset significant defense budget reductions. He favored an approach where JLSC would quickly select and implement standard information systems. By doing this, the Comptroller hoped that DOD could transition to a standard logistics system within a reasonable period of time at an affordable cost. The Comptroller recommended that JLSC immediately select a functionally and technically integrated information system from those being operated by one of the services and DLA for each of the materiel management and depot maintenance business areas. In November 1992, the PSA for logistics (at that time the Assistant Secretary of Defense for Production and Logistics) issued the Logistics CIM Migration Master Plan. This plan established the selection of migration systems as the CIM implementation strategy within the logistics area. As a result, JLSC shifted its focus from implementing the near-term initiatives to selecting migration systems for materiel management and depot maintenance. Although JLSC continued to implement the 7 near-term initiatives it had started, it incorporated the remaining 13 projects into the analysis used to select migration systems. JLSC also developed a three-step strategy designed to gradually evolve the services and DLA from their multiple and often redundant materiel management and depot maintenance business practices to a single, or corporate, DOD logistics process. As presented in its DOD Logistics CIM Migration Plan, the three steps of the migration strategy are as follows: Select and deploy migration systems—either single information systems or groups of information systems—in each functional area. The systems are to be linked together to satisfy users’ total requirements. Improve current business processes and add new functions to fill voids. Combine the improved and new business processes with the new information systems to form a corporate logistics process. Once the selected migration systems are deployed (step 1 of the strategy), JLSC plans to work with the services and DLA to add needed functions and make incremental improvements to logistics business processes (step 2). Developing a corporate logistics process (step 3) is where JLSC expects to use such tools as reengineering to identify and implement major and innovative changes in the logistics area. While the strategy appears to be sequential, JLSC is concurrently working on all three steps. Later in this report, we discuss JLSC’s work to identify how to improve current materiel management and depot maintenance business processes. In October 1993, the Deputy Secretary of Defense, noting the necessity to offset declining resources, reemphasized the priority given to information systems by directing that senior DOD managers accelerate the selection and deployment of migration systems. The Deputy Secretary stated, “We must accelerate the pace at which we define standard baseline process and data requirements, select and deploy migration systems, implement data standardization and conduct functional process improvements, reviews and assessments (business process re-engineering) within and across all functions of the Department.” Although he stated that the acceleration of all these actions was key to containing the functional costs of performing the DOD mission within constrained budgets, he established specific milestones only for the selection and implementation of migration systems and the completion of data standardization. The Secretary stated that “our near-term strategy requires: the selection of migration systems within six months, with follow-on DOD-wide transition to the selected systems over a period not to exceed three years.” He also stated that data standardization was to be accomplished within 3 years. The remaining activities such as functional process improvement were to continue on an expedited basis, but their completions were not to be “prerequisites” to implementation of the migration systems and data standardization acceleration strategy. Because JLSC’s migration strategy would take 7 to 8 years to complete, the Deputy Under Secretary of Defense (Logistics) in March 1994 proposed changing JLSC’s management structure and mission. He recommended the replacement of JLSC with a Logistics Standard Systems Joint Program Office. This new office would be staffed with personnel specializing in automated information systems to provide intensive focus on information systems improvement and deployment. At the end of our audit work in July 1994, the services and DLA were commenting on this proposal. Industry experts who have studied organizations that have successfully improved their business practices advised DOD to focus its efforts on reengineering its business processes before improving the automated information systems supporting these processes. Reengineering, these experts believe, offers DOD the best opportunity to move to a new plateau of performance As stated in chapter 1, this was articulated by the Executive Level Group in November 1989, when CIM was being initiated. The group recommended that DOD adopt a management philosophy that emphasized continuous improvement of business methods before identifying specific computing and communications technologies. This recommendation was endorsed by the Information Technology Association of America, in its July 1993 study on “enterprise integration” within DOD. According to the study, companies that had experience in enterprise integration took steps to ensure that their corporatewide focus was on process improvement first and on technology improvements last. They stated that “Reengineered business processes reflect how the corporation truly functions. Automation was applied only after processes were analyzed and cross-functional integration achieved.” In reviewing the CIM initiative, the association observed that DOD’s definition of enterprise integration did not differ from the industry’s. DOD’s view on implementation and objectives, however, is different. The association stated, “For instance, the Corporate Information Management initiative in DOD seems to be primarily driven by cost avoidance, rather than on BPR in order to meet mission requirements.” Noting DOD’s migration phase focused on near-term cost avoidance, the association recommended that DOD accelerate out of this migration phase as quickly as possible and move directly into their target objective phase. According to the association, the sooner DOD makes this move the more money it will save and the sooner war-fighting capability will be enhanced. We also reported on potential problems DOD faces if too much emphasis is placed on improving information systems, rather than business process reengineering. In our 1992 report, we concluded that business improvements needed to be made concurrent with technology selection. To select technology alone invited risk and created only an illusion of progress. We also concluded that by selecting information systems before improving business processes, DOD may be wasting money modifying and implementing systems to support old, inefficient ways of doing business. DOD, in its early estimates, acknowledged that business process improvements held the greatest potential for significant cost savings. In April 1992, DOD officials projected that CIM-related business process improvements would provide about $30 billion, or 83 percent, of cost savings expected, whereas better use of information technology would account for only $6 billion, or 17 percent, of these savings. Although DOD no longer projects CIM savings, it concluded in the January 1994 DOD enterprise model that information systems alone could not yield the dramatic business improvements necessary to achieve a new plateau of performance required to respond to major new challenges of the post-Cold War era. Yet, DOD continues to focus on information technology and migration systems. As described in the following section, DOD believes that selecting a common set of information systems is necessary to make functional integration and interoperability possible so that all DOD activities can work together more efficiently and effectively. In its Logistics CIM Migration Master Plan, DOD gives two reasons why the selection and implementation of migration systems are critical first steps toward business process improvement. First, they provide needed quick cost recoveries. Second, they establish a common business environment to reengineer business processes. According to JLSC, the CIM migration strategy resulted from a request from the service secretaries. The service secretaries, concerned about the slow progress of the CIM effort and the amount of funding stripped from their fiscal years 1993 through 1997 budgets as a result of multiple DMR savings targets, asked the DOD Comptroller to come up with a technique for getting more immediate cost savings. This request was the genesis for the CIM strategy of studying current information systems and selecting a few for use across DOD. DOD officials have stated that the vast number of different logistics processes and supporting information systems in DOD must be reduced before it can make significant improvements. For example, the Deputy Director for Materiel and Logistics Functional Information Management stated, “While it is the intent of the Corporate Information Management (CIM) program to determine the Business Process Improvements (BPI) prior to automation efforts, in the case of the Logistic systems, we must first ’standardize’ the existing process to be improved.” The Deputy Director cited the experience of General Telephone and Electronics Corporation as support for this position. He said that in moving toward an integrated system the company first selected a single migration system. JLSC supports the migration system concept as a necessary tool to eliminate multiple information systems supporting the same business functions. According to the migration plan, standard information systems will form the foundation upon which significant improvements to current logistics practices can be made. This foundation of migratory systems will eliminate the need to implement significant changes across the multitude of systems and processes that exist throughout the services and DLA. More importantly, the resulting standardization of the best of the existing logistics processes across DOD will, in itself, result in significant business process improvements. Although DOD and JLSC believe that selecting migration systems is a necessary first step in the reengineering process, we have several concerns about this strategy. First, people familiar with business process reengineering believe that the focus should be on process improvement first and on technology improvements last. We believe that by doing otherwise DOD increases the risk of locking itself into inefficient ways of doing business and not achieving the cost savings that it needs in the current environment of shrinking budgets. Second, DOD’s requirement to select and implement migrating systems within 3 years adds a new dimension of risk to the CIM process. Without some flexibility in this schedule, the services and DLA may have to implement migration systems that are not capable of meeting their needs. DLA officials told us, for example, that the migration system for materiel management—as currently configured—does not meet its operational requirements. Unless additional capabilities are added to this system to handle DLA’s requirements, these officials predicted that it will be a major failure. Nevertheless, JLSC believes that the accelerated migration system schedule is what the CIM initiative needed. The JLSC Commander stated that the accelerated schedule forced JLSC and others to stop their analysis and actually begin to implement change. He conceded that the first versions of the migration systems will not likely include all the capabilities the services and DLA need or desire. His goal, however, is to make the systems functional for all users before they are deployed in 3 years. Under CIM’s continuous improvement concept, additional capabilities can be incorporated in later versions of the systems. As discussed previously, DOD has proposed a major reorganization of JLSC to meet its accelerated CIM schedule. Under this proposal, the number of personnel assigned to the new joint program office would be reduced from about 250 (JLSC staffing) to 120. It is unclear how this new smaller office will be able to deploy materiel management and depot maintenance migration systems in half the time planned by JLSC. Third, some DLA managers also believe that CIM in general, and JLSC’s focus on selecting and implementing migration systems in particular, is affecting their ability to implement business process improvements. DLA, for example, is attempting some innovative pilot projects to find better, more efficient ways of doing business. Encouraged by a series of reports we issued over the past 3 years, which compared DLA practices to the best in the private sector, DLA is looking at concepts such as direct vendor delivery and supplier parks. If these concepts prove successful, DLA could significantly reduce its inventories, storage space requirements, and the number of supply depots. Eventually, DLA may be able to eliminate supply depots altogether—at least as DOD knows them today. To effectively carry out the pilot projects, however, DLA officials said they will need funds to develop supporting information systems or help from JLSC to ensure the selected migration systems satisfy their new process requirements. At the time we met with DLA officials, however, they said that JLSC had not provided assistance. They were concerned that the pilot projects might have to be stopped or significantly curtailed. Subsequent to our meeting with DLA officials, JLSC officials told us they had met with DLA officials and were taking steps to arrive at a mutual solution to the problem. As directed by DOD, JLSC selected migration systems for materiel management and depot maintenance functions. JLSC also began documenting current logistics processes to identify opportunities for improvements, although it has not yet made major changes to current processes. Finally, in accordance with its mandate, JLSC eliminated service and DLA funding requests ($22.7 million in 1993 and $320.6 million in 1994) for information system projects that it deemed redundant. By June 1994, JLSC—in cooperation with teams of service and DLA experts—had selected 32 migration systems from among the more than 200 information systems currently being used to support major materiel management and depot maintenance business processes. Before the systems were selected, JLSC gave each service and DLA the opportunity to identify the system (or combination of systems) that it used to support its logistics business area. Service and DLA experts for materiel management and depot maintenance presented their candidate systems in an open forum for consideration. These presentations included detailed information on their systems’ capabilities, interfaces with other logistics systems, and other information, such as cost, benefit, and technical data. On the basis of this information, service, DLA, and JLSC representatives reached consensus on 32 candidate systems—24 for materiel management and 8 for depot maintenance. The selections of these systems was later approved by Deputy Under Secretary of Defense for Logistics. (App. II describes each of the 32 selected systems.) The 24 migration systems for materiel management support the four major materiel management business processes: asset management, supply and technical data, and requirements determination. Together, they form what JLSC calls the Materiel Management Standard System. JLSC planned to deploy the first version—functional release 1—of this combined system at one site—the Marine Corps Logistics Base, Albany, Georgia—beginning in July 1994. Upon successful deployment of this first version, JLSC will assist the services and DLA in implementing the new DOD standard system at additional sites. As of September 1993, on the basis of a preliminary functional economic analysis, JLSC projected that improved business processes and reductions in the number of systems would help the services and DLA recover as much as $12 billion over a 10-year period ending in fiscal year 2005. While we did not review the support behind this estimate, JLSC cautioned that it is their first look at potential savings. JLSC must do much additional data collection and analysis before cost recoveries can be predicted with any certainty. However, it believes that the standard system will eventually result in numerous improvements to materiel management business processes, primarily because it incorporates general business improvements from DOD initiatives such as DMR, prior CIM efforts, and a compilation of best practices identified in numerous DOD, service, and DLA initiatives. The eight migration systems selected for depot maintenance support the three major depot maintenance business processes of project management (planning and allocating labor, material, and capital resources for repairing major end items, such as airplanes, ships, and tanks), reparables management (activities for making labor and equipment more productive on the shop floor), and specialized support (various individual functions such as tracking hazardous materials, tools and test samples). These eight migration systems, along with a system yet to be selected, form the Depot Maintenance Standard System. JLSC plans to test this combined system at the Warner-Robbins Air Logistics Center beginning in January 1995. Upon successful completion of the test, JLSC will assist the services’ and DLA’s implementation of the new system at additional sites. On the basis of a preliminary functional economic analysis completed in January 1994, JLSC expected that improvements to depot maintenance processes and reductions in the number of systems would help the services and DLA recover as much as $4 billion over the period ending in fiscal year 2003. This estimate, however, assumed a 7-year implementation period, not the 3-year period later mandated by DOD. While it facilitated the selection of migration systems under the first step of its CIM implementation strategy, JLSC also took preliminary steps to identify how it could improve current materiel management and depot maintenance business processes—the second step of its CIM implementation strategy. As of September 1993, JLSC, in conjunction with service and DLA representatives, had developed models documenting 484 logistics practices used by the services and DLA to accomplish materiel management and depot maintenance activities. Service and DLA officials are now analyzing these JLSC models to further define their current business environment, establish business requirements, and identify the best business practices. When complete, these models are to serve two purposes. In the near term, they form a basis for understanding and discussing logistics processes, evaluating their effectiveness, and identifying opportunities for improvement. In the longer term, JLSC plans to use the models to help reengineer business processes, control this evolution, integrate new technologies, and communicate new functions of reengineered business processes. As part of the CIM strategy, the Assistant Secretary of Defense for Production and Logistics gave JLSC review authority over the services’ and DLA’s budget requests for development of new materiel management and depot maintenance information systems. Under this authority, JLSC is to identify funding that could be eliminated from a budget request for any information system development project that duplicates a project or operational system of another service. JLSC reviewed the services’ and DLA’s requests and justifications for fiscal year 1993 project funds and compared the proposed new information systems to those (1) already existing or being developed by other services and (2) selected by JLSC as near-term initiatives. As shown in table 3.1, JLSC reduced the requests by $22.7 million, or about 36 percent. In 1993, JLSC performed the same type of analysis on fiscal year 1994 budget requests from the services and DLA. The only difference was that JLSC analyzed these requests to determine if any systems overlapped with the systems selected as the migration systems for materiel management and depot maintenance. As shown in table 2.2, JLSC reduced the budget requests by $320.6 million, or about 96 percent. According to JLSC officials, the reduction of these requests may not directly equate to cost savings of the same amount because (1) the requests could have been overstated (which sometimes happens early in a budget request cycle), (2) the requested funds may not have been approved by DOD under the traditional budget process, and (3) the services or DLA may have received funding for their projects through other budget submissions. JLSC, however, believes this type of drastic reduction in budget requests can be sustained only for a short period of time—2 or 3 years. According to the JLSC commander, the downsizing of DOD has resulted in the services and DLA having fewer people to run their current business processes. Over the short term, he believes that the services and DLA can manage the situation. It cannot, however, be sustained over the longer term. For this reason, the commander said that JLSC must provide more efficient materiel management and depot maintenance information systems to the services and DLA or, once again, allow them some amount of funding to improve or replace their existing systems. Three critical impediments are jeopardizing JLSC’s ability to successfully implement its strategy for improving business practices. First, some DOD functional and technical managers have not fully accepted CIM. Second, DOD has not integrated its various CIM efforts, including those of JLSC. Third, program management authority is unclear because of confusing DOD guidance. These impediments are not confined to materiel management and depot maintenance but cut cross DOD’s overall management of the CIM initiative. To help resolve these impediments, DOD has taken several actions, including issuance of a strategic plan to demonstrate top-level support for the initiative and guide its implementation and creation of a board chaired by the Deputy Secretary of Defense to exchange views about cross-functional issues. These actions are good “first steps,” but more must be done. Private companies that have successfully reengineered their business operations generally agree that changing their organizational cultures to support new ways of doing business was critical to their success. While DOD recognizes that it needs to change its organizational culture to overcome CIM’s impediments, it has been slow to make these changes. Independent studies have shown that for major improvement initiatives such as CIM to succeed, employees from all levels in an organization must accept and actively participate in the changes. For example, the Information Technology Association of America, in its July 1993 report, said that DOD must ensure that all parties buy into the enterprise integration effort and are willing to work wholeheartily to form and implement the enterprise integration plan. Similarly, the Policy Analysis Center of the Institute of Public Policy, in its November 1993 report, Functional Process Improvement Implementation: Public Sector Reengineering, stated that even the best constructed improvement plans are likely to fail unless employees are involved at all stages of the reengineering effort. Recognizing that “buy in” was a critical success factor, JLSC took actions to involve the services and DLA in implementing CIM. For instance, more than 250 logistics personnel from the services and DLA were brought together to work at JLSC. Also, JLSC has tried to maintain a continual dialogue with the Office of the Secretary of Defense, service, and DLA managers responsible for DOD logistics. Nevertheless, JLSC officials said they have still encountered a strong institutional bias against the changes posed by CIM, primarily because managers view these changes as a threat to their authority over logistics business decisions. This lack of acceptance, according to JLSC officials, has slowed implementation of CIM. For example, during the evaluation of the Air Force’s Combat Ammunition System as a proposed migration system, JLSC representatives visited the Air Force program office developing the system to obtain needed cost and requirements data. However, program management officials were unwilling to provide the data because, according to the JLSC Deputy Commander, Air Force officials would have to relinquish some of their authority and control over the system’s development. Air Force officials eventually provided the data but only after the JLSC Commander notified them that due to the lack of cooperation JLSC intended to select a competing Army system. JLSC officials did not estimate the length of delay caused by this lack of cooperation. “Based on our interviews with both functional and technical areas managers, we found there is no clear and consistent definition or understanding of the CIM initiative and its respective elements . . . While they accept the broad precepts of the CIM Initiative, they are reluctant to give full support until they see and fully understand the complete CIM plan. That reluctance manifested itself in two broad areas—support for organizational realignments and for selection of technical solutions.” Because this impediment appeared to affect more than JLSC’s efforts within materiel management and depot maintenance, we discussed it with DOD officials responsible for implementing CIM across logistics areas, as well as those responsible for all CIM efforts. These officials confirmed that service and DLA managers agree with the intent of CIM, which is to improve business operations, but not with the manner in which it was being implemented. DOD officials in C3I agree that for CIM to succeed, employees should understand the nature of the changes that must be made. They did not agree, however, that the lack of consensus and support for the overall CIM initiative by DOD managers was hampering its implementation. They said that executive level commitment, involvement, and authority were sufficient for CIM to succeed and that the Secretary of Defense, the Deputy Secretary of Defense, their Principal Staff Assistants, and the military departments strongly supported the initiative. On October 13, 1993, for example, the Deputy Secretary of Defense issued a memorandum that reemphasized top-level support for CIM and required senior managers to take specific actions within established milestones to help implement the initiative. DOD officials also noted that clear, top-level support and guidance for the initiative were given in the CIM Strategic Plan issued on June 13, 1994. While DOD may have top-level management support and commitment for CIM, which are critical prerequisites for a major reengineering effort, we do not believe that is enough to overcome the type of cultural barriers impeding the initiative. If CIM is to succeed, we believe that DOD needs to change its management strategy to get service and DLA managers, particularly the service Chiefs of Staff and DLA Director, more actively involved in managing CIM and leading the reengineering efforts. This action is particularly important for DOD to undertake because service secretaries and other top-level managers in the Office of the Secretary of Defense, who are currently leading the CIM initiative, typically change on a regular basis. Because CIM is a long-term effort that will likely transcend many management reorganizations, it is important to have support of CIM principles and ideals throughout all levels of the organization, particularly in the military services and DLA. In February 1992, for example, we reported that private companies that had undergone massive changes (such as DOD is proposing in its CIM initiative) had to overcome cultural barriers. Those companies that succeeded in changing their cultures not only had top-management support and commitment but also created specific management styles and organizational structures that were compatible with and reinforced their desired visions and goals. They also trained their employees to instill in them the organizations’ new missions, values, and guiding principles. Our studies of organizational change also support more active participation by functional managers in major reengineering efforts. In our April 1994 report on the CIM initiative, for example, we stated that “unless Defense’s executive-level leadership and mid-level managers take a more active and visible role, broad acceptance and understanding of CIM will not occur and cultural opposition to change will continue.” The importance of functional managers to the overall success of major reengineering efforts was again highlighted in a recent executive guide we prepared on using information technology to improve mission performance. We observed that in every successful organization studied, senior executives realized that getting managers to work differently meant putting them in charge of the change process. The Information Technology Association of America in its study on enterprise integration in DOD also noted that in the view of functional managers, CIM efforts are being directed by DOD’s information technology offices. In private industry, information technology is used as a tool to facilitate enterprise integration, not as an end in itself. Functional managers must lead the effort with the information technology community in support. DOD, in its June 13, 1994, strategic plan and elsewhere, has recognized the need to change its culture and management strategy to build consensus throughout the Department, but implementation (and actual change) has been slow. For example, today the Assistant Secretary of Defense for C3I is responsible for implementing CIM—overseeing and integrating business process innovation within and across all DOD functional areas. The Assistant Secretary, however, is also the Senior Information Management Official for DOD. We believe that this has contributed to functional managers’ misunderstanding of the CIM initiative and has reenforced their view that CIM is primarily an information technology initiative. In addition to changing the CIM management strategy and providing training to all employees, DOD may need to rename the initiative. Contrary to what its name implies to many DOD managers, CIM is much more than an information technology initiative. As designed, CIM is supposed to be a major effort to reengineer business processes, with information technology being a necessary support function. As discussed previously, however, many defense managers view it as either a budget-cutting or information technology initiative and have not given it their full support and cooperation. While top-level support, strategic planning, changing management strategy, and training would help solve this problem, we believe a name change would also give the improvement effort a fresh start. In draft CIM guidance dated January 1993, DOD recognizes that no DOD function can be accomplished in isolation from other functions. For example, improvements to weapon systems management could cut across several business areas, including logistics, finance, and procurement. Consequently, when trying to improve DOD functions, it is important to address all related business areas. We found that the CIM improvement efforts are to a great extent being made in isolation from one another. According to JLSC officials, there is continual overlap of CIM issues across the efforts underway in the different DOD business areas. However, the integration requirements of the related business areas have not been fully identified and established. Nor is any one office overseeing the integration of CIM business process improvements across these areas. While JLSC has sought to resolve integration issues among CIM efforts and maintains liaisons with offices responsible for CIM efforts in finance and procurement, it does not have the authority to arbitrate disputes between CIM efforts or enforce integration decisions. Because of this isolation, or “stovepiping,” CIM improvements made in one business area can duplicate or conflict with those made in another business area even though the function being improved is common to both. According to JLSC officials, stovepiping impeded its progress in selecting migration systems for the materiel management and depot maintenance business areas. For example, JLSC reviewed the practices involved in buying supply items. Functions involved in preparing procurement requests, such as determining the type and amount of supplies needed, fall under the logistics CIM effort. Functions performed after a supply contract is awarded are the responsibility of the procurement CIM effort. In consultation with service and DLA representatives, JLSC chose the Integrated Technical Item Management and Procurement information system as the migration system for supply contract pre-award practices. However, the Procurement CIM Council reviewed the practices performed after a supply contract is awarded and chose the Defense Procurement and Contracting System. Although the pre-contracting and post-contracting activities are part of the larger procurement process, the logistics and procurement CIM efforts were not integrated. While they did not estimate the resources involved, JLSC officials stated that much time has been spent working on such integration issues with various service and DLA representatives. Without some direct attention by top-level management in this area, we believe that DOD will likely develop, deploy, operate, and maintain two automated systems to provide information on different parts of the procurement process. Such a result would be inconsistent with the stated CIM purpose of streamlining business processes and standardizing their supporting information systems. Recognizing the need to integrate CIM efforts, DOD established a number of boards and councils to facilitate their integration, but these efforts have not succeeded. For example, DOD established the Information Policy Council to facilitate the integration of information management functions, activities, and systems. According to DOD officials, this Council was not successful because it did not meet frequently enough and did not include in its membership the officials needed to decide integration issues, nor did it have decision-making authority. Also, in January 1992, the Assistant Secretary of Defense for C3I established the Corporate Functional Integration Board to build more active CIM participation. While this Board has identified some cross-functional issues, DOD said that a higher level body with decision-making authority was needed to successfully resolve integration issues. DOD, in April 1994, established the Enterprise Integration Executive Board, chaired by the Deputy Secretary of Defense, to resolve cross-functional integration issues. As established, this Board and its supporting Enterprise Integration Corporate Management Council are to exchange information and views about cross-functional management concepts, policies, and plans to achieve CIM goals. With membership of DOD senior-level managers, service secretaries, and the Chairman of the Joint Chiefs of Staff, this Board has the membership and authority to make decisions on cross-functional and integration issues. Commenting on a draft of this report, DOD officials stated that DOD is moving aggressively to integrate its CIM efforts. They cited the Deputy Secretary of Defense’s issuance of the DOD Enterprise Integration Implementing Strategy to support the CIM Strategic Plan as evidence of actions being taken. These latest actions, we believe, are important steps toward resolving cross-functional issues. According to DOD officials, the success of the Enterprise Integration Executive Board and its supportive Enterprise Integration Corporate Management Council will depend on the level of interest and commitment from the members, as well as the quality and implementation of their decisions. Success of additional actions also will depend on their quality and implementation. With the establishment of JLSC, DOD created two separate lines of authority for managing the development of logistics information systems. DOD Directives 5000.1, “Defense Acquisition,” and 5000.2, “Defense Acquisition Management Policies and Procedures,” grant service program managers sole authority for managing their assigned programs. However, under authority granted by the Assistant Secretary of Defense for Production and Logistics, JLSC is to manage the design, development, implementation, and maintenance of logistics information systems and to exercise funding control over these acquisitions. According to JLSC officials, this dual authority has resulted in dissension between JLSC and program offices about which office has overall authority over the development and implementation of information systems. For example, the Air Force’s Depot Maintenance Management Information System was selected as a migration system to be installed at the Warner-Robbins Air Logistics Center test site in January 1995. The Air Force project manager, however, believed that the development project is under the Air Force acquisition program and, as such, must follow the direction of the senior project manager. Under this direction, the new information system could not be exported to other installations until it passed 90 days of operational testing and evaluation and obtained approval from the Major Automated Information Systems Review Council. The operational tests, originally scheduled for August 1993, were delayed until December 1993. As of April 1994, the data collection phase of the test was complete but the final report had not been issued and reviewed by the Major Automated Information Systems Review Council. According to the Deputy Under Secretary of Defense (Logistics) official responsible for logistics CIM, this program authority problem will be remedied by making JLSC, not the Air Force, responsible for managing the system project. In late 1993, a DOD logistics review group found that current program management direction divides the responsibility and accountability for developing CIM migration systems. The core issue, the review group said, was the need to “minimize management layering and delegate review and milestone approval authority commensurate with the resources and risks involved.” Although the group reviewed the problem within logistics, it identified four options for assigning program management responsibilities in all CIM efforts to a particular organizational unit or senior DOD manager. In its comments on a draft of this report, DOD officials said they did not agree that the current guidance was conflicting; it was just misunderstood by those responsible for implementing it. However, DOD cited the issuance of its CIM Strategic Plan as a recent effort that should clarify program authority under the CIM initiative. Private industry and our studies show that a strategic plan that clearly articulates responsibilities and describes how the initiative fits with other organizational priorities is critical. We have stated in the past that the Office of Secretary of Defense would need to provide strong leadership and establish a stable organization with clear lines of authority and accountability for CIM to succeed. To the extent that DOD’s CIM Strategic Plan establishes clear lines of authority, we believe that it can successfully resolve conflicts over who manages projects to develop migratory information systems. The impediments JLSC faces illustrate fundamental problems in DOD’s management of the overall CIM initiative. While DOD has taken some important steps to address these problems, more needs to be done. First, DOD needs to ensure that functional service and DLA managers actively participate in the management and implementation of the initiative with the information technology community in support. Private companies that have reengineered their business operations cite the active participation of their line managers as critical to their success. Second, DOD needs to take specific action to build the support and commitment of all DOD employees for the cultural changes that must be made to implement CIM. Although DOD has taken actions to demonstrate top-level support and commitment to the initiative, the DOD employees are the ultimate key to CIM’s success. As private companies have learned by implementing massive changes in their organizations, employee support and commitment is essential to overcome deeply entrenched barriers to change. To build this support and commitment, employees must be trained to ensure that they understand why business practices need to be changed, how changes will improve business operations, and what they must do to implement needed changes. While training may be the most comprehensive method for ensuring employee understanding, renaming the initiative could greatly increase its acceptance. Because of the evolution of the initiative and the shifts in its emphasis, many employees are confused and misunderstand CIM’s primary purpose. Renaming the initiative to clearly communicate its primary objectives, would help remove employees’ confusion and serve as a first step for building their support and commitment. To overcome the fundamental weaknesses in the management of the CIM initiative and to further encourage cultural changes needed to support the new DOD business operations, we recommend that the Secretary take the following actions: Revise the CIM management strategy to ensure that functional managers, particularly the service Chiefs of Staff and DLA Director, actively participate and lead efforts to reengineer DOD’s business processes under the CIM initiative. Train DOD employees at all levels to promote understanding and acceptance of changes needed to their current ways of doing business. Change the name of the CIM initiative to lessen the confusion created as the initiative has evolved and to more accurately communicate the primary CIM objective. DOD appreciated our overall support for the CIM initiative and our recognition that JLSC had made progress toward developing logistics standard systems and reengineering processes in support of the materiel management and depot maintenance functions. DOD, however, was concerned about the tone of the report and the differences between our and its interpretation of CIM plans, expert advice, and reviews. Consequently, we modified our draft report where appropriate. A number of modifications were designed to present a balanced view of the CIM initiative while others were made to clarify our interpretation of CIM plans, expert advice, and reviews. When differences in interpretation remained, we added DOD’s view to the report. Finally, DOD has taken several actions since we completed our audit work that addressed strategies to management and implement CIM. In view of these actions, we deleted two recommendations and modified a third to more precisely identify the actions we believe the Secretary should take. DOD concurred with our recommendation on training but did not concur with our recommendation on renaming the initiative. According to DOD, renaming the initiative would create confusion because it would signal a change in the initiative or in management that has not taken place. Our review showed, however, that DOD managers are already confused about the initiative’s primary objective. This confusion has resulted in a negative perception about CIM and the failure by many service and DLA managers to fully accept and support the effort. Despite DOD arguments, we continue to believe that renaming the initiative to more accurately communicate its primary objective would promote understanding and acceptance. The risk of creating some additional confusion is more than offset by the advantages that a name change should produce. Additional DOD comments and our responses appear in appendix III.

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) implementation of its Corporate Information Management (CIM) initiative, focusing on: (1) DOD progress in improving the logistics functions and depot maintenance under the initiative; and (2) impediments to further progress in achieving CIM goals. GAO found that: (1) CIM has had little effect on improving DOD materiel management and depot maintenance business practices; (2) DOD reengineering efforts have been delayed because the Joint Logistics Systems Center (JLSC) has been focusing on selecting standard logistics information systems that it believes are necessary in the reengineering process; (3) DOD believes that improving migration systems will generate quick cost savings that are needed to offset budget reductions; (4) the mandated 3-year milestone for implementing the migration systems may not allow enough time to ensure that the systems meet the services' and the Defense Logistics Agency's operational requirements; (5) JLSC has selected some migration systems, begun preliminary work on improving business processes, and reduced budget requests for redundant migration systems development projects; (6) impediments to CIM implementation include the reluctance of some DOD managers to accept CIM, DOD failure to integrate its CIM efforts, and confusing DOD guidance on CIM management authority; and (7) DOD has developed a strategic plan for improving business operations and clarifying authority over systems development, and a mechanism to handle cross-functional issues.

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As part of our undercover investigation, we produced counterfeit documents before sending our two teams of investigators out to the field. We found two NRC documents and a few examples of the documents by searching the Internet. We subsequently used commercial, off-the-shelf computer software to produce two counterfeit NRC documents authorizing the individual to receive, acquire, possess, and transfer radioactive sources. To support our investigators’ purported reason for having radioactive sources in their possession when making their simultaneous border crossings, a GAO graphic artist designed a logo for our fictitious company and produced a bill of lading using computer software. Our two teams of investigators each transported an amount of radioactive sources sufficient to manufacture a dirty bomb when making their recent, simultaneous border crossings. In support of our earlier work, we had obtained an NRC document and had purchased radioactive sources as well as two containers to store and transport the material. For the purposes of this undercover investigation, we purchased a small amount of radioactive sources and one container for storing and transporting the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company, stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detectors. Suppliers are not required to exercise any due diligence in determining whether the buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The amount of radioactive sources our investigator sought to purchase did not require an NRC document. The company mailed the radioactive sources to an address in Washington, D.C. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their rental vehicle. Our investigators – acting in an undercover capacity – drove to an official port of entry between Canada and the United States. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our investigators were signaled to drive through the radiation portal monitors and to meet the CBP inspector at the booth for their primary inspection. As our investigators drove past the radiation portal monitors and approached the primary checkpoint booth, they observed the CBP inspector look down and reach to his right side of his booth. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them where they lived. One of our investigators on the two-man undercover team handed the CBP inspector both of their passports and told him that he lived in Maryland while the second investigator told the CBP inspector that he lived in Virginia. The CBP inspector also asked our investigators to identify what they were transporting in their vehicle. One of our investigators told the CBP inspector that they were transporting specialized equipment back to the United States. A second CBP inspector, who had come over to assist the first inspector, asked what else our investigators were transporting. One of our investigators told the CBP inspectors that they were transporting radioactive sources for the specialized equipment. The CBP inspector in the primary checkpoint booth appeared to be writing down the information. Our investigators were then directed to park in a secondary inspection zone, while the CBP inspector conducted further inspections of the vehicle. During the secondary inspection, our investigators told the CBP inspector that they had an NRC document and a bill of lading for the radioactive sources. The CBP inspector asked if he could make copies of our investigators’ counterfeit bill of lading on letterhead stationery as well as their counterfeit NRC document. Although the CBP inspector took the documents to the copier, our investigators did not observe him retrieving any copies from the copier. Our investigators watched the CBP inspector use a handheld Radiation Isotope Identifier Device (RIID), which he said is used to identify the source of radioactive sources, to examine the investigators’ vehicle. He told our investigators that he had to perform additional inspections. After determining that the investigators were not transporting additional sources of radiation, the CBP inspector made copies of our investigators’ drivers’ licenses, returned their drivers’ licenses to them, and our investigators were then allowed to enter the United States. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their vehicle. Our investigators drove to an official port of entry at the southern border. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our two-person undercover team was signaled by means of a traffic light signal to drive through the radiation portal monitors and stopped at the primary checkpoint for their primary inspection. As our investigators drove past the portal monitors and approached the primary checkpoint, they observed that the CBP inspector remained in the primary checkpoint for several moments prior to approaching our investigators’ vehicle. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them if they were American citizens. Our investigators told the CBP inspector that they were both American citizens and handed him their state-issued drivers’ licenses. The CBP inspector also asked our investigators about the purpose of their trip to Mexico and asked whether they were bringing anything into the United States from Mexico. Our investigators told the CBP inspector that they were returning from a business trip in Mexico and were not bringing anything into the United States from Mexico. While our investigators remained inside their vehicle, the CBP inspector used what appeared to be a RIID to scan the outside of the vehicle. One of our investigators told him that they were transporting specialized equipment. The CBP inspector asked one of our investigators to open the trunk of the rental vehicle and to show him the specialized equipment. Our investigator told the CBP inspector that they were transporting radioactive sources in addition to the specialized equipment. The primary CBP inspector then directed our investigators to park in a secondary inspection zone for further inspection. During the secondary inspection, the CBP inspector said he needed to verify the type of material our investigators were transporting, and another CBP inspector approached with what appeared to be a RIID to scan the cardboard boxes where the radioactive sources was placed. The instrumentation confirmed the presence of radioactive sources. When asked again about the purpose of their visit to Mexico, one of our investigators told the CBP inspector that they had used the radioactive sources in a demonstration designed to secure additional business for their company. The CBP inspector asked for paperwork authorizing them to transport the equipment to Mexico. One of our investigators provided the counterfeit bill of lading on letterhead stationery, as well as their counterfeit NRC document. The CBP inspector took the paperwork provided by our investigators and walked into the CBP station. He returned several minutes later and returned the paperwork. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. We conducted corrective action briefings with CBP and NRC officials shortly after completing our undercover operations. On December 21, 2005, we briefed CBP officials about the results of our border crossing tests. CBP officials agreed to work with the NRC and CBP’s Laboratories and Scientific Services to come up with a way to verify the authenticity of NRC materials documents. We conducted two corrective action briefings with NRC officials on January 12 and January 24, 2006, about the results of our border crossing tests. NRC officials disagreed with the amount of radioactive material we determined was needed to produce a dirty bomb, noting that NRC’s “concern threshold” is significantly higher. We continue to believe that our purchase of radioactive sources and our ability to counterfeit an NRC document are matters that NRC should address. We could have purchased all of the radioactive sources used in our two undercover border crossings by making multiple purchases from different suppliers, using similarly convincing cover stories, using false identities, and had all of the radioactive sources conveniently shipped to our nation’s capital. Further, we believe that the amount of radioactive sources that we were able to transport into the United States during our operation would be sufficient to produce two dirty bombs, which could be used as weapons of mass disruption. Finally, NRC officials told us that they are aware of the potential problems of counterfeiting documents and that they are working to resolve these issues. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Given today's unprecedented terrorism threat environment and the resulting widespread congressional and public interest in the security of our nation's borders, GAO conducted an investigation testing whether radioactive sources could be smuggled across U.S. borders. Most travelers enter the United States through the nation's 154 land border ports of entry. Department of Homeland Security U.S. Customs and Border Protection (CBP) inspectors at ports of entry are responsible for the primary inspection of travelers to determine their admissibility into the United States and to enforce laws related to preventing the entry of contraband, such as drugs and weapons of mass destruction. GAO's testimony provides the results of undercover tests made by its investigators to determine whether monitors at U.S. ports of entry detect radioactive sources in vehicles attempting to enter the United States. GAO also provides observations regarding the procedures that CBP inspectors followed during its investigation. GAO has also issued a report on the results of this investigation (GAO-06-545R). For the purposes of this undercover investigation, GAO purchased a small amount of radioactive sources and one secure container used to safely store and transport the material from a commercial source over the telephone. One of GAO's investigators, posing as an employee of a fictitious company located in Washington, D.C., stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detection pagers. The purchase was not challenged because suppliers are not required to determine whether prospective buyers have legitimate uses for radioactive sources, nor are suppliers required to ask a buyer to produce an NRC document when purchasing in small quantities. The amount of radioactive sources GAO's investigator sought to purchase did not require an NRC document. Subsequently, the company mailed the radioactive sources to an address in Washington D.C. The radiation portal monitors properly signaled the presence of radioactive material when our two teams of investigators conducted simultaneous border crossings. Our investigators' vehicles were inspected in accordance with most of the CBP policy at both the northern and southern borders. However, GAO's investigators, using counterfeit documents, were able to enter the United States with enough radioactive sources in the trunks of their vehicles to make two dirty bombs. According to the Centers for Disease Control and Prevention, a dirty bomb is a mix of explosives, such as dynamite, with radioactive powder or pellets. When the dynamite or other explosives are set off, the blast carries radioactive material into the surrounding area. The direct costs of cleanup and the indirect losses in trade and business in the contaminated areas could be large. Hence, dirty bombs are generally considered to be weapons of mass disruption instead of weapons of mass destruction. GAO investigators were able to successfully represent themselves as employees of a fictitious company present a counterfeit bill of lading and a counterfeit NRC document during the secondary inspections at both locations. The CBP inspectors never questioned the authenticity of the investigators' counterfeit bill of lading or the counterfeit NRC document authorizing them to receive, acquire, possess, and transfer radioactive sources.

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DOD relies on its research laboratories and test facilities as well as industry and academia to develop new technologies and systems that improve and enhance military operations and ensure technological superiority over adversaries. Yet, historically, DOD has experienced problems in bringing technologies out of the lab environment and into real use. At times, technologies do not leave the lab because their potential has not been adequately demonstrated or recognized. In other cases, acquisition programs—which receive the bulk of DOD’s funding in research, development, testing and evaluation of technology—are simply unwilling to fund final stages of development of a promising technology, preferring to invest in other aspects of the program that are viewed as more vital to success. Other times, they choose to develop the technologies themselves, rather than rely on DOD labs to do so—a practice that brings cost and schedule risk since programs may well find themselves addressing problems related to technology immaturity that hamper other aspects of the acquisition process. And often, DOD’s budgeting process, which requires investments to be targeted at least 2 years in advance of their activation, makes it difficult for DOD to seize opportunities to introduce technological advances into acquisition programs. In addition, it is challenging just to identify and pursue technologies that could be used to enhance military operations given the very wide range of organizations inside and outside of DOD that are focused on technology development and the wide range of capabilities that DOD is interested in advancing. In recognizing this array of challenges, DOD and Congress have established a number of “technology transition” programs, each with a particular focus. (See table 1.) The Advanced Concept Technology Demonstration (ACTD) program, for example, was initiated by DOD in 1994 as a way to get technologies that meet critical military needs into the hands of users faster and at less cost than the traditional acquisition process. Under this program, military operators test prototypes that have already been developed and matured in realistic settings. If they find the items to have military utility, DOD may choose to buy additional quantities or just use the items remaining after the demonstration. In 1980, DOD established the Foreign Comparative Testing (FCT) Program to identify, evaluate, and procure technologies that have already been developed and tested in other countries—saving DOD the costly burden of maturing the technology itself. Other programs include those that seek to quickly identify and solve production problems associated with technology transition (the Manufacturing Technology Program—MANTECH) and to partner with the commercial sector in completing projects that are useful to both military and industry (the Dual Use Science and Technology program). Even taken together, however, these programs represent a very small portion of DOD dollars spent on applied research and advanced technology development—about $9 billion annually—and considerably less of total money spent on the later stages of technology development, which includes an additional $60 billion spent on advanced component development and prototypes, largely within weapons acquisition programs. As such, they cannot single-handedly overcome transition problems, but rather demonstrate various ways to ease transition and broaden participation from the industrial base. Three of the more recent initiatives include the TTI and DACP, both established by Congress in fiscal year 2003, and the Quick Reaction Fund, established by DOD the same year. TTI is focused on speeding the transition of technologies developed by DOD’s S&T programs into acquisition programs, while DACP is focused on introducing innovative and cost-saving technologies developed inside and outside DOD. The Quick Reaction Fund is focused on field testing technology prototypes. All three programs are managed by DOD’s Office of Defense Research and Engineering, which reports to the Under Secretary of Defense for Acquisition, Technology and Logistics. Together, these three programs received about $64 million in fiscal year 2005–a fraction of the $9.2 billion DOD invested in applied research and advanced technology development the same year and a relatively small budget compared to some of the other transition programs. Nevertheless, DOD has been increasing its investment in these programs and plans to further increase it over the next few years. (See figure 1.) Table 2 highlights similarities and differences between DACP, TTI, and Quick Reaction Fund. Table 3 provides examples of projects that have already been funded. The three transition programs, which are being implemented consistent with congressional intent, reported that benefits can already be seen in many projects, including improvements to performance, affordability, manufacturability, and operational capability for the warfighter. While such benefits may have eventually been achieved through normal processes, program officials believe the three transition programs enabled DOD to realize them sooner due to the immediate funding that was provided to complete testing and evaluation as well as attention received from senior managers. DOD officials also emphasized that these programs are calling attention to emerging technologies that have the potential to offer important performance gains and cost savings but, due to their size and relative obscurity, may otherwise be overlooked when competing against other, larger-scaled technologies and/or technologies already deemed as vital to a particular acquisition program’s success. Another benefit cited with the DACP is an expansion of the Defense industrial base, because the program invites participation from companies and individuals that have not been traditional business partners with DOD. Nevertheless, it is too early for us to determine the impact that these programs have had on technology transition. At the time we selected projects to review, few projects had been completed. In addition, the programs had limited performance measures to gauge success of individual projects or track return on investment over time. The following examples highlight some of the reported benefits of individual projects. Host Weapons Shock Profile Database—DOD spends a significant amount of time and resources to test new accessories (e.g., night vision scopes) for Special Operations Forces weapons. Currently, when new accessories are added, they must go through live fire testing to determine if they work properly and will meet reliability standards. This process could take several months to complete as the acquisition office must schedule time at a test range to complete the testing. Program officials must also identify and pay for an expert to conduct the testing and pay for ammunition that will be used in the test. The DACP is funding the test and evaluation of a database that will simulate the vibration or shock of various machine guns in order to test new accessories for that gun. This will eliminate almost all of the testing costs mentioned above and greatly reduce the amount of time needed for testing. The project office estimates that it will save almost $780,000 per year in ammunition costs alone. Enhanced Optics for the Rolling Airframe Missile—The Rolling Airframe Missile is part of the Navy’s ship self-defense system to counter attacks from missiles and aircraft. However, the missile experiences operational deficiencies in certain weather conditions, and the program has had problems producing components for the optics. The DACP is providing funding to a small business to test and evaluate a new sapphire dome and optics for the missile to resolve these problems. Program officials estimate that program funding will accelerate the development of a solution 1 to 2 years earlier than anticipated. If the DACP project is successful, an added benefit will be that the dome material will be readily available from manufacturers in the United States instead of a single overseas supplier, as is currently the case. Water Purification System— For tactical situations in which deployed troops do not have quick and easy access to potable water, the pen will allow soldiers to treat up to 300 liters of any available, non-brackish water source on one set of lithium camera batteries and common table salt. The pen eliminates the risk of the soldiers’ exposure to diseases and bio-chemical pollutants. TTI funding was used to purchase approximately 6,600 water pens for distribution to the military services. In addition, TTI funding enabled this item to be placed on a General Services Administration schedule, where approximately 8,600 additional water pens have been purchased by DOD customers. DOD and the company that produces the pen donated hundreds of these systems to the tsunami relief effort in Southeast Asia. Dragon Eye—The Dragon Eye is a small, unmanned aerial vehicle with video surveillance capabilities used by the marines. To address the concerns over a chemical and biological threat to troops in Iraq, the Quick Reaction Fund funded the integration of a small chemical detection and biological collection device on the Dragon Eye. The low- flying Dragon Eye can tell troops in real time where and when it is collecting samples, and in cases where a plume is detected, it can determine the direction the plume is moving. According to program officials, Quick Reaction funding allowed the chemical and biological detection capability to be developed 2 years ahead of schedule. The technology was available to a limited number of Special Operations Forces at the beginning of the Iraqi conflict. Despite the evident benefits of certain projects, it is too early to determine the programs’ impact on technology transition. At the time we selected projects for review, only 11 of 68 projects started in fiscal years 2003 and 2004 had been completed, and, of those, only 4 were currently available to warfighters. These include one TTI project—a miniaturized water purification system that is now being offered through a General Services Administration schedule to the warfighter—and three projects under the Quick Reaction Fund, including the Dragon Eye chemical and biological sensor, planning software used by Combatant Commanders dealing with weapons of mass destruction targets, and special materials that strengthen unmanned aerial vehicles. Since the time we selected projects, 20 have been reported as completed and 13 have been reported as available to warfighters. The latest project completion information by program is shown in Table 4. It is important to note that, even though 20 TTI and Quick Reaction Fund projects are considered to be complete, not all of the capabilities have reached the warfighter. For example: The T58 Titanium Nitride Erosion Protection is a TTI project that has transitioned to an acquisition program but has not yet reached the warfighter. The project is being developed to improve the reliability of T-58-16A helicopter engines used in Iraq. While the compressor blades are designed for 3000 operating hours, the Marine Corps has had to remove engines with fewer than 150 operational hours due to sand ingestion. The project received funding from the TTI in fiscal years 2003 and 2004 to develop a titanium nitride coating for engine blades that would significantly mitigate erosion problems in a desert environment. According to program documents, blades with the new coating will be included in future production lots beginning in July 2005. Modification kits will also be developed for retrofitting engines already produced. Program officials expect the project will double the compressor life of the engine in a sand environment and save about $12 million in life-cycle costs through fiscal year 2012. The Ping project, funded by the Quick Reaction Fund, is an example of a project that is considered complete, but a prototype was never field tested by the warfighter. The Air Force had hoped to broaden the capability of the microwave technology it used to identify large objects such as tanks or cars to also detect concealed weapons or explosives— such as suicide vests. However, the project was cancelled after some initial testing revealed that the technology was not accurate enough to determine the microwave signatures of small arms or suicide vests that could have numerous configurations and materials. DOD officials stated that, even though the project was unsuccessful, they gained a better understanding of microwave technologies and are continuing to develop these technologies for other applications. The long-term impact of the programs will also be difficult to determine because the technology transition programs have a limited set of metrics to gauge project success or the impact of program funding over time. While each funded project had to identify potential impact in terms of dollar savings, performance improvements, or acceleration to the field as part of the proposal process, actual impact of specific projects as well as the transition programs as a whole is not being tracked consistently. The value of having performance measures as well as DOD’s progress in adopting them for these transition programs is discussed in the next section of this report. To ensure that new technologies can be effectively transitioned and integrated into acquisitions, transition programs need to establish effective selection, management and oversight, and assessment processes. For example, programs must assure that proposals being accepted have established a sound business case, that is, technologies being transitioned are fairly mature and in demand and schedules and cost for transition fit within the program’s criteria. Once projects are selected, there needs to be continual and effective communication between labs and acquisition programs so that commitment can be sustained even when problems arise. To assure that the return on investment is being maximized, the impact of programs must be tracked, including cost and time savings as well as performance enhancements. Our work over the past 7 years has found that high-performing organizations adopt these basic practices as a means for successfully transitioning technologies into acquisitions. Moreover, several larger DOD technology transition programs, such as the ACTD program and some Defense Advanced Research Projects Agency (DARPA) projects, embrace similar practices and have already developed tools to help sustain commitment, such as memorandums of agreement between technology developers and acquirers. Both DARPA and ACTD manage budgets that are considerably larger than the programs included in this review. As such, the level of detail and rigor associated with their management processes may not be appropriate for TTI, DACP, or Quick Reaction Fund. However, the concepts and basic ingredients of their criteria and guidance could serve as a useful starting point for the smaller programs to strengthen their own processes. The three programs we reviewed adopted these practices to varying degrees. Overall, the DACP had disciplined and well-defined processes for selecting and managing, and overseeing projects. The TTI had disciplined and well-defined processes for selecting projects, but less formal processes for management and oversight. The Quick Reaction Fund was the least formal and disciplined of all three, believing that success was being achieved through flexibility and a high degree of senior management attention. All three programs had limited performance measures to gauge progress and return on investment. Generally, we found that the more the programs adopted structured and disciplined management processes, the fewer problems they encountered with individual efforts. Success in transitioning technologies from a lab to the field or an acquisition program hinges on a transition program’s ability to choose the most promising technology projects. This includes technologies that can substantially enhance an existing or new system either through better performance or cost savings and those with technologies at a fairly mature stage, in other words, suitable for final stages of testing and evaluation. A program can only do this, however, if it is able to clearly communicate its purpose and reach the right audience to submit proposals in the first place. It is also essential that a program have a systematic process for determining the relative technical maturity of the project as well as for evaluating other aspects of the project, such as its potential to benefit specific acquisition programs. Involving individuals in the selection process from various functions within an organization—e.g., technical, business, and acquisition—further helps to assure that the right projects are being chosen and that they will have interested customers. An analytical tool that can be particularly useful in selecting projects is a technology readiness level (TRL) assessment, which assesses the maturity level of a technology ranging from paper studies (level 1), to prototypes that can be tested in a realistic environment (level 7), to an actual system that has proven itself in mission operations (level 9). Our prior work has found TRLs to be a valuable decision-making tool because it can presage the likely consequences of incorporating a technology at a given level of maturity into a product development. As further detailed in table 5, the DACP program has a fairly robust selection process. The program relies on internet-based tools to communicate its goals and announce its selection process and ensure a broad audience is targeted. As a result, it receives a wide array of proposals from which the program office assesses their potential for generating improvements to existing programs as well as actual interest from the acquisition community. The DACP also solicits technical experts from inside and outside DOD to assess potential benefits and risks. Once the number of projects is whittled down, the program takes extra steps to secure commitments from acquisition program managers as well as program executive officers. The program’s popularity, however, has had some drawbacks. For example, the sheer number of proposals have tended to overwhelm DACP staff and slowed down the selection process, particularly in the first year. In addition, while technology benefits and risks are assessed in making selection decisions, DACP does not formally confirm the technology readiness levels being reported. The TTI program also has a fairly rigorous selection process, with specific criteria for selection, including technology readiness, and a team of representatives of higher-level DOD S&T officials in charge of disseminating information about the program in their organization, assessing their organization’s proposals based on TTI criteria as well as other criteria they developed, and ranking their top proposals. The program, which is focused on reaching DOD’s S&T community rather than outside industry, had been communicating in a relatively informal manner and it was unclear during our review the extent to which the TTI was reaching its intended audience. The program, however, has been taking steps to strengthen its ability to reach out to the S&T community. In addition, TTI does not confirm TRLs. At the time of our review, the Quick Reaction Program selection process was much less structured and disciplined than DACP and TTI. This was by design, because the program wants to select projects quickly and get them out to the field where they can be of use in military operations in Iraq, Afghanistan, and elsewhere. However, the program experienced problems related to selection and as a result—for example, significant gaps in knowledge about technology readiness led to the cancellation of one project. To program officials, the risk associated with less formal selection is worth the benefit of being able to move rapidly evolving technologies into an environment where they can begin to immediately enhance military operations and potentially save lives. Nevertheless, the program is now taking steps to strengthen selection processes. Selecting promising projects for funding is not enough to ensure successful transition. Program managers must also actively oversee implementation to make sure that project goals are being met and the program is working as intended and to identify potential barriers to transition. They must also sustain commitment from acquirers. Moreover, the transition program as a whole must have good visibility over progress and be positioned to shift attention and resources to problems as they arise. A tool that has proven particularly useful for other established DOD technology transition programs is designating individuals, preferably with experience in acquisitions or operations and/or the S&T world, as “deal brokers” or agents to facilitate communication between the lab and the acquisition program and to resolve problems as they arise. DARPA employs such individuals, for example, as well as some Navy-specific transition programs. Both have found that these agents have been integral to transition success. Another tool that is useful for sustaining commitment from the acquirers is a formal agreement. Our previous work found that best practice companies develop agreements with cost and schedule targets to achieve and sustain buy-in and that the agreements are modified as a project progresses to reflect more specific terms for accepting or rejecting a technology. DARPA develops similar agreements that describe how projects will be executed and funded as well as how projects will be terminated if the need arises. The agreements are signed by high-level officials, including the director of DARPA and senior-level representatives of the organizations DARPA is working with. The ACTD program develops “implementation directives” that clarify roles and responsibilities of parties executing an ACTD, time frames, funding, and the operational parameters by which military effectiveness is to be evaluated. The agreements are also signed by high-level officials. DACP has fairly robust management and oversight mechanisms. Status is monitored via formal quarterly reporting as well as interim meetings which, at a minimum, involve the customer, the developer, and the DACP project manager. The meetings provide an opportunity to ensure the acquisition program is still committed to the project and to resolve problems. Though formal memoranda of agreements are not usually employed, the program establishes test and evaluation plans that detail pass/fail criteria so that funding does not continue on projects that experience insurmountable problems. TTI also employs periodic status reports and meetings; however, communication has not been as open. In two cases, projects ran into significant problems, such as loss of acquisition program office support in one case and logistics issues that had not been addressed to transition a technology smoothly in the other, which had not come to the attention of the TTI program office. As a result, the TTI office thought the projects had transitioned when in actuality, significant problems still needed to be addressed. Per legislation, TTI had also established a formal council comprised of high-level DOD officials to help oversee the program; however, the Council has only met once in 2 years, while the act requires that it meet at least semiannually. In addition, there is some confusion among Council members and others we spoke with as to what the purpose of the Council should be—that is, focused on TTI only or broader transition issues. Congressional officials expressed that they intended for the Council to focus on broader transition issues and how best to solve them. Although the Quick Reaction Fund does not require status reports to assess progress, project managers are required to submit after-action reports. However, these were not regularly reviewed by the office. We identified several problems that arose during transition that were not known to the Quick Reaction Fund program manager. The program manager is currently taking steps to improve the management and oversight of projects. For example, a website has been developed to help monitor and execute the program. Among other things, the website will allow for the automatic collection of monthly status reports. Though the transition programs we reviewed are relatively small in scale compared to other transition programs in DOD, the government’s investment is still considerable and it will continue to grow if DOD’s funding plans for the programs are approved. As a result, it is important that these programs demonstrate that they are generating a worthwhile return on investment—whether through cost savings to acquisition programs, reduced times for completing testing and evaluation and integrating technologies into programs, and/or enhanced performance or new capabilities. Developing such information can enable transition program managers to identify what is or is not working well within a program; how well the program is measuring up to its goals, as well as to make trade-off decisions between individual projects. On a broader level, it can enable senior managers and oversight officials to compare and contrast the performance of transition programs across DOD. Finding the right measures to use for this purpose is challenging, however, given the wide range of projects being pursued, the different environments to which they are being applied, and difficulties associated with measuring certain aspects of return on investment. For example, measuring long-term cost savings could be problematical because some projects could have impacts on platforms and systems that were not part of the immediate transition effort. As a result, the best place to start may be with high-level or broad metrics or narratives that focus on the spectrum of benefits and cost savings being achieved through the program, complemented by more specific quantifiable metrics that do not require enormous efforts to develop and support, such as time saved in transition or short-term cost savings. At this time, however, the transition programs have limited measures to gauge individual project success and program impact or return on investment in the long term. At best, they are collecting after action reports that describe the results of transition projects, and occasionally identify some cost savings, but not in a consistent manner. In addition, there are inconsistencies in how the reports are being prepared, reviewed, and used. The Quick Reaction Fund program manager, in fact, had trouble just getting projects to submit after action reports. Officials from all three transition programs we reviewed as well as higher level officials agreed that they should be doing more to capture information regarding return on investments for the programs. They also agreed that there may already be readily available starting points within DOD. For example, the Foreign Comparative Testing Program has established metrics to measure the health, success, and cost-effectiveness of the program and has developed a database to facilitate return on investment analyses. The program also captures general performance enhancements in written narratives. The program has refined and improved its metrics over time and used them to develop annual reports. The specific metrics established by the FCT program may not be readily transferable to DACP, TTI, or the Quick Reaction Fund because the nature of FCT projects is quite different—technologies themselves are more mature and costs savings are achieved by virtue of the fact that DOD is essentially avoiding the cost of developing the technologies rather than applying the technologies to improve larger development efforts. However, the process by which the program came to identify useful metrics as well as the automated tools it uses could be valuable to the other transition programs. In addition, DOD has asked the Naval Post Graduate School to study metrics that would be useful for assessing the ACTD program. The results of this study may also serve as a starting point for the transition programs in developing their own ways to assess return on investment. The ability to spur and leverage technological advances is vital to sustaining DOD’s ability to maintain its superiority over others and to improve and even transform how military operations are conducted. The three new transition programs are all appropriately targeted on what has been a critical problem in this regard—quickly moving promising technologies from the laboratory and commercial environment into actual use. Moreover, by tailoring processes and criteria to focus on different objectives, whether that may be saving time or money or broadening the industrial base, DOD has had an opportunity to experiment with a variety of management approaches and criteria that can be used to help solve transition problems affecting the approximately $69 billion spent annually on advanced stages of technology development. Already, it is evident that an element missing from all three programs is good performance measurement. Without having this capability, DOD will not be able to effectively assess which approaches are working best and whether the programs individually or as a whole are truly worthwhile. In addition, it is evident that having well-established tools for selecting and managing projects as well as communicating with technology developers and acquisitions helps programs to reduce risk and achieve success, and that there are opportunities for all three programs for strengthening their capabilities in this regard. In light of its plans to increase funding for the three programs, DOD should consider actions to strengthen selection and management capabilities, while taking into account resources needed for implementing them as well as their impact on the ability of the programs to maintain flexibility. We recommend that the Secretary of Defense take the following five actions: To optimize DOD’s growing investment in the Technology Transition Initiative, the Defense Acquisition Challenge Program, and the Quick Reaction Fund, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to develop data and measures that can be used to support assessments of the performance of the three transition programs as well as broader assessments of the return on investment that would track the long-term impact of the programs. DOD could use measures already developed by other transition programs, such as FCT, as a starting point as well as the results of its study on performance measurement being conducted by the Naval Post Graduate School. To complement this effort, we recommend that DOD develop formal feedback mechanisms, consisting of interim and after action reporting, as well as project reviews if major deviations occur in a project. Deviations include, but are not limited to, changes in the technology developer, acquirer, or user, or an inability for the technology developer to meet cost, schedule, or performance parameters at key points in time. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to implement the following, as appropriate, for each of the transition programs: (1) formal agreements to solidify up-front technology development agreements related to cost, schedule, and performance parameters that must be met at key points in time and (2) confirmation of technology readiness levels as part of the proposal acceptance process. In addition, we recommend that DOD identify and implement mechanisms to ensure that transition program managers, developers, and acquirers are able to better communicate to collectively identify and resolve problems that could hinder technology transition. There may be opportunities to strengthen communication by improving the structure and content of interim progress meetings and possibly even designating individuals to act as deal brokers. Lastly, as DOD considers solutions to broader technology transition problems, we recommend that Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to assess how the Technology Transition Council can be better used. DOD provided us with written comments on a draft of this report. DOD partially concurred with four of the five recommendations and concurred with one recommendation. The reason DOD only partially concurred with four of the recommendations is because it does not believe the Quick Reaction Fund fits the definition of a transition program. However, we continue to believe it is important for DOD to institute better management controls and have better visibility of the Quick Reaction Fund as it increases its investment in this program over the next several years. DOD comments appear in appendix I. DOD partially concurred with our recommendation that the programs develop data and measures that can be used to support assessments of the performance of the three transition programs as well as broader assessments of return on investment that would track the long term impact of the programs. DOD agreed that performance measures for the DACP and TTI programs could be improved but does not believe that measuring the impact of the Quick Reaction Fund is necessary because it does not technically fit the definition of a transition program. We disagree. DOD should track the progress of its various programs to determine if the programs are worthwhile and should be continued, if the program should receive additional funding, or if changes should be made in the selection or implementation process that could result in better outcomes. Further, failure to track even the most basic information, such as the number of projects completed, could result in a lack of ability to manage the program properly and poor stewardship of taxpayer money. DOD partially concurred with our recommendation that the three programs develop formal feedback mechanisms consisting of interim and after action reporting, as well as project reviews if major deviations occur in a project. DOD agrees that the TTI and DACP can be improved and has recently taken steps in this regard. However, DOD believes that due to the limited scope and duration of Quick Reaction Fund projects, formal feedback mechanisms may not be necessary for this program. We believe that regular feedback on the progress of each program is important to help program managers mitigate risk. As stated in the report, the Quick Reaction Fund program manager was unaware that one project ran out of funding prior to field testing the technology. Had the program manager been aware of the problem, money that had not yet been allocated could have been used to finish the project. In addition, based upon our discussions with the current program manager, DOD is planning to require monthly status reports for funded projects. DOD partially concurred with our recommendation that the programs implement, as appropriate: (1) formal agreements to solidify up-front technology development agreements related to cost, schedule, and performance parameters that must be met at key points in time and (2) confirmation of technology readiness levels as part of the proposal acceptance process. DOD indicated that it recently implemented Technology Transition Agreements for the TTI, and the DACP program also uses formal agreements. However, DOD does not believe formal agreements are necessary for the Quick Reaction Fund because it is not intended to be a transition program. Also, it does not believe TRLs should be a factor in the proposal acceptance process. As stated in the report, we agree that formal agreements may not be appropriate for Quick Reaction Fund projects. However, TRLs should be considered during the selection process. Since the goal of this particular program is to prototype a new technology in 12 months or less, it is important that DOD has some assurance that the technology is ready to be field tested. As discussed in the report, the Quick Reaction Fund had to cancel one project, after $1.5 million had already been spent, because it had only achieved a TRL 3. Had the selecting official known the TRLs of each proposed project during the selection phase, he may have decided to fund another, more mature project instead. DOD also partially concurred with our recommendation that the programs identify and implement mechanisms to ensure that transition program managers, developers, and acquirers better communicate and collectively identify and resolve problems that could hinder technology transition. DOD established a Transition Overarching Integrated Product Team earlier this year to provide the necessary oversight structure to address this issue, but does not believe this recommendation applies to the Quick Reaction Fund program. We believe that if DOD receives monthly status reports on the Quick Reaction Fund, as planned by the program manager, it should be in a good position to identify and resolve problems that could hinder the testing of new technology prototypes. DOD concurred with our recommendation that the Under Secretary of Defense (Acquisition, Technology and Logistics) assess how the Technology Transition Council can be better used as DOD considers solutions to broader technology transition problems. Although DOD did not indicate how it plans to do this, the Deputy Under Secretary of Defense (Advanced Systems and Concepts) has a goal that the Council not limit itself to just the TTI program, but look at broader technology transition issues across DOD. We are sending copies of this report to the Secretary of Defense, the Director of the Office of Management and Budget, and interested congressional committees. We will also make copies available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (937) 258-7915. Key contributors to this report were Cristina Chaplain, Cheryl Andrew, Art Cobb, Gary Middleton, and Sean D. Merrill.

The Department of Defense (DOD) and Congress both recognize that Defense technology innovations sometimes move too slowly from the lab to the field. Three new programs have been recently created in DOD to help speed and enhance the transition of new technologies. A report accompanying the fiscal year 2003 National Defense Authorization Act required GAO to review two of these programs--the Technology Transition Initiative (TTI) and Defense Acquisition Challenge Program (DACP). The first is designed to speed transition of technologies from DOD labs to acquisition programs and the second is designed to introduce cost-saving technologies from inside and outside DOD. We were also asked to review the Quick Reaction Fund, which is focused on rapidly field testing promising new technology prototypes. We assessed the impact the programs had on technology transition and the programs' selection, management and oversight, and assessment practices. The ability to spur and leverage technological advances is vital to sustaining DOD's ability to maintain its superiority over others and to improve and even transform how military operations are conducted. The three new transition programs we reviewed are all appropriately targeted on what has been a critical problem in this regard--quickly moving promising technologies from the laboratory and commercial environment into actual use. Moreover, by tailoring processes and criteria to focus on different objectives, whether that may be saving time or money or broadening the industrial base, DOD has had an opportunity to experiment with a variety of management approaches and criteria that can be used to help solve transition problems affecting the approximately $69 billion spent over the past 3 years on later stages of technology development. However, it is too soon for us to determine the impact the three new DOD technology transition programs are having. At the time of our review, the programs--the TTI, DACP, and Quick Reaction Fund--had completed only 11 of 68 projects funded in fiscal years 2003 and 2004; of those, only 4 were providing full capability to users. Additionally, the programs have limited measures to gauge success of individual projects and return on investment. Nonetheless, reports from the programs have pointed to an array of benefits, including quicker fielding of technological improvements, cost savings, and the opportunity for DOD to tap into innovative technologies from firms that are new to defense work. Some sponsored technologies are bringing benefits to warfighters, such as a small, unmanned aircraft that can detect chemical and biological agents, and a device the size of an ink pen that can be used to purify water on the battlefield or in disaster areas. Furthermore, DOD officials credit the programs with giving senior leaders the flexibility to rapidly address current warfighter needs and for highlighting smaller technology projects that might otherwise be ignored. Long-term success for the programs likely will depend on how well the programs are managed and overseen. The programs must have effective processes for selecting the best projects, and management and oversight processes that will catch potential problems early. Thus far, of the three programs, the DACP has adopted the most disciplined and structured process for selecting and managing projects, and has encountered few problems managing projects. However, the program has had some difficulties processing the large number of proposals it receives. The TTI has also established selection criteria and processes, but it is unclear the extent to which it is reaching its intended audience and has had less success in tracking its projects. The Quick Reaction Fund has the least structured processes of the three programs--a deliberate approach seen as providing the flexibility needed to field innovations rapidly. It has had some difficulty selecting, managing and tracking projects.

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The MAF is a data file that contains a list of all known living quarters in the United States and Puerto Rico. The Bureau uses the MAF to support the decennial census as well as the American Community Survey and other ongoing demographic surveys. The MAF contains address information, census geographic location codes, and source and history data. In conjunction with the MAF, the TIGER contains spatial geographical information that allows information from the MAF to be mapped. For the 2010 Census, the Bureau updated the MAF through a complete address canvassing that verified virtually every existing MAF address and added new addresses and deleted those that no longer exist. While full address canvassing helped ensure the accuracy of the address list, we believe it was also very costly. According to Bureau decision documents leading up to the 2010 Census, the Bureau canceled planned research on the feasibility of targeting its canvassing when prioritizing its research agenda early in the decade given its funding levels. As part of the Bureau’s effort to conduct the 2020 Census at a cost lower than the 2010 Census, the Bureau is researching the feasibility of conducting targeted address canvassing, verifying addresses in only select areas that are more likely to require updates to the address list. To support targeted address canvassing, the Bureau plans to increase its reliance on other previously used sources of updates, including U.S. Postal Service files, commercial database files, and significant input from state and local governments. For example, GSS-I is working to allow government agencies at all levels to more regularly share and update their address lists with the Bureau throughout the decade (rather than solely 2 years prior to the decennial, as had been the case in prior decennial censuses) so that fewer areas need to be fully canvassed. The life cycle for 2020 Census preparation is divided into five phases, as illustrated in figure 1. The Bureau intends to use the early research and testing phase through fiscal year 2015 to develop a proposal for conducting targeted address canvassing that considers both cost and quality implications. By the end of the early research and testing phase, the Bureau plans to complete decisions about preliminary operational designs rather than continuing critical research and testing until the end of the decade as it did for the 2010 Census. The Bureau faces legally mandated deadlines for delivering census tabulations. Effective scheduling is critical for ensuring that the Bureau adheres to a timeline that meets these deadlines. The Bureau relies on schedules to help monitor progress of its many interdependent activities. The schedules are essential to help manage the risks to preparing and implementing a successful decennial census. Certain dates within the schedule could be subject to change or activities may be canceled as a result of time or budget constraints. As dates change from the original schedule or there are significant changes to the work planned, there could be an associated increase in risk as the Bureau may have less time than originally planned to complete future activities in time to make decisions needed to execute the 2020 Census. We determined that a schedule not only provides a road map for systematic execution of a program, but also provides a means by which to gauge progress, identify and address potential problems, and promote accountability. In the GAO Schedule Assessment Guide,four characteristics of a reliable schedule. A schedule should be: Comprehensive: The schedule should identify all activities and resources necessary to accomplish the project. The schedule should cover the scope of work to be performed so that the full picture is available to managers. Well constructed: Activities should be logically sequenced and critical activities that would affect the timelines of the schedule should be identified. Credible: All schedules should be linked to a complete master schedule for managers to reference and analyzed for how risk impacts the outcome of the schedule. Controlled: There should be a documented process for changes to the schedule so that the integrity of the schedule is assured. For a schedule to be reliable, it must substantially or fully meet all criteria for these four characteristics. These characteristics and their criteria are described in more detail in appendix II. We found that the Bureau’s 2020 Research and Testing and GSS-I schedules exhibit some of the characteristics of a reliable schedule, yet important weaknesses remain. Each of the schedules substantially met one of the four characteristics (controlled) and minimally or partially met the other three characteristics (comprehensive, well constructed, and credible) (see table 1). Examples of the extent to which these characteristics were met are provided below. For a more detailed explanation, see appendix III. The Bureau is using a work breakdown structure to guide the activities of the 2020 Research and Testing and GSS-I schedules. A work breakdown structure defines in detail the work necessary to accomplish a program’s objectives. However, not all activities listed in the work breakdown structure are included in the 2020 Research and Testing and GSS-I schedules. For example, in the GSS-I schedule, 20 of the 28 projects have very few activities in them, indicating a lack of detail. Additionally, two MAF-related projects in the 2020 Research and Testing schedule, the MAF Business Rules Improvement project and the Frame Extract Evaluation project, do not have activities assigned to them. If research activities—or any other activities relevant to developing the MAF—are not listed in a schedule, managers may not be able to readily identify causes of delay. According to the Bureau, the schedules are still evolving, these two projects have not yet started or been staffed, and activities and detail will continue to be added to the schedule. For both schedules, the Bureau appeared to record reasonable durations for most activities, helping to ensure that managers can understand the time activities are expected to take and can hold staff who are executing these activities accountable for meeting deadlines. However, neither schedule included information about what levels of resources are required to complete the planned work. Information on resource needs and availability in each work period assists with forecasting the likelihood that activities will be completed as scheduled. Bureau officials stated that they hope to begin the exercise of identifying the resources needed for each activity in both schedules by early 2014 and are waiting for decisions and guidance from the Bureau’s effort to standardize cost estimation practices enterprise-wide. In 2012 we recommended, and the Bureau agreed, that the Bureau establish and communicate a timeline for all enterprise activity However, the Bureau so that decennial managers can plan accordingly.has not yet produced this timeline. In both of the schedules, the Bureau logically linked many of the activities in a sequence. This helps staff identify next steps as they progress through MAF development activities and helps managers identify the impact of changes in one activity on subsequent activities. Yet in both schedules, the Bureau did not identify the preceding and following activity for a number of activities (20 percent for the GSS-I schedule and 9 percent for the 2020 Research and Testing schedule). Scheduling staff were unable to explain why this information was missing. Without this logic, the effect of a change in one activity on future activities cannot be seen in the schedule. For example, in the GSS-I schedule, the “delivery of the targeted address canvassing recommendation report” to managers has no predecessor. According to the Bureau, this report is to outline the research findings, impacts, operational considerations, and benefits of conducting a targeted address canvassing. For those activities that lack predecessors in the schedule, the real effects of changes or delays in preceding activities would not be visible in the schedule, potentially resulting in unforeseen delays in the recommendation report. The Bureau used a large number of constraints which, if used inappropriately, can affect the reliability of the schedule. Activities for which constraints would be justified are Census Day and the delivery of the Apportionment Count, because they have legally mandated deadlines. But, for example, the Bureau also placed a constraint on the delivery of a draft targeted address canvassing report. Such an activity would likely not need a constraint because delays in preceding activities could affect the actual timing of the delivery of the draft report. Placing a constraint on this type of activity would mask in the schedule the effects of any changes or delays that would affect the true delivery date. While our schedule guide states that documenting the justification for constraints is important, the Bureau has not provided justifications in the schedule for its use of constraints. The Bureau told us that justifications are in meeting notes and e-mails, rather than the schedule. If this information is not included in the schedule, the justification for constraints remains unclear to those who did not have access to the meeting notes or e-mails. Also, leaving constraints within the schedule beyond when the schedule is being tested can make the schedule unreliable for other purposes. Additionally, inappropriately used constraints make it difficult to identify the schedules’ “critical path”—the sequence of steps needed to achieve the end goal that, if they slip, could negatively affect the overall project completion date. The absence of a critical path or a poorly constructed one calls into question the reliability of the calculated schedule dates, such as estimates of when research results will be available. When certain constraints are placed on an activity, this can automatically trigger the schedule software to place an activity on the calculated critical path when it might otherwise not be. Because the Bureau used so many constraints and the schedule is missing logic about preceding and following activities, it is possible that the calculated critical path includes activities that are not necessarily germane to the true critical path. Eliminating the unnecessary constraints and including additional logic would provide a more accurate picture of the degree of criticality in the schedule. Until the Bureau can produce a true critical path, it will not be able to provide reliable timeline estimates of effects of schedule changes. This undermines the Bureau’s ability to focus on activities that will have detrimental effects on the progress of designing targeted address canvassing and other 2020 Census decisions. Finally, a critical path with so many activities appearing on it is not useful to managers in identifying what is truly necessary to develop the MAF in a timely manner. For example, within the 2020 Research and Testing schedule, 52 percent of activities not yet completed appear on the calculated critical path. Similarly, for the GSS-I schedule, 19 percent of the activities appear on the calculated critical path, almost half of which could be because constraints are placed on them. Such a large share of activities appearing on the critical path can reduce the flexibility managers have to complete activities in parallel with each other or to reallocate resources when the same resource is needed for multiple activities on the path. The schedules have shortcomings with (1) the integration into management reporting and (2) the ability to automatically change as activities within the schedule change. First, management documents from the 2020 Research and Planning Office indicate the Bureau does not always derive information on milestones from the schedule. For example, two documents dated July 2013 cite the same baseline date from the schedule list major milestones, but the documents indicate a different date for the same part of the research and testing schedule; one states that the research and testing milestones for the current phase will be complete in September 2014, while the other states that these milestones will be completed in September 2015. Bureau managers acknowledged that the planning milestones within the schedule had not been updated to reflect ongoing Bureau management decisions about reprioritizing research and testing plans in light of budget uncertainty during fiscal year 2013. Without keeping the schedule current and using the most recent information to derive information for management such as schedule milestones, there are limited assurances that management is receiving reliable information. Second, we tested the schedules to determine how they changed when dates within the schedule were changed. In our test, the Research and Testing schedule responded automatically to changes in dates of activities, following best practices. However, the GSS-I schedule did not respond in the same way: When we adjusted the date of an activity, subsequent related activities appearing necessary to achieve the milestone did not change, even though the ultimate milestone date changed based on the date shift. More importantly, though, the Bureau is not in a position to carry out systematic quantitative risk analysis on its schedule. A quantitative risk analysis relies on statistical simulation to predict the level of confidence in meeting a program’s completion date. The Bureau has identified risks to MAF development efforts, but a quantitative risk analysis would have the advantage of illustrating the impact of risks on the schedule and how that would affect the Bureau’s ability to meet milestones and provide a measure of how much time contingency should be built in the schedule to help manage certain risks. Bureau officials said they were waiting for decisions about scheduling software before making decisions about conducting a schedule risk analysis. Without a more credible schedule, the Bureau cannot determine the likelihood that information will be available in time to inform decisions about building the MAF; moreover, the Bureau may not be able to fully understand which risks could affect when information will be available to make decisions and the likelihood that the risks could occur. Both schedules were baselined—creating a comparison schedule to measure, monitor, and report the project’s progress—in March 2013, and there is evidence the Bureau has a schedule management process in place and a method for logging changes to the schedule that is in line with best practices. By baselining the schedule, the Bureau helps provide some accountability and transparency to the measurement of the program’s progress. The Bureau has implemented a formal change control process which helps ensure the measurement of meaningful progress through comparisons to past versions of the schedule. The Bureau clearly documented its criteria for justifying changes. A team of senior managers is to approve the change and Bureau teams are to acknowledge the change’s effect if the schedule indicates they will be affected by the change. The Bureau provides narratives that go along with some schedule updates and includes these in monthly status reports, ensuring that management are informed of schedule changes on a regular basis in accordance with leading practices. This practice helps Bureau officials use their schedules to produce reports that can be used to identify work that should have started or finished by that time. Bureau managers acknowledged that not all changes reflecting Bureau decisions on dealing with budget uncertainty have been processed and reflected yet in the schedule. Yet with processes in place—and being used—that ensure the schedule is updated, management can be reasonably assured that it is looking at current data when examining the schedule, contingent upon the accuracy of the updates. In conversations with Bureau officials responsible for managing the 2020 Research and Testing and GSS-I schedules, they said that they had not although staff received training or certification in scheduling practices,have received training in the software they are using for scheduling and many staff have been trained in project management. The scheduling managers referred to GAO’s Schedule Assessment Guide as a key resource for their efforts; however, staff answers to interview questions about leading practices demonstrated a lack of knowledge of the practices. For example, staff explained the presence of the large number of constraints in the schedule they provided to us was related to their occasional “testing” of the schedule, but guidelines for a baselined schedule state that it represents the original configuration of the program plan, and would, thus, not include temporary changes such as the staff described. Both the 2020 Research and Planning Office and the Geography Division have contracted for scheduling support in recent years, and maintain that their contractors have a number of certifications in the advanced use of appropriate software and project management methods. Further, Bureau officials described high turnover and extended vacancies in the management team over the 2020 Research and Planning Office’s scheduling contractors and staff until shortly before we began our audit and obtained a copy of their schedule to review. After we completed our audit work at the Bureau, officials told us that subject to the availability of funding, schedule team members will pursue professional certification to further develop and refine their project scheduling skills. Geography Division managers also stressed to us their commitment to schedule management. GAO, Human Capital: Key Principles for Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). We developed the key principles of workforce planning by reviewing documents from organizations with expertise in workforce planning models and federal agencies with promising workforce planning practices, as well as our past work. to achieve programmatic goals. A key principle for strategic workforce planning includes systematically identifying gaps in competencies in staff with the goal of minimizing or eliminating these gaps. Our prior work has shown that organizations can use methods such as training, contracting, staff development, and hiring to help align skills in order to eliminate gaps in competencies needed for mission success. By conducting a workforce planning process that includes an analysis of skills and training needed, such as what the Bureau describes for its scheduling staff in the future, and the identification of gaps to be addressed, the Bureau can better ensure that staff who manage the schedules understand the leading practices and the importance of adhering to them. Thus, the Bureau can better ensure it has the capacity to develop schedules able to support key management decisions. Several divisions are involved in efforts to build the 2020 MAF, making collaboration critical to ensuring that participating divisions work together to achieve the Bureau’s goals. In our past work, we identified leading practices to foster collaborative relationships across organizational boundaries. We determined that four of these practices were directly relevant to the Bureau’s internal efforts to build its MAF. Table 2 identifies and describes these four practices and shows our assessment of the extent to which Bureau documentation demonstrates the Bureau engaged in these leading practices. The Bureau has documented its goals for building a more cost-effective MAF as part of its strategic plans. The Bureau’s 2020 Census Strategic Plan set forth Bureau-wide goals for the MAF and the 2020 Census. These goals provide a common rationale for Bureau teams to work across organizational boundaries. Specifically, the Bureau has documented its intention to improve the coverage and accuracy of the address list; continuously update the address list through the decade; and improve the cost-effectiveness of the address list. The Geography Division and the 2020 Research and Planning Office have incorporated these common outcomes as part of their individual efforts. Officials in these units indicated an understanding of these goals and communicated them to us. Each also documented these goals in their planning documents. For example, the Geography Division’s governance document for GSS-I connects its purpose to working towards building the 2020 MAF. Moreover, in the 2020 Research and Planning Office’s Research and Testing management plan, the Bureau sets goals for the division’s research associated with improving the accuracy and cost-effectiveness of the MAF. The Bureau, through its strategic plan, has set goals for the 2020 MAF, communicating these to organizational units in a way that will help focus the work in support of upcoming design decisions. Similar to its goals, the Bureau has established and documented joint strategies as part of its strategic plans. These strategies help outline how the Bureau will achieve the goals of an accurate, continuously updated and cost-effective MAF. The Bureau’s 2013-2017 Strategic Plan and 2020 Census Strategic Plan specifically identify these strategies for achieving its goals for the MAF: defining components of error in the MAF; assessing how rules for using addresses contained in the MAF should implementing targeted address canvassing; change to accommodate new address sources; and identifying more effective approaches to incorporate addresses from state, local, and tribal governments. The Bureau is executing five research projects related to these strategies. The Bureau is also reinforcing implementation of these strategies by creating new coordination groups as well as placing staff from relevant units on MAF-related research projects. For example, the MAF error model research team has representation from the Geography Division, the Decennial Statistical Studies Division, and the Field Division, among others. The importance of having joint strategies clearly documented is underscored by the differences in perspectives that these divisions can bring to common challenges they may work on together, such as developing a proposal for targeted address canvassing. For example, the Geography Division is responsible for, among other things, administering geographic and cartographic activities needed for the 2020 Census. Its research when working with other teams will focus on geographic concepts, methods, and standards needed for the 2020 Census. Meanwhile, the Field Division, with its responsibility for effectively deploying field personnel to support efficient field data collection, will focus on the “on the ground” feasibility and challenge of targeting certain types of housing units for address canvassing. In addition, coordination bodies are working to share information. In May 2013, relevant Bureau officials began to meet regularly to discuss issues related to implementing targeted address canvassing. Bureau officials involved in these meetings said that the team acts as a vehicle to provide status updates across organizational boundaries. Another team working to identify models to predict where addresses were most in need of being updated was chartered in May 2013. The charter indicated that membership was to include representation from staff in the Field Division and would work with relevant research projects. By defining strategies and reinforcing the collaborative nature of these strategies through such actions as coordination groups and matrixed research teams, the Bureau is helping to align the activities and resources of various divisions to achieve the goals of the 2020 MAF. The Bureau’s 2013-2017 Census Strategic Plan identifies relevant divisions within the Bureau with responsibilities related to developing a more cost-effective 2020 MAF and implementing targeted address canvassing. The 2020 Research and Planning Office has identified the relevant divisions participating in active research projects and coordination groups through documents such as charters. For example, the Targeted Address Canvassing Research, Model, and Area Classification team—a coordination team headed by the Geography Division—was chartered in May 2013 and defines what is both in and out of the scope of its activities. Members are responsible for analyzing potential datasets to be used for targeted address canvassing, but are not responsible for analyzing the costs of targeted address canvassing. In addition, the Bureau recently established memorandums of understanding between the 2020 Research and Planning Office and other relevant divisions, generally finalizing them in May 2013 and signing them in June and July 2013. These agreements are not limited to MAF building efforts, but they provide the broad framework for working together and defining coordination. The agreements define the responsibilities of the 2020 Research and Planning Office and the relevant divisions and include provisions for communication between the two organizational units, resource sharing, and modifying agreements as changes in work dictate. However, the Bureau has not taken advantage of some opportunities to use its schedules to reinforce roles or clarify responsibilities. Detailed schedules for 2020 Research and Testing and GSS-I do not completely reflect roles and responsibilities of other divisions or organizational units, such as by reflecting dependencies of activities or handing off to each other. Information on dependencies between projects is available in the project plans for research projects, but such dependencies are not reflected in the schedules. Bureau officials said they would address this by directing project teams to more clearly identify dependencies on various divisions, and review activities to be flagged as having “external” dependencies within the Research and Testing schedule. The Bureau reinforces individual accountability for collaborative activities through individual performance expectations including both broad ones and others specific to MAF development efforts. Bureau-wide, individuals are rated on their “customer service,” a work competency that includes their performance working in collaboration with those outside of their division to respond to internal and external needs. Managers we spoke with said that collaboration across units within the Bureau is assessed within this competency. Bureau officials also provided examples of performance management plans where staff were to be rated specifically on collaboration. For example, one staff member was expected to attend interdivisional coordination meetings and to implement new projects based on these meetings. The inclusion of specific performance expectations and metrics dependent on collaborative activity can reinforce synergy across organizational boundaries within the Bureau. This should help ensure that individuals with responsibility for developing the MAF have a vested interest in achieving the overall goals set by the Bureau. As the Bureau moves to testing and implementation, roles and responsibilities will change, and the respective roles of divisions may also change in prominence. Continued management attention to follow leading practices for collaboration will help to ensure that collaboration across units is occurring as the Bureau strives to achieve its goal of a more cost- effective 2020 MAF and Census. Planning efforts related to targeted address canvassing and building a more cost-effective MAF are important to the Bureau’s efforts to control the costs of the 2020 decennial. As key design decisions are to be made in the coming years, it is important that the Bureau has a reliable schedule in place upon which management can depend to make those decisions. Our analysis of two Bureau schedules key to MAF development efforts indicates that there are problems with the schedules’ reliability. It will be important to ensure that schedules are comprehensive in order for management to be reasonably assured that they have complete information to make decisions. Similarly, problems with the schedules’ construction mean that the progression of critical events could be unclear to management. Finally, the schedules lack credibility, meaning that risks, including those the Bureau has already identified, could impact the schedules in ways not yet considered. Some of the identified deficiencies indicate that staff and managers have not been available and prepared to sufficiently construct and maintain the schedules. Conducting a workforce planning process of staff working on MAF schedules could help the Bureau to identify staff skills needed to help ensure related gaps are addressed. Without staff knowledge of the leading practices and the importance of adhering to them, the schedules may prove problematic for decennial managers’ ability to assess progress, make decisions, identify future risks, or anticipate potential delays. With its planning documents, memorandums of understanding, and various charters, the Bureau has put in place a framework to support collaborative efforts following leading practices, particularly in recent months, which will aid the efforts. These methods could be bolstered by building collaboration into the schedule. By improving practices in the area of constructing a schedule, the Bureau can help address these gaps. As the Bureau continues its implementation efforts up to and beyond key decisions about how to build a cost-effective MAF, it is vital to ensure that the practices incorporated into Bureau planning documents and processes thus far are continued. To help maintain a more thorough and insightful 2020 Census development schedule in order to better manage risks to a successful 2020 Census, the Secretary of Commerce and Undersecretary of Economic Affairs should direct the U.S. Census Bureau to improve its scheduling practices in three areas: the comprehensiveness of schedules, including ensuring that all relevant activities are included in the schedule; the construction of schedules, including ensuring complete logic is in place to identify the preceding and subsequent activities as well as a critical path that can be used to make decisions; and the credibility of schedules, including conducting a quantitative risk assessment. In addition, we recommend that the Director of the U.S. Census Bureau initiate a robust workforce planning process for those working on schedules related to the Master Address File, including actions such as an analysis of skills needed, to identify and address gaps in scheduling skills. We provided a draft of this report to the Department of Commerce and received the department’s written comments on November 5, 2013. The comments are reprinted in appendix IV. The Department of Commerce concurred with our findings and recommendations and provided several clarifications, which are reflected in this report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Commerce, the Under Secretary of Economic Affairs, the Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on GAO’s website at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512-2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff that made major contributions to this report are listed in appendix V. This report (1) assesses the reliability of the schedules for two key Master Address File (MAF) development programs, and (2) examines the extent to which the Census Bureau (Bureau) is following leading practices for collaboration for its MAF development work. To determine the extent to which the Bureau is following leading practices for scheduling as identified in the GAO Schedule Assessment Guide, we analyzed the Geographic Support System Initiative (GSS-I) schedule and the 2020 Research and Planning Office (Research and Testing) schedule. We scored each scheduling best practice on a five-point scale ranging from “not met” to “fully met.” To determine the extent to which the Bureau’s key efforts to build a cost-effective MAF/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) incorporate leading practices for collaboration, we identified leading practices to apply to intra-agency collaborative efforts based on our past work on leading collaboration We identified organizational units and activities relevant to practices.building a cost-effective MAF in consultation with the Bureau. We also identified documentation of their research projects. We reviewed key management documents for content pertaining to collaboration, including the Bureau’s strategic plan for the decennial and current (2013-2017) strategic plan. In addition, we reviewed documents directly addressing coordination efforts, such as charters and meeting minutes from coordination groups and memorandums of understanding between divisions. We compared the documented plans and activities to best practices in order to rate the extent to which leading practices were incorporated or were intended to be incorporated into Bureau documents. We rated each practice on a three-point scale from “Not Documented” to “Generally Documented.” Not Documented: The Bureau provided no documentary evidence that satisfies any of the criteria. Partially Documented: The Bureau provided documentary evidence that satisfies a portion of the criteria. Generally Documented: The Bureau provided documentary evidence that satisfies all or nearly all of the criteria. We then interviewed Bureau officials in the Geography and 2020 Research and Planning Office divisions to discuss schedules and their collaboration efforts. Additionally, regarding scheduling and collaboration, we spoke with relevant officials in the Center for Administrative Records Research and Applications, Decennial Statistical Studies Division, and Field Division. These divisions are participating in some MAF development activities with the Geography and 2020 Research and Planning Office divisions. Our review of scheduling and collaboration practices was limited to 2020 Decennial Census activities and focused on MAF development activities and cannot be generalized to other, non- decennial Bureau activities and operations. Description A schedule should reflect all activities defined in the project’s work breakdown structure and include all activities to be performed by the government and contractor. The schedule should realistically reflect the resources (i.e., labor, material, and overhead) needed to do the work, whether all required resources will be available when needed, and whether any funding or time constraints exist. The schedule should reflect how long each activity will take to execute. The schedule should be planned so that all activities are logically sequenced in the order they are to be carried out. The schedule should identify the critical path, or those activities that, if delayed, will negatively impact the overall project completion date. The critical path enables analysis of the effect delays may have on the overall schedule. The schedule should identify float—the amount of time an activity can slip in the schedule before it affects other activities—so that flexibility in the schedule can be determined. As a general rule, activities along the critical path have the least amount of float. The detailed schedule should be horizontally traceable, meaning that it should link products and outcomes associated with other sequenced activities. The integrated master schedule should also be vertically traceable—that is, varying levels of activities and supporting subactivities can be traced. Such mapping or alignment of levels enables different groups to work to the same master schedule. The schedule should include a schedule risk analysis that uses statistical techniques to predict the probability of meeting a completion date. A schedule risk analysis can help management identify high priority risks and opportunities. Progress updates and logic provide a realistic forecast of start and completion dates for program activities. Maintaining the integrity of the schedule logic at regular intervals is necessary to reflect the true status of the program. To ensure that the schedule is properly updated, people responsible for updating should be trained in critical path method scheduling. A baseline schedule represents the original configuration of the program plan and is the basis for managing the project scope, the time period for accomplishing it, and the required resources. Comparing the current status of the schedule to the baseline can help managers target areas for mitigation. Verifying that the schedule is traceable horizontally and vertically Conducting a schedule risk analysis Updating the schedule with actual progress and logic Legend:  Fully Met: The Bureau provided complete evidence that satisfies the entire criteria. ◕ Substantially Met: The Bureau provided evidence that satisfies a large portion of the criteria. ◓ Partially Met: The Bureau provided evidence that satisfies about half of the criteria. ◔ Minimally Met: The Bureau provided evidence that satisfies a small portion of the criteria.  Not Met: The Bureau provided no evidence that satisfies any of the criteria. Assigning resources to all activities Establishing the durations of all activities Confirming that the critical path is valid Verifying that the schedule is traceable horizontally and vertically Conducting a schedule risk analysis Updating the schedule with actual progress and logic Legend:  Fully Met: The Bureau provided complete evidence that satisfies the entire criteria. ◕ Substantially Met: The Bureau provided evidence that satisfies a large portion of the criteria. ◓ Partially Met: The Bureau provided evidence that satisfies about half of the criteria. ◔ Minimally Met: The Bureau provided evidence that satisfies a small portion of the criteria.  Not Met: The Bureau provided no evidence that satisfies any of the criteria. Other key contributors to this report include Ty Mitchell, Assistant Director; Tom Beall; Juaná Collymore; Rob Gebhart; David Hulett; Andrea Levine; Jeffrey Niblack; Karen Richey; and Timothy Wexler.

According to the Bureau, it is committed to limiting its per household cost for the 2020 Census to that of the 2010 Census, and believes that reducing the cost of updating the MAF can be of significant help. Because of tight deadlines and the involvement of several different Bureau units in this effort, effective scheduling and collaboration practices are important for the entire process to stay on track. GAO was asked to examine scheduling and collaboration in the Bureau's efforts to develop a more cost-effective MAF. GAO (1) assessed the reliability of the schedules for two key MAF development programs, and (2) examined the extent to which the Bureau is following leading practices for collaboration for its MAF development work. GAO analyzed the schedules for the two programs most relevant to developing the address list, and reviewed strategic plans and other documents establishing coordination mechanisms and compared them to leading practices for intra-agency collaborative efforts. The Census Bureau (Bureau) is not producing reliable schedules for the two programs most relevant to building the Master Address File (MAF)--the 2020 Research and Testing program and the Geographic Support System Initiative. The Bureau did not include all activities in either schedule. The schedules appeared to have reasonable durations for most activities, but they did not include information about required resources. For both schedules, the Bureau logically linked many activities in a sequence. Yet in both schedules the Bureau did not identify the preceding and following activity for a significant number of activities. Without this logic, the effect of a change in one activity on future activities cannot be seen in the schedule, potentially resulting in unforeseen delays. The Bureau is not in a position to carry out a quantitative risk analysis on the schedules. As a result of these issues, the schedules are producing inaccurate dates, which could mislead Bureau managers to falsely conclude that all of the work is on schedule when it may not be. Without reliable schedule information, such as valid forecasted dates and the amount of flexibility remaining in the schedule, management faces challenges in assessing the progress of MAF development efforts and determining what activities most need attention. Staff managing the schedules said that they had not received thorough training or certification on scheduling best practices, and, according to schedule managers, staff turnover contributed to the issues GAO identified. Workforce planning and training can help the Bureau have the skills in place to ensure that characteristics of a reliable schedule are met to support key management decisions. The Bureau has documented collaboration activities that follow many leading practices for collaboration. Because several divisions are involved in efforts to develop the MAF, collaboration across these divisions is critical. In recent months, the Bureau has put in place a variety of mechanisms to aid coordination, such as crosscutting task teams. For example, research projects relevant to developing the MAF have representation from multiple divisions. The Bureau has also established memorandums of understanding across divisions to provide a broad framework for working together. Continued management attention to collaboration practices will help to ensure that collaboration across units is occurring as MAF development continues. GAO recommends that the Census Director take a number of actions to improve the reliability of its schedules, including steps to ensure that all relevant activities are included in the schedules, complete scheduling logic is in place, and a quantitative risk assessment is conducted. In addition, GAO recommends a robust workforce planning effort to identify and address gaps in scheduling skills for staff that work on schedules. The Department of Commerce concurred and suggested several clarifications, which GAO included in the report as appropriate.

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The Clean Air Act, a comprehensive federal law that regulates air pollution from stationary and mobile sources, was passed in 1963 to improve and protect the quality of the nation’s air. The act was substantially overhauled in 1970 when the Congress required EPA to establish national ambient air quality standards for pollutants at levels that are necessary to protect public health with an adequate margin of safety and to protect public welfare from adverse effects. EPA has set such standards for ozone, carbon monoxide, particulate matter, sulfur oxides, nitrogen dioxide, and lead. In addition, the act directed the states to specify how they would achieve and maintain compliance with the national standard for each pollutant. The Congress amended the act again in 1977 and 1990. The 1977 amendments were passed primarily to set new goals and dates for attaining the standards because many areas of the country had failed to meet the deadlines set previously. The act was amended again in 1990 when several new themes were incorporated into it, including encouraging the use of market-based approaches to reduce emissions, such as cap-and-trade programs. The major provisions of the 1990 amendments are contained in the first six titles. As requested, this report addresses EPA’s actions related to Titles I, III, and IV: Title I establishes a detailed and graduated program for the attainment and maintenance of the national ambient air quality standards; Title III expands and modifies regulations of hazardous air pollutant emissions and establishes a list of 189 hazardous air pollutants to be regulated; Title IV establishes the acid deposition control program to reduce the adverse effects of acid rain by reducing the annual emissions of pollutants that contribute to it. Although the Clean Air Act is a federal law, states and local governments are responsible for carrying out certain portions of the statute. For example, states are responsible for developing implementation plans that describe how they will come into compliance with national standards set by EPA. EPA must approve each state’s plan, and if an implementation plan is not acceptable, EPA may assume enforcement of the Clean Air Act in that state. Once EPA sets a national standard, it is generally up to state and local air pollution control agencies to enforce the standard, with oversight from EPA. For example, state air pollution control agencies may hold hearings on permit applications by power or chemical plants. States may also fine companies for violating air pollution limits. According to EPA, by many measures, the quality of the nation’s air has improved in recent years. Each year EPA estimates emissions that impact the ambient concentrations of the six major air pollutants for which EPA sets national ambient air quality standards. EPA uses these annual emissions estimates as one indicator of the effectiveness of its air programs. As figure 1 shows, according to EPA, between 1970 and 2004, gross domestic product, vehicle miles traveled, energy consumption, and U.S. population all grew; during the same time period, however, total emissions of the six principal air pollutants dropped by 54 percent. Despite this progress, large numbers of Americans continue to live in communities where pollution sometimes exceeds federal air quality standards for one or more of the six principal air pollutants. For example, EPA reported in April 2004 that 159 million people lived in areas of the United States where air pollution sometimes exceeds federal air quality standards for ground-level ozone. According to EPA, exposure to ozone has been linked to a number of adverse health effects, including significant decreases in lung function; inflammation of the airways; and increased respiratory symptoms, such as cough and pain when taking a deep breath. Moreover, in 2003, 62 million people lived in counties where monitors showed particle pollution levels higher than national particulate matter standards, according to a December 2004 EPA report. Long-term exposure to particle pollution is associated with problems such as decreased lung function, chronic bronchitis, and premature death. Even short-term exposure to particle pollution—measured in hours or days—is associated with such effects as cardiac arrhythmias (heartbeat irregularities), heart attacks, hospital admissions or emergency room visits for heart or lung disease, and premature death. EPA identified 452 actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. About half of these required actions were included under Title III, which also included the largest number of requirements with statutory deadlines. As shown in table 1, the 1990 amendments specified statutory deadlines for 338 of the Title I-, III-, and IV-related requirements. The numerous actions required to meet the objectives of Titles I, III, and IV of the 1990 amendments vary in scope and complexity. For example, Title I of the Clean Air Act requires EPA to periodically review and revise, as appropriate, the national health- and welfare-based standards for air quality. After EPA revises any one of these standards, states are responsible for developing plans that detail how they will achieve the revised standard. EPA then must review the individual state plans for each standard and decide whether to approve them. While EPA must review and approve all individual state plans submitted, each set of reviews is only counted as one action. Other Title I requirements, on the other hand, only require EPA to publish reports on air quality and emission trends. While the reports may represent a significant amount of effort, the steps required to implement national ambient air quality standards are inherently more difficult to accomplish and often require parties independent of EPA, such as state and local agencies, to pass legislation and issue, adopt, and implement rules. Comparing the requirements among titles also shows how they vary in complexity. For example, Title IV required EPA to develop a new market-based cap and trade program to reduce emissions of sulfur dioxide and a rate-based program to reduce emissions of nitrogen oxides from power plants. While developing the cap and trade program was a large undertaking on EPA’s part, it involved regulating a specified number of stationary sources in a single industry. In contrast, under Title III, EPA is required to implement technology-based standards for 174 separate categories of sources of hazardous air pollutants, involving many industries. As shown in table 2, a large portion of the requirements with statutory deadlines related to Titles I, III, and IV were met late. That is, 256 of the 338 requirements with statutory deadlines have been completed but were late. Of the 114 requirements without statutory deadlines, all but 3 of the requirements have been completed. On average, EPA met the requirements related to Titles I, III, and IV about 24, 25, and 15 months after their statutory deadlines, respectively. Of the 256 requirements that EPA met late, 162 were met within 2 years of their statutory deadline and 94 were completed more than 2 years after their deadlines (see table 3). Consequently, improvements in air quality associated with some of these requirements may have been delayed. EPA officials cited several factors to explain why the agency missed deadlines for so many requirements. Among these factors was an emphasis on stakeholders’ review and involvement during regulatory development, which added to the time needed to issue regulations. For example, according to an EPA official, the process to develop an early technology rule under Title III involved protracted negotiations among EPA, industry groups, a labor union, and environmental groups. The rule was finalized in October 1993, 10 months after its statutory deadline. In addition, EPA officials mentioned the need to set priorities among the tremendous number of new requirements for EPA resulting from the 1990 amendments, which meant that some of these actions had to be delayed. Moreover, competing demands caused by the workload associated with EPA’s responses to lawsuits challenging some of its rules caused additional delays. For example, the time needed to respond to litigation of previous rules impinged on EPA staff’s ability to develop new rules, according to agency officials. In addition, at the time of our 2000 report, EPA officials also attributed delays to the emergence of new scientific information that led to major Clean Air Act activities unforeseen by the 1990 amendments. For example, the emergence of new scientific information regarding the importance of regional ozone transport led to an extensive collaborative process between states in the eastern half of the country to evaluate and address the transport of ozone and its precursors. As of April 2005, 45 of the requirements related to Titles I, III, and IV with statutory deadlines that had passed have not been met. Thus, any improvements in air quality that would result from EPA meeting these requirements remain unrealized. The majority of the unmet requirements related to Title I are activities involving promulgating regulations that limit the emissions of volatile organic compounds from different groups of consumer and commercial products. According to EPA officials, these rules were never completed because EPA shifted its priorities toward issuing the Title III technology-based standards. Additionally, EPA officials noted that many states have implemented their own rules limiting emissions of volatile organic compounds from these products, and these state rules are achieving the level of emissions reductions that would be achieved by a national rule passed by EPA. However, EPA is currently being sued because it did not implement these rules by their statutory deadlines. According to an EPA official, the agency and the litigant have agreed on the actions to be taken to address the requirements, but they could not reach agreement on completion dates. As a result, EPA is currently awaiting court-issued compliance dates. In addition, 21 Title III requirements have yet to be met. Most of these are “residual risk” reviews of technology-based standards with deadlines prior to April 2005. That is, within 8 years of setting each technology-based standard, EPA is required to assess the remaining health risks (the residual risk) from each source category to determine whether the standard appropriately protects public health. Applying this “risk-based” approach, EPA must revise the standards to make them more protective of health, if necessary. EPA completed its first review and issued the first set of these risk-based amendments in March 2005. Two actions required by Title IV have not been met, but, according to EPA, the agency has decided not to pursue these actions further. The requirements were to (1) promulgate an opt-in regulation for process sources and (2) conduct a sulfur dioxide/nitrogen oxides inter-pollutant trading study. According to EPA officials, the agency decided not to promulgate the opt-in regulation because it determined that the federal resources needed to develop the rule would be well in excess of those available and the implementation of this provision would not reduce overall emissions. EPA officials also said that the rule would not be cost-effective due to these factors and the limited number of sources expected to use the opt-in option. EPA officials said that the agency decided not to pursue the sulfur dioxide/nitrogen oxides inter-pollutant study because of the lack of a trading ratio that would capture the complex environmental relationship between sulfur dioxide and nitrogen oxides and because an inter-pollutant trading program would be complex and unlikely to result in environmental benefits. The list of specific actions EPA is required to take to meet the objectives of Titles I and III of the Clean Air Act Amendments of 1990 includes requirements for periodic assessments of some of the standards related to these titles. Under the Clean Air Act, EPA is required every 5 years to review the levels at which it has set national ambient air quality standards to ensure that they are sufficiently protective of public health and welfare. If EPA determines it is necessary to revise the standard, the agency undertakes a rulemaking to do so. Each new national ambient air quality standard, in turn, will trigger a number of subsequent EPA actions under Title I, such as setting the boundaries of areas that do not attain the standards and approving state plans to correct nonattainment. As a result, the set of required actions related to Title I tends to repeat over time. Title III also includes requirements for periodic assessments of its technology-based standards. In addition to the residual risk assessments discussed above, the Clean Air Act requires that EPA review the technology-based standards every 8 years, and, if necessary, revise them to account for improvements in air pollution controls and prevention. The first round of these recurring reviews will occur concurrently with the first round of residual risk assessments, according to an EPA official. Moreover, EPA’s workload related to its air programs may increase as a result of recommendations for regulatory reform compiled by the Office of Management and Budget. For example, in response to a recommendation to permit the use of new technology to monitor leaks of volatile air pollutants, EPA plans to propose a rule or guidance in March 2006. The Clean Air Act Amendments of 1990 constituted a significant overhaul of the Clean Air Act, and notable reductions in emissions of air pollutants have been attained as a result of the many actions these amendments required of EPA, states, and other parties. Currently, EPA has completed most of the 452 actions required by the 1990 amendments related to Titles I, III, and IV. The number, scope, and complexity of the required actions under each of these titles varied widely, and these differences, along with other challenges EPA faced, led to varying timeliness in implementing these requirements. Although EPA did not meet the statutory deadlines in many cases, we believe that the deadlines played an important role in EPA’s implementation of the myriad and diverse actions mandated in the 1990 amendments by providing a structure to guide and support the agency’s efforts to complete them. As EPA and the Congress now move on to addressing the remaining air pollution problems that pose health threats to our citizens, some points from our 2000 report on the implementation of the 1990 amendments bear repeating. First, some of the stakeholders we interviewed representing environmental groups and state and local government agencies expressed a preference for legislation and regulations that describe specific amounts of emissions to be reduced, provide specific deadlines to be met, and identify the sources to be regulated. Second, we, along with many of these stakeholders, concluded in that report that the acid rain program under Title IV could offer a worthwhile model for some other air quality problems because it set emission-reduction goals and encouraged market-based approaches, such as cap-and-trade programs, to attain these goals. While EPA officials noted that emissions-trading programs may not be suitable for all air pollutants, the agency has applied this approach to several pollutants since 2000. Specifically, EPA has issued final rules using cap-and-trade programs to achieve further reductions in sulfur dioxide and nitrogen oxides and to require reductions of mercury emissions for the first time. However, whether EPA can apply the cap-and-trade model to hazardous air pollutants such as mercury in the absence of express statutory authority to do so is unclear, particularly in light of the lawsuit that has been filed challenging EPA’s March 2005 rule on mercury emissions. We provided EPA with a draft of this report for its review and comment. EPA generally agreed with the findings presented in the report and provided supplemental information about the air quality, public health, and environmental benefits associated with implementation of the Clean Air Act Amendments of 1990 and comments related to its future challenges. The agency also provided technical comments, which we incorporated where appropriate. Appendix V contains the full text of the agency’s comments and our responses. 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 date of this letter. At that time, we will send copies of this report to the appropriate congressional committees; the Administrator, EPA; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix VI. The Clean Air Act requires that all areas of the country meet national ambient air quality standards (NAAQS), which are set by EPA at levels that are expected to be protective of human health and the environment. NAAQS have been established for six “criteria” pollutants: ozone, carbon monoxide, nitrogen dioxide, sulfur oxides, particulate matter, and lead. The act further specifies that EPA must assess the level at which the standards are set every five years and revise them, if necessary. To accomplish the objectives of Title I of the Clean Air Act Amendments of 1990, EPA identified 171 requirements. The specific requirements contained in Title I direct EPA to perform a variety of activities, many of which are related to implementing the NAAQS. Implementation of the standards involves several stages, many requiring efforts by both EPA and states. For example, once EPA has determined the appropriate air quality level at which to set a standard, the agency then goes through a designation process during which it identifies the areas of the country that fail to meet the standard. After the nonattainment areas are identified, states have primary responsibility for attaining and maintaining the NAAQS. To do this, states develop state implementation plans (SIPs) that specify the programs that states will develop to achieve and maintain compliance with the standards. Once a state submits a SIP to EPA, EPA is responsible for reviewing it and either approving or disapproving the plan. To assist states in developing their plans, EPA develops guidance documents that help states interpret the standards and provide information on how to comply. For example, EPA established several alternative control techniques documents for various sources that emit nitrogen oxides. These documents provide suggestions for states and industry on different techniques that can be used to reduce nitrogen oxides emissions. In some circumstances, EPA may provide guidance to the state and local air pollution control agencies through the issuance of EPA guidance and/or policy memos. For example, although designating areas as nonattainment or attainment is a complex and time-consuming process, EPA issued guidance through policy memos on the factors and criteria EPA used to make decisions for designating areas of the country as nonattainment. As of April 2005, EPA had completed 146 of the requirements that the agency must implement to meet the objectives of Title I. Sixty-one requirements that EPA had met by April 2005 had statutory deadlines. As table 4 shows, EPA met 16 of these requirements on time and missed the deadlines for 45 of them. EPA also completed 85 of the 88 requirements that did not have statutory deadlines. On average, Title I-related requirements that were met late were completed 24 months after their statutory deadline. As table 5 shows, the length of time by which requirements were met late for Title I varied. For example, 24 of the late requirements were met within 1 year of their statutory deadline while 8 requirements were completed more than 3 years late. According to EPA, the agency missed deadlines for Title I-related requirements for a number of reasons, such as (1) having to review a larger quantity of scientific information than was available in the past; (2) competing demands placed on agency staff who had to work concurrently on more than one major rulemaking; and (3) engaging in longer, more involved interagency review processes. According to agency officials, many of the requirements that EPA completed late arose due to issues beyond EPA’s control. For example, in implementing the ozone and particulate matter NAAQS, the emergence of new scientific information regarding the importance of regional ozone transport led to an extensive collaborative process between states in the eastern half of the country to evaluate and address the transport of ozone and its precursors. This information was then taken into account in the review and subsequent revision of the ozone NAAQS in 1997. In addition, EPA was sued on both the 1997 ozone and particulate matter standards, which delayed EPA’s action to designate areas as nonattainment. Moreover, the ongoing review of the particulate matter NAAQS has been significantly extended as a consequence of the unprecedented amount of new scientific research that has become available since the last review, according to EPA. Currently, EPA has not completed 22 requirements related to Title I with statutory deadlines (see table 6). Fifteen of these requirements call for rules involving different groups of consumer and commercial products, six involve reviewing the NAAQS for the criteria pollutants, and one requires EPA to finalize approving the state implementation plans for ozone and carbon monoxide. The outstanding rules involving the consumer and commercial products are to limit volatile organic compound emissions from various products, such as cleaning products, personal care products, and a variety of insecticides. The 1990 amendments specified that the rules be promulgated in four groups, based on a priority ranking established by EPA that includes a number of factors, such as the quantity of emissions from certain products. While EPA completed the first group of rules by September 1998, the agency had not done anything further to implement the remaining three groups of rules. According to EPA officials, no further work had been done to implement the rules because EPA shifted its priorities toward issuing the Title III technology-based standards. Additionally, EPA officials noted that many states have implemented their own rules limiting emissions of volatile organic compounds from these products, and these state rules are achieving the level of emissions reductions that would be achieved by a national rule passed by EPA. An EPA official stated that a national rule would not provide much of an additional benefit in the areas where emissions of volatile organic compounds are a problem and that a national rule would be fought by industry in states where emissions of volatile organic compounds are not a problem. However, promulgating these rules is a requirement under the 1990 amendments, and according to EPA officials, the agency is currently being sued by the Sierra Club, an environmental advocacy group, for not promulgating them by their statutory deadline. EPA and the litigant have agreed on the actions to be taken to address the requirements, however, they could not reach agreement on the completion dates and are currently awaiting court-issued compliance dates. In addition, the other six unmet requirements related to Title I involve potentially revising the NAAQS for the criteria pollutants. While EPA has been involved in litigation regarding four of these standards, litigation is still ongoing only regarding the lead NAAQS. EPA is being sued for not reviewing since 1991 the lead NAAQS that was originally issued in October 1978. According to EPA officials, the agency did not undertake this review because it shifted its focus to controlling other sources of lead, such as drinking water and hazardous waste facilities. As shown in table 6, EPA expects to complete the required reviews for four of the criteria pollutants by 2009. In addition to the unmet requirements discussed above, EPA has three requirements related to Title I without statutory deadlines that have not yet been completed. The first is to develop a proposed particulate matter implementation rule, which EPA expects to complete in summer 2005. The second is the promulgation of methods for measurement of visible emissions; EPA has not yet set a completion date for this action. The third is the promulgation of phase II of the 8-hour ozone implementation rule, expected in summer 2005. Title III of the Clean Air Act Amendments of 1990 established a new regulatory program to reduce the emissions of hazardous air pollutants, specifying 189 air toxics whose emissions would be controlled under its provisions. The list includes organic and inorganic chemicals, compounds of various elements, and numerous other toxic substances that are frequently emitted into the air. Title III was intended to reduce the population’s exposures to these pollutants, which can cause serious adverse health effects such as cancer and reproductive dysfunction. After identifying the pollutants to be regulated, Title III directs EPA to impose technology-based standards, or Maximum Achievable Control Technology (MACT) standards, on industry to reduce emissions. These technology- based standards require the maximum degree of reduction in emissions that EPA determines achievable for new and existing sources, taking into consideration the cost of achieving such reduction, health and environmental impacts, and energy requirements. The process for developing each MACT standard may include surveying impacted industries, visiting sites, testing emissions, and conducting public hearings. As a second step, within 8 years after completing each technology-based standard, EPA is to review the remaining risks to the public and, if necessary, issue health-based amendments to each of the MACT rules to address such risks. The first set of these “residual risk” standards was finalized in March 2005; residual risk standards for the remaining MACT rules have not been completed. Finally, the Clean Air Act requires that EPA review and, if necessary, revise the technology-based standards at least every 8 years, to account for improvements in air pollution controls and prevention. The first round of these recurring reviews will occur concurrently with the first round of residual risk assessments, according to an EPA official. EPA identified 237 requirements—either with statutory deadlines prior to April 2005 or without statutory deadlines—that accomplish the objectives of Title III of the Clean Air Act Amendments of 1990. Most of the specific requirements under Title III direct EPA to promulgate MACT standards for various sources of hazardous air pollutants, such as dry cleaning facilities, petroleum refineries, and the printing and publishing industry. Title III also requires EPA to issue a variety of studies and reports to the Congress. For example, EPA has issued a series of studies on the deposition of air pollutants to the Great Lakes and other bodies of water. In addition, Title III also directs EPA to issue guidance on a number of subjects, including, for example, guidance regarding state air toxics programs. As of April 2005, EPA had met almost all of the requirements it identified to fully implement the objectives of Title III of the Clean Air Act Amendments of 1990, as shown in table 7. EPA’s most recent data show that it has taken the required action to meet 216 of the 237 Title III requirements, although 195 of these were met late, as shown in table 7. As shown above, the vast majority of Title III requirements were met late. On average, Title III requirements met late were completed 25 months after their statutory deadline. However, the length of time by which requirements were met late varied. As shown in table 8, 116 of the 195 requirements met late were completed within the first 2 years after the statutory deadline, while 29 were not completed until more than 3 years after the deadline. In explaining why requirements under Title III were met late, an EPA official discussed several factors. For example, the official said that the vast majority of the requirements involved the development of the MACT standards, which requires a significant amount of time and effort. The official also confirmed the reasons that requirements were met late provided by EPA officials at the time of our 2000 report, which included the need to prioritize, given resource limitations, the time needed to develop the policy framework and infrastructure of the MACT program, and the need for stakeholder participation in the rulemaking processes for certain MACT standards. In addition, the EPA official pointed out that in the past, litigation on issued rules has imposed additional demands on EPA staff working to meet outstanding requirements, leading to delays. There are 21 requirements under Title III that EPA had not met as of April 2005, most of which involve the residual risk reviews required after EPA has set technology-based standards (see table 9). Specifically, EPA has not yet reviewed residual risk for 19 MACT standards with deadlines prior to April 2005. EPA completed its first review and issued the first set of these risk-based amendments, for the coke oven batteries MACT standard, on March 31, 2005. In addition to the residual risk reviews, EPA has not yet completed its urban area source standards. The other unmet requirement under Title III calls for EPA to promulgate standards for solid waste incinerators not previously regulated under the title. According to an EPA official, the agency has focused its resources on regulating major solid waste incinerators, while this requirement consists of a “catch-all” to pick up remaining sources. Part of the challenge to completing this action has involved identifying what these other sources might be, according to the official. In addition to the unmet requirements above, EPA has not yet completed residual risk reviews for 76 MACT standards whose deadlines fall later than April 2005. Because these residual risk reviews are not due until 8 years after the completion of each technology standard, some of these residual risk reviews are not due until 2012. Title IV of the Clean Air Act Amendments of 1990 established the acid deposition control program. This program was designed to provide environmental and public health benefits through reductions in emissions of sulfur dioxide and nitrogen oxides, the primary causes of acid rain. The program provides an alternative to traditional “command and control” regulatory approaches by using a market-based trading program that allocates sulfur dioxide emission allowances to affected electric utilities. The program creates a cost-effective way for utilities to achieve their required sulfur dioxide emission reductions in the manner that is most suitable to them. Utilities can choose to buy, sell, or bank their allowances, as long as their annual emissions do not exceed the amount of allowances (whether originally allocated to them or purchased) that they hold at the end of the year. The nitrogen oxides program, on the other hand, does not cap emissions of nitrogen oxides, nor does it utilize an allowance trading system. Rather, this program, which focuses on emissions of nitrogen oxides from coal-fired electric utility boilers, provides flexibility for utilities in meeting emission limits by focusing on the emission rate to be achieved and providing options for compliance. To accomplish the objectives of Title IV of the Clean Air Act Amendments of 1990, EPA identified 44 requirements. Many of the required activities had to do with setting up the acid rain program—for example, conducting allowance auctions, issuing allowances to utilities, and establishing an allowance trading system. Additionally, EPA developed requirements for utilities to continuously monitor their emission levels to properly account for allowances. As of April 2005, EPA had completed 42 of the 44 requirements to meet the objectives of Title IV. There were 26 requirements in Title IV with statutory deadlines—EPA met 8 of them on time and missed 16; 2 others were unmet. There were 18 requirements that did not have statutory deadlines, and EPA has completed all of them. (See table 10.) On average, for the 16 requirements EPA met late, they were completed within approximately 15 months of their deadlines. As shown in table 11, 10 were met within 1 year of their deadline and 1 was met more than 3 years late. According to EPA officials, the agency was late with some of the requirements because interagency review and consultation with the Acid Rain Advisory Committee added time to the process. Officials consider this time spent worthwhile because it allowed for more stakeholder input into the rulemaking process, which may have made the rules less controversial. In fact, EPA officials stated that Title IV has been subjected to less litigation than other titles. According to the officials, litigation, however, did cause a delay in the effective date of the first phase of the acid rain nitrogen oxides reduction program by 1 year. EPA officials said the second phase of this program affected approximately three times more units and was implemented on schedule. EPA officials stated that since implementation of the acid rain program, changes have been necessary to keep the program up to date and successful. For example, EPA revised the continuous emission-monitoring rule in 1999 and 2002. According to EPA, these updates were necessary because of changes in the industry, such as technological advances and growth in the number of sources. Two Title IV requirements that EPA has not completed have statutory deadlines that have passed. The two requirements are (1) promulgating the opt-in regulation for process sources and (2) conducting a sulfur dioxide/nitrogen oxides inter-pollutant trading study. After conducting preliminary work for the first action, which was to have been completed by May 1992, EPA determined that the federal resources required to accomplish it were well in excess of those available. Additionally, according to an EPA official, there was evidence of very limited use of the opt-in election for other sources. Given these two factors, and EPA’s view that implementation of this provision would not reduce overall emissions, the agency determined that it would not be cost-effective to promulgate the regulation. Finally, EPA officials said that the agency decided not to pursue the second action, which was to have been completed by January 1994, for three reasons. Specifically, according to EPA officials, (1) they lacked a trading ratio that would capture the complex environmental relationship between sulfur dioxide and nitrogen oxides; (2) if the ratio issue could be resolved, an annual allowance system for nitrogen oxides would need to be created with which to trade sulfur dioxide allowances; and (3) it was not clear that implementing inter-pollutant trading would result in a net environmental benefit as there are multiple and complex health and environmental impacts of both sulfur dioxide and nitrogen oxides requiring a comprehensive analysis of impacts and cost-effectiveness beyond available resources. The objective of this review was to determine the extent to which the Environmental Protection Agency (EPA) has completed the various actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. These titles, which respectively address national ambient air quality standards, hazardous air pollutants, and acid deposition control, are the most relevant to proposed legislation and recently finalized regulations that address emissions of air pollutants by power plants. To obtain information on the status of EPA’s implementation of requirements related to Titles I, III, and IV of the Clean Air Act Amendments of 1990—both those with and without statutory deadlines— we obtained lists of these requirements used for GAO’s 2000 report, Air Pollution: Status of Implementation and Issues of the Clean Air Act Amendments of 1990 (GAO/RCED-00-72) and held discussions with EPA officials knowledgeable about EPA’s workload required to meet the objectives of these titles. EPA officials verified the list of requirements related to each of the three titles for accuracy and completeness and provided documentation for any changes and additions made to the list. To determine how late the requirements were met, we compared the statutory deadline for each requirement to the month in which the requirement was met. For regulations that appeared in the Federal Register, for example, we considered the date the Federal Register issue was published to be the date the requirement was met, as agreed with EPA officials. In addition, we obtained explanations for why a large number of requirements were met after their statutory deadlines from two sources—our 2000 report and through discussions with EPA officials. For requirements that had not been met as of April 2005, we obtained additional information from EPA officials, including actions taken to date. To ensure the reliability of the information provided by EPA, we requested documentation for any changes EPA made to the list of requirements developed for our previous report and checked the documentation to ensure it matched the description of the requirement. In addition, we reviewed the information EPA submitted to ensure there were no duplicate entries or apparent inconsistencies; for any entries that appeared questionable, we followed up with EPA officials and usually obtained additional documentation. In certain cases, in particular with regard to Title III requirements, we also independently verified the status of the requirements. In all cases, EPA provided confirmation for the conclusions we reached as well as, in some cases, additional documentation. We determined that the data we obtained about the status of EPA’s implementation of required actions were sufficiently reliable for the purposes of this report. We also reviewed the methodology of two EPA studies that contained information about areas of the United States impacted by ground-level ozone and particulate matter. We determined that these studies were sufficiently methodologically sound to present their results in this report as background information. While this report addresses the extent to which EPA has met its requirements related to Titles I, III, and IV of the 1990 amendments, it does not address the status of requirements under other titles of the amendments or show the extent to which states have implemented applicable requirements. We conducted our work from January 2005 to May 2005 in accordance with generally accepted government auditing standards. The following are GAO’s comments on EPA’s letter dated May 18, 2005. 1. As background, our report states that while air quality in the United States has steadily improved over the last few decades, more than a hundred million Americans continue to live in communities where pollution causes the air to be unhealthy at times, according to EPA. EPA has apparently interpreted this statement as implying that missed deadlines described in the report are responsible for the scope of the current particulate matter and ozone nonattainment problems. However, our report does not make that link. 2. EPA provided us several examples of cases in which a delay in the implementation of certain specific requirements did not lead to a delay in improvements in air quality. While our draft report indicated that requirements met late delayed improvements in air quality, we did not mean to suggest that all late requirements delayed improvements in air quality. Therefore, we revised the report to say that delays in implementation of some of the requirements may have led to delays in improvements in air quality. 3. During the course of our work, we discussed our proposed methodology with EPA officials and they agreed with our plan to use the Federal Register publication date as the completion date for relevant requirements. In commenting on the draft report, however, the agency stated that its Office of Air and Radiation generally considers that it has met its statutory obligation to issue a rule on the date on which a final rule is signed and disseminated to the public, which is likely to be earlier than the publication of that rule in the Federal Register. Although we agree with EPA’s assessment that using the signature date, rather than the Federal Register publication date, would not change the report’s conclusions, we revised the report to include EPA’s comment. 4. We revised report language throughout to reflect the fact that certain actions originally included as requirements of Title I of the Clean Air Act Amendments of 1990 were established earlier but are related to these amendments. John B. Stephenson, (202) 512-3841 ([email protected]) Christine Fishkin, (202) 512-6895 ([email protected]) In addition to the individuals named above, Nancy Crothers, Christine Houle, Karen Keegan, Judy Pagano, and Nico Sloss made key contributions to this report.

While air quality in the United States has steadily improved over the last few decades, more than a hundred million Americans continue to live in communities where pollution causes the air to be unhealthy at times, according to the Environmental Protection Agency (EPA). The Clean Air Act, first passed in 1963, was last reauthorized and amended in 1990, when new programs were created and changes were made to the ways in which air pollution is controlled. The 1990 amendments included hundreds of requirements for EPA, as well as other parties, to take steps that will ultimately reduce air pollution. The amendments also established deadlines for many of these requirements. Since the 1990 amendments, various actions have been proposed to either amend the Clean Air Act or implement its provisions in new ways. GAO was asked to report on the current status of EPA's implementation of requirements under Titles I, III, and IV of the 1990 amendments. These titles, which address national ambient air quality standards, hazardous air pollutants, and acid deposition control, respectively, are the most relevant to proposed legislation and recently finalized regulations addressing emissions of air pollutants by power plants. As of April 2005, EPA had completed 404 of the 452 actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. Of the 338 requirements that had statutory deadlines prior to April 2005, EPA completed 256 late: many (162) 2 years or less after the required date, but others (94) more than 2 years after their deadlines. Consequently, improvements in air quality associated with some of these requirements may have been delayed. The numerous actions required to implement these titles varied in scope and complexity. For example, these actions included reviewing numerous state plans to comply with national health- and welfare-based air quality standards for six major pollutants, setting technology-based standards to reduce emissions from sources of hazardous air pollutants, and developing a new program to reduce acid rain. EPA officials cited several reasons for the missed deadlines, including the emphasis on stakeholders' involvement during regulatory development, which added to the time needed to issue regulations; the need to set priorities among the tremendous number of new responsibilities EPA assumed as a result of the 1990 amendments, which meant that some actions had to be delayed; and competing demands caused by the workload associated with EPA's response to lawsuits challenging some of its rules. Of the 48 requirements EPA had not met as of April 2005, 45 had associated deadlines, and 3 did not. The unmet requirements include 15 Title I requirements to promulgate regulations to limit the emissions of volatile organic compounds from a number of consumer and commercial products, such as household cleaners and pesticides. According to EPA officials, these rules were not completed because EPA shifted its priorities toward issuing standards related to the emissions of hazardous air pollutants regulated under Title III. However, the unmet requirements also include actions under Title III to periodically assess whether EPA's emissions standards for sources that emit significant amounts of hazardous air pollutants appropriately protect public health. These "residual risk" assessments are to be made within 8 years of the setting of each of the emissions standards, and 19 of these assessments are now past the 8-year mark. EPA completed the first of these residual risk assessments in March 2005. Any improvements in air quality that would result from EPA meeting these requirements remain unrealized. In commenting on a draft of this report, EPA generally agreed with our findings and provided supplemental information, primarily on the benefits of the Clean Air Act Amendments of 1990 and the reasons for implementation delays.

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With an overall goal of developing research that communities need to make sound decisions about how best to prevent and reduce girls’ delinquency, OJJDP established the Girls Study Group (Study Group) in 2004 under a $2.6 million multiyear cooperative agreement with a research institute. OJJDP’s objectives for the group, among others, included identifying effective or promising programs, program elements, and implementation principles (i.e., guidelines for developing programs). Objectives also included developing program models to help inform communities of what works in preventing or reducing girls’ delinquency, identifying gaps in girls’ delinquency research and developing recommendations for future research, and disseminating findings to the girls’ delinquency field about effective or promising programs. To meet OJJDP’s objectives, among other activities, the Study Group identified studies of delinquency programs that specifically targeted girls by reviewing over 1,000 documents in relevant research areas. These included criminological and feminist explanations for girls’ delinquency, patterns of delinquency, and the justice system’s response to girls’ delinquency. As a result, the group identified 61 programs that specifically targeted preventing or responding to girls’ delinquency. Then, the group assessed the methodological quality of the studies of the programs that had been evaluated using a set of criteria developed by DOJ’s Office of Justice Programs (OJP) called What Works to determine whether the studies provided credible evidence that the programs were effective at preventing or responding to girls’ delinquency. The results of the group’s assessment are discussed in the following sections. OJJDP’s effort to assess girls’ delinquency programs through the use of a study group and the group’s methods for assessing studies were consistent with generally accepted social science research practices and standards. In addition, OJJDP’s efforts to involve practitioners in Study Group activities and disseminate findings were also consistent with the internal control standard to communicate with external stakeholders, such as practitioners operating programs. According to OJJDP research and program officials, they formed the Study Group rather than funding individual studies of programs because study groups provide a cost-effective method of gaining an overview of the available research in an issue area. As part of its work, the group collected, reviewed, and analyzed the methodological quality of research on girls’ delinquency programs. The use of such a group, including its review, is an acceptable approach for systematically identifying and reviewing research conducted in a field of study. This review helped consolidate the research and provide information to OJJDP for determining evaluation priorities. Further, we reviewed the criteria the group used to assess the studies and found that they adhere to generally accepted social science standards for evaluation research. We also generally concurred with the group’s assessments of the programs based on these criteria. According to the group’s former principal investigator, the Study Group decided to use OJP’s What Works criteria to ensure that its assessment of program effectiveness would be based on highly rigorous evaluation standards, thus eliminating the potential that a program that may do harm would be endorsed by the group. However, 8 of the 18 experts we interviewed said that the criteria created an unrealistically high standard, which caused the group to overlook potentially promising programs. OJJDP officials stated that despite such concerns, they approved the group’s use of the criteria because of the methodological rigor of the framework and their goal for the group to identify effective programs. In accordance with the internal control standard to communicate with external stakeholders, OJJDP sought to ensure a range of stakeholder perspectives related to girls’ delinquency by requiring that Study Group members possess knowledge and experience with girls’ delinquency and demonstrate expertise in relevant social science disciplines. The initial Study Group, which was convened by the research institute and approved by OJJDP, included 12 academic researchers and 1 practitioner; someone with experience implementing girls’ delinquency programs. However, 11 of the 18 experts we interviewed stated that this composition was imbalanced in favor of academic researchers. In addition, 6 of the 11 said that the composition led the group to focus its efforts on researching theories of girls’ delinquency rather than gathering and disseminating actionable information for practitioners. According to OJJDP research and program officials, they acted to address this issue by adding a second practitioner as a member and involving two other practitioners in study group activities. OJJDP officials stated that they plan to more fully involve practitioners from the beginning when they organize study groups in the future and to include practitioners in the remaining activities of the Study Group, such as presenting successful girls’ delinquency program practices at a national conference. Also, in accordance with the internal control standard, OJJDP and the Study Group have disseminated findings to the research community, practitioners in the girls’ delinquency field, and the public through conference presentations, Web site postings, and published bulletins. The group plans to issue a final report on all of its activities by spring 2010. The Study Group found that few girls’ delinquency programs had been studied and that the available studies lacked conclusive evidence of effective programs; as a result, OJJDP plans to provide technical assistance to help programs be better prepared for evaluations of their effectiveness. However, OJJDP could better address its girls’ delinquency goals by more fully developing plans for supporting such evaluations. In its review, the Study Group found that the majority of the girls’ delinquency programs it identified—44 of the 61—had not been studied by researchers. For the 17 programs that had been studied, the Study Group reported that none of the studies provided conclusive evidence with which to determine whether the programs were effective at preventing or reducing girls’ delinquency. For example, according to the Study Group, the studies provided insufficient evidence of the effectiveness of 11 of the 17 programs because, for instance, the studies involved research designs that could not demonstrate whether any positive outcomes, such as reduced delinquency, were due to program participation rather than other factors. Based on the results of this review, the Study Group reported that among other things, there is a need for additional, methodologically rigorous evaluations of girls’ delinquency programs; training and technical assistance to help programs prepare for evaluations; and funding to support girls’ delinquency programs found to be promising. According to OJJDP officials, in response to the Study Group’s finding about the need to better prepare programs for evaluation, the office plans to work with the group and use the remaining funding from the effort— approximately $300,000—to provide a technical assistance workshop by the end of October 2009. The workshop is intended to help approximately 10 girls’ delinquency programs prepare for evaluation by providing information about how evaluations are designed and conducted and how to collect data that will be useful for program evaluators in assessing outcomes, among other things. In addition, OJJDP officials stated that as a result of the Study Group’s findings, along with feedback they received from members of the girls’ delinquency field, OJJDP plans to issue a solicitation in fiscal year 2010 for funding to support evaluations of girls’ delinquency programs. OJJDP has also reported that the Study Group’s findings are to provide a foundation for moving ahead on a comprehensive program related to girls’ delinquency. However, OJJDP has not developed a plan that is documented, is shared with key stakeholders, and includes specific funding requirements and commitments and time frames for meeting its girls’ delinquency goals. Standard practices for program and project management state that specific desired outcomes or results should be conceptualized, defined, and documented in the planning process as part of a road map, along with the appropriate projects needed to achieve those results, supporting resources, and milestones. In addition, government internal control standards call for policies and procedures that establish adequate communication with stakeholders as essential for achieving desired program goals. According to OJJDP officials, they have not developed a plan for meeting their girls’ delinquency goals because the office is in transition and is in the process of developing a plan for its juvenile justice programs, but the office is taking steps to address its girls’ delinquency goals, for example, through the technical assistance workshop. Developing a plan for girls’ delinquency would help OJJDP to demonstrate leadership to the girls’ delinquency field by clearly articulating the actions it intends to take to meet its goals and would also help the office to ensure that the goals are met. In our July report, we recommended that to help ensure that OJJDP meets its goals to identify effective or promising girls’ delinquency programs and supports the development of program models, the Administrator of OJJDP develop and document a plan that (1) articulates how the office intends to respond to the findings of the Study Group, (2) includes time frames and specific funding requirements and commitments, and (3) is shared with key stakeholders. OJP agreed with our recommendation and outlined efforts that OJJDP plans to undertake in response to these findings. For example, OJJDP stated that it anticipates publishing its proposed juvenile justice program plan, which is to include how it plans to address girls’ delinquency issues, in the Federal Register to solicit public feedback and comments, which will enable the office to publish a final plan in the Federal Register by the end of the year (December 31, 2009). Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. For questions about this statement, please contact Eileen R. Larence 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 statement. Individuals making key contributions to this statement include Mary Catherine Hult, Assistant Director; Kevin Copping; and Katherine Davis. Additionally, key contributors to our July 2009 report include David Alexander, Elizabeth Blair, and Janet Temko. 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.

This testimony discusses issues related to girls' delinquency--a topic that has attracted the attention of federal, state, and local policymakers for more than a decade as girls have increasingly become involved in the juvenile justice system. For example, from 1995 through 2005, delinquency caseloads for girls in juvenile justice courts nationwide increased 15 percent while boys' caseloads decreased by 12 percent. More recently, in 2007, 29 percent of juvenile arrests--about 641,000 arrests--involved girls, who accounted for 17 percent of juvenile violent crime arrests and 35 percent of juvenile property crime arrests. Further, research on girls has highlighted that delinquent girls have higher rates of mental health problems than delinquent boys, receive fewer special services, and are more likely to abandon treatment programs. The Office of Juvenile Justice and Delinquency Prevention (OJJDP) is the Department of Justice (DOJ) office charged with providing national leadership, coordination, and resources to prevent and respond to juvenile delinquency and victimization. OJJDP supports states and communities in their efforts to develop and implement effective programs to, among other things, prevent delinquency and intervene after a juvenile has offended. For example, from fiscal years 2007 through 2009, Congress provided OJJDP almost $1.1 billion to use for grants to states, localities, and organizations for a variety of juvenile justice programs, including programs for girls. Also, in support of this mission, the office funds research and program evaluations related to a variety of juvenile justice issues. As programs have been developed at the state and local levels in recent years that specifically target preventing girls' delinquency or intervening after girls have become involved in the juvenile justice system, it is important that agencies providing grants and practitioners operating the programs have information about which of these programs are effective. In this way, agencies can help to ensure that limited federal, state, and local funds are well spent. In general, effectiveness is determined through program evaluations, which are systematic studies conducted to assess how well a program is working--that is, whether a program produced its intended effects. To help ensure that grant funds are being used effectively, you asked us to review OJJDP's efforts related to studying and promoting effective girls' delinquency programs. We issued a report on the results of that review on July 24, 2009. This testimony highlights findings from that report and addresses (1) efforts OJJDP has made to assess the effectiveness of girls' delinquency programs, (2) the extent to which these efforts are consistent with generally accepted social science standards and federal standards to communicate with stakeholders, and (3) the findings from OJJDP's efforts and how the office plans to address the findings. This statement is based on our July report and selected updates made in October 2009. With an overall goal of developing research that communities need to make sound decisions about how best to prevent and reduce girls' delinquency, OJJDP established the Girls Study Group (Study Group) in 2004 under a $2.6 million multiyear cooperative agreement with a research institute. OJJDP's objectives for the group, among others, included identifying effective or promising programs, program elements, and implementation principles (i.e., guidelines for developing programs). Objectives also included developing program models to help inform communities of what works in preventing or reducing girls' delinquency, identifying gaps in girls' delinquency research and developing recommendations for future research, and disseminating findings to the girls' delinquency field about effective or promising programs. OJJDP's effort to assess girls' delinquency programs through the use of a study group and the group's methods for assessing studies were consistent with generally accepted social science research practices and standards. In addition, OJJDP's efforts to involve practitioners in Study Group activities and disseminate findings were also consistent with the internal control standard to communicate with external stakeholders, such as practitioners operating programs. The Study Group found that few girls' delinquency programs had been studied and that the available studies lacked conclusive evidence of effective programs; as a result, OJJDP plans to provide technical assistance to help programs be better prepared for evaluations of their effectiveness. However, OJJDP could better address its girls' delinquency goals by more fully developing plans for supporting such evaluations.

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Before 1991, the military services maintained separate finance and accounting operations that were duplicative and inefficient. DFAS was created to standardize DOD finance and accounting policies, procedures, and systems. Military services and defense agencies generally use operations and maintenance appropriations to pay for DFAS services. Before fiscal year 1991, the military services and defense agencies each had their own financial management structure, consisting of a headquarters comptroller organization; finance and accounting centers; and accounting, finance, and disbursing offices at military bases. Each service and agency developed its own processes and systems that were geared to its particular mission. In many instances, the military services and defense agencies interpreted governmentwide and DOD-level finance and accounting policies differently. According to DOD, these variances sometimes resulted in managers being provided conflicting information. Over the years as greater emphasis was placed on joint operations, financial management system incompatibility and lack of standardization (even within a military service) became more apparent. For example, there was only one pay schedule for military personnel, yet DOD maintained and operated dozens of different pay systems. These types of conditions produced business practices that were complex, slow, and error prone. According to DOD officials, no matter how skilled the people operating them, DOD’s financial management systems and processes were inherently handicapped in their efficiency and effectiveness. Furthermore, DOD officials stated that there was an inherent inefficiency in having multiple organizations perform virtually identical functions. Given these problems; changes in the economic, political, and management environments; and advances in technology, DOD officials became convinced they needed to improve the economy and efficiency of their finance and accounting operations. After assessing how finance and accounting activities were performed, DOD determined that consolidating these activities offered a number of potential advantages, including increasing DOD-wide oversight; improving consistency in the application of accounting principles, policies, procedures, systems, and standards throughout DOD; eliminating the costs of maintaining and operating multiple financial operations and systems; improving decision making by providing DOD managers with more timely, meaningful, and accurate financial information; and accelerating the implementation of standard DOD-wide financial systems. The establishment of DFAS in January 1991 was the first step taken by DOD directed at fundamentally reforming finance and accounting operations. DFAS was formed by consolidating into a single agency under DOD’s Comptroller, the large finance and accounting centers that belonged to the military services and the Defense Logistics Agency. Recognizing that additional economies and efficiencies could be achieved, the Deputy Secretary of Defense, in December 1991, directed DFAS to assume control of existing finance and accounting operations and personnel at the command and installation levels within the military services. By 1994, DFAS had assumed responsibility for many of the finance and accounting activities at 332 offices (in the continental United States, Alaska, Hawaii, Guam, Puerto Rico, and Panama) and had announced plans to consolidate these activities at a limited number of DFAS locations. To focus DOD management’s attention on managing the cost of finance and accounting activities, DFAS was designated a Defense Business Operations Fund (DBOF) business area in fiscal year 1992. The concept of DBOF is to promote total cost visibility by charging customers (primarily the military services and defense agencies) for the full cost of providing goods and services. By doing this, DOD hoped that all levels of management would focus their attention on the total costs of carrying out certain critical DOD business operations. DOD anticipated that this would encourage managers to become more conscious of operating costs and make fundamental improvements in how DOD conducts business. In fulfilling DBOF’s concept, DFAS sets the prices it charges the military services and defense agencies and bills them to cover the full cost of its operations. The military services and defense agencies pay for these services primarily with funds from their operations and maintenance appropriations. The 1997 Defense Authorization Act required DOD to conduct a comprehensive study of DBOF and present an improvement plan to the Congress for approval. Pending the results of this study, DOD’s Comptroller, on December 11, 1996, dissolved DBOF and created four working capital funds: (1) Army Working Capital Fund, (2) Navy Working Capital Fund, (3) Air Force Working Capital Fund, and (4) Defense-wide Working Capital Fund. DFAS is part of the Defense-wide Working Capital Fund. The four working capital funds will continue to operate under the revolving fund concept—using the same policies, procedures, and systems as they did under DBOF—and charge customers the full costs of providing goods and services to them. Over the past few years, DOD’s finance and accounting organization and management structure has undergone major changes. For example, DFAS and the military services now share the finance and accounting responsibilities that previously belonged to the military services. Most significantly, however, DFAS has developed a new concept of operations that involves performing most of its finance and accounting operations at consolidated sites rather than at local bases and installations. This has allowed it to reduce the number of locations and personnel needed to perform these operations and to begin standardizing its accounting systems and processes. This section describes the current organizational structure of DOD’s finance and accounting activities and the status of various changes with respect to finance and accounting locations, personnel, budgets, and systems. DFAS and the military services are jointly responsible for carrying out DOD finance and accounting activities. DFAS negotiated a division of responsibility with each military service. Finance and accounting operations are performed by two chains of command within DOD. On one side is DFAS, which reports to the Under Secretary of Defense Comptroller/Chief Financial Officer within the Office of the Secretary of Defense. On the other side are the military services, which are headed by their respective secretary. Each service secretary has an assistant secretary for financial management who directs and manages financial management activities consistent with policies prescribed by the Chief Financial Officer and the service’s implementing directives. As shown in figure 1, the Under Secretary has no direct line of authority to any of the financial management staff within the military services, defense agencies, and DOD field activities. Those staff report through their own organizational structure to their respective unit heads. The Under Secretary and the unit heads report to the Secretary of Defense. The Under Secretary, however, does issue policies, instructions, regulations, and procedures relating to financial management matters and the production of financial statements, which are binding on all DOD activities. The National Defense Authorization Act for Fiscal Year 1994 designated the Comptroller as DOD’s Chief Financial Officer. Specific duties of the Comptroller/Chief Financial Officer as specified in the Chief Financial Officers Act include directing, managing, and providing policy guidance and oversight of agency financial management personnel, activities, and operations; developing and maintaining integrated accounting and financial monitoring the financial execution of the agency budgets in relation to actual expenditures and preparing and submitting timely performance reports; and overseeing the recruitment, selection, and training of personnel to carry out agency financial management functions. As mentioned, each service secretary has an assistant secretary for financial management who reports to the service secretary and directs and manages financial management activities consistent with policies prescribed by the Chief Financial Officer and the service’s implementing directives. The assistant secretary for financial management position in each service was established in the National Defense Authorization Act for Fiscal Year 1989. The act delineated many of the responsibilities of the office, including managing financial management activities and operations; directing the preparation of budget estimates; approving any asset management systems, including cash and credit collecting debts; and accounting for property and inventory systems. Because of potentially overlapping responsibilities, DFAS met several times with the military services’ financial managers and their staffs during 1994 to reach agreement on their respective finance and accounting roles. These meetings resulted in “responsibility matrices” that identify the specific activities that will be performed by DFAS and each military service. According to DFAS, the responsibility matrix agreements were driven, to a large extent, by the number of finance and accounting personnel each service had transferred to DFAS. Prior to the negotiations in 1994, for example, the Army had transferred about 75 percent of its finance and accounting people to DFAS. According to Army officials, it kept only a small contingent of managerial accountants at each installation and major command location to interpret accounting reports provided by DFAS to the installation or major command and provide advice to the commander on proper stewardship of public funds. As a result, DFAS and the Army agreed that DFAS would perform just about all of the Army’s financial activities. On the other hand, Air Force and Navy officials stated that they transferred smaller percentages of their staffs (50 and 29 percent, respectively). They took this approach to maintain control of activities they felt were essential to providing service to their military personnel and families, such as computing travel pay or helping uniformed personnel solve pay-related problems. Travel payment, a finance function, is an example where DFAS provides different levels of service to its military customers. In this case, authorization, computation, disbursement, and accounting are performed by either the military services or DFAS. Table 3 identifies the responsible party for each of these steps. DFAS assumed control over the military services' finance centers and some of the activities at 332 military installations. DFAS is currently consolidating all its activities into 5 centers and not more than 21 operating locations. The military services continue to perform their remaining activities at most of the 332 installations. When DFAS was established, it opened a headquarters office in Arlington, Virginia, and assumed management control over the six large finance centers that belonged to the military services and defense agencies. One of these centers was subsequently closed, but the others continue to support the military service or defense agency they supported prior to the formation of DFAS. According to the Director of DFAS, this was done primarily to ensure that support levels to the military services and defense agencies remained at an acceptable level. DFAS also assumed control over many of the people and functions at 332 small finance and accounting offices around the world. To improve operational efficiencies and reduce costs, DFAS has focused a great deal of attention on consolidating the personnel and workload at a small number of locations. In May 1994, for example, the Deputy Secretary of Defense announced plans to move the DFAS workload and many of the people at these 332 locations to either the existing 5 centers or 20 new operating locations. As of September 1996, DFAS had closed 230 (or about 70 percent) of the small accounting offices and opened 17 operating locations. Figure 2 shows the number of finance and accounting offices that DFAS plans to close through fiscal year 1998, when the consolidation is now expected to be completed. Announced for fiscal year 1997 Three of the planned operating locations—Lexington, Kentucky; Newark, Ohio; and Rantoul, Illinois—have not been formally scheduled for opening at this time. The fourth planned operating location, at Memphis, Tennessee, will be under the cognizance of the U.S. Army Corps of Engineers until the Corps completes its consolidation of finance and accounting operations around fiscal year 1999. At that time, the Corps will transfer the activity to DFAS. Except for Honolulu, Hawaii; Norfolk, Virginia; Orlando, Florida; and San Antonio, Texas, each operating location provides services to a single military service. Honolulu serves all of the military services; Norfolk serves Navy and Army customers; and both Orlando and San Antonio serve Army and Air Force customers. In addition, Charleston, South Carolina; Pensacola, Florida; and Omaha, Nebraska, provide civilian pay service to all military services and defense agencies. Figure 3 shows the locations of the 5 centers and 21 existing or planned operating locations as of September 30, 1996. The primary customer (military service or defense agency) of each center is shown in parentheses in the figure. Not opened as of September 30, 1996. As discussed in the previous section, each of the military services retained certain functions (e.g., managerial accounting, travel claim computation, and customer service) in order to support local commanders and customers. To do this, the services have maintained some staff at most of the 332 installation-level finance offices. Although there are interfaces and exchanges of information between the staff at these offices and DFAS, organizationally they are not part of DOD’s Comptroller or DFAS’ communities. Rather, they report to and receive budgetary support from the base or installation commander. Civilian and military personnel at these activities are paid from operations and maintenance and military personnel appropriations, respectively. DOD estimated it had 46,000 people performing finance and accounting activities in 1994 and has 40,800 performing these today. 28,000 people were transferred into DFAS, leaving the military services with 18,000 people. DFAS currently has 23,500 employees. The military services do not track the number of finance and accounting personnel they employ, but estimate there are about 17,300. In May 1994, when the Deputy Secretary of Defense announced plans to consolidate finance and accounting operations, he said that the number of people performing these activities should drop from about 46,000 to 23,000 by 1999. As of September 1996, DOD estimates show that there were about 40,800 people performing finance and accounting activities—about 5,200 less than estimated in 1994. However, there is some uncertainty about these numbers primarily because the military services do not centrally budget for or manage finance and accounting operations. As a DBOF entity that is now part of the new Defense-wide Working Capital Fund, DFAS tracks the number of personnel it employs so that it can accurately charge its customers for the full cost of operations. Therefore, it generally knows how many people it inherited from the military services and its current on-board strength. DFAS officials told us, for example, that by 1994 DFAS had assumed control of 28,000 personnel—about 10,000 at the 5 large finance centers and about 18,000 at the 332 small, installation-level finance and accounting offices. As of September 1996, this workforce had been reduced to 23,500 and DFAS has plans to eliminate another 3,500 positions by the year 2000. According to DOD, most of these reductions are (or will be) made possible by economies of scale achieved by closing the 332 small finance and accounting offices and consolidating activities at the 5 centers and 21 operating locations. Finance and accounting personnel and activities in the military services, however, are budgeted for and controlled at the installation level. Consequently, service representatives said there were no specific plans to centrally assess or reduce the size of their finance and accounting network. For this reason, they were also uncertain of the number of people that remained after DFAS assumed control of resources in 1994 or that are currently onboard. According to DOD, however, there should have been about 18,000 finance and accounting personnel left with the military services in 1994. In 1992, DFAS and the military services issued a data call to all installation-level finance offices, and in 1994, estimated that the total number of people in DOD’s network was about 46,000. On the basis of this estimate, DFAS assumed control of 28,000 people, leaving about 18,000 people in the military services. To determine the number of people in the current military service network, the services (at our request) either issued another data call to their installations or prepared an estimate based on other available information. They reported to us that, as of September 30, 1996, approximately 17,300 people were performing finance and accounting activities in the military services. On the basis of a comparison of the original data call and the current estimate, about 700 fewer people are performing finance and accounting activities now than DOD officials believe were doing so when DFAS completed its transfer process in 1994. Figure 4 shows the number of finance and accounting personnel reported to us by DFAS and the military services as of September 30, 1996. This includes 589 personnel in the Marine Corps. The total budget for DOD finance and accounting activities is unknown but exceeds $2 billion. DFAS' 1996 budget was $1.64 billion. The military services estimate their personnel costs for fiscal year 1996 at $598 million. The vast majority of the funds come from operations and maintenance appropriations. Information that was provided by DFAS and the military services indicates that DOD budgeted at least $2 billion in fiscal year 1996 to support finance and accounting activities. This estimate includes all DFAS costs plus estimated personnel costs in the military services. Because military service finance and accounting activities are budgeted at local installations and bases in various appropriation accounts, the military services were unable to estimate other finance and accounting-related costs such as training, equipment, supplies, and overhead. As part of the new Defense-wide Working Capital Fund, DFAS does not receive an appropriation. Instead, it bills customers, primarily the military services, for the cost of operations. These bills include charges for direct labor costs related to the performance of finance and accounting functions; indirect costs, such as systems support and depreciation expenses; and overhead costs, such as management support and electricity bills. The bills may also include additional charges or reductions to make up for prior year losses or gains. The military services use their operations and maintenance appropriations to pay the bills. Figure 5 shows DFAS’ financial operations budget from fiscal years 1991 through 1996 and the projected budget for fiscal years 1997 through 2000—the numbers are in constant 1996 dollars. As shown in figure 5, DFAS’ budget for finance and accounting increased from $339 million (in 1996 dollars) in fiscal year 1991 to about $1.64 billion in fiscal year 1996, primarily as a result of an increase in its scope of operations. In fiscal year 1991, for example, DFAS was in operation for only 9 months and was only supporting the finance centers. In fiscal year 1992, DFAS became a DBOF entity and began to identify and charge the military services for the full cost of its operations. For example, system support (e.g., computer hardware and software) costs that had been part of the Defense Information Systems Agency budget in the past were included in the DFAS budget. In fiscal year 1993, DFAS began to assume control of the 332 installation-level finance and accounting offices, and in 1994, DFAS began renovating buildings at the new operating locations. Between fiscal years 1996 and 2000, DFAS estimates its budget will decrease by about 10 percent—from $1.64 billion in fiscal year 1996 to $1.47 billion in 2000 in constant 1996 dollars. According to DFAS officials, the decrease reflects a leveling off of depreciation expenses associated with capital expenditures (such as new computer systems), a drop in workload as DOD continues to downsize its military force structure, and the completion of personnel and workload consolidations from the small finance and accounting offices to DFAS centers and operating locations. The military services’ finance and accounting activities are funded through annual operation and maintenance appropriations. Because these appropriations are allocated to many different budget categories at the installation level, military service officials were not able to estimate the total amount budgeted to support their finance and accounting activities. On the basis of the estimated number of personnel that are currently performing finance and accounting activities, the services estimated that for fiscal year 1996 they budgeted about $598 million in personnel costs. Figure 6 shows the personnel costs each of the military services estimated it incurred during fiscal year 1996. DFAS is responsible for reducing the number of finance and accounting systems used throughout DOD. Since 1991, the number of DOD's reported finance and accounting systems has been reduced from 324 to 217. The military services continue to operate hundreds of feeder systems for which DFAS has no responsibility. As part of its mission, DFAS is responsible for standardizing the finance and accounting systems used throughout DOD. When it was established, for example, DFAS reported that it inherited 127 finance and 197 accounting systems that were in use throughout DOD. In general, DOD defines finance systems as those used to process payments to DOD personnel, retirees, annuitants, and contractors, and accounting systems as those relied on to track appropriations and record operating and capital expenses. In accordance with DOD Financial Management Regulations (DOD 7000.14-R, Volume 1), DFAS, however, does not recognize or include in its inventory several hundred “feeder systems”—systems used to initially record financial data, such as logistics, inventory, and personnel systems—as finance and accounting systems. Yet these feeder systems, which are under the control and operations of the military services and defense agencies, are the source of much of the information that is needed to adequately account for DOD’s assets and operations. DFAS embarked on what it calls a migration system strategy to reduce the number of DFAS finance and accounting systems. Under this strategy, which is depicted in figure 7, DFAS plans to gradually reduce the number of systems used in each functional area (e.g., civilian payroll, military payroll, and accounting) until it eventually arrives at systems that would be used DOD-wide for each finance and accounting area. While the completion of this strategy varies by system and functional area, DFAS estimates that about 49 percent of its current systems (107 of 217) will be eliminated by 2000. . . . . . . This migration strategy typically involves (1) selecting one of the legacy systems from each service, (2) implementing the system servicewide, (3) selecting the best interim migratory system to be DOD’s standard migratory system, and (4) enhancing the migratory system until it meets all DOD requirements. As shown in table 4, DFAS has reduced the reported number of finance systems from 127 to 67 (a 47-percent reduction) and accounting systems from 197 to 150 (a 24-percent reduction). By the year 2000, DFAS estimates that the number of systems will be further reduced to 110—43 finance and 67 accounting systems. Table 4 also shows the number of finance and accounting locations where these systems were used as of September 30, 1996. On the basis of the information presented in table 4, DFAS has been successful in reducing the number of systems in several areas, particularly those where the military services had already consolidated activities at a small number of locations. When DFAS was formed, for example, each of the military services was already operating standard retiree and annuitant pay systems at its respective finance centers. After evaluating the relative capabilities of these systems, DFAS selected the Navy’s retiree pay system and the Air Force’s annuitant pay system as DOD-wide migratory systems. DFAS subsequently integrated these two systems into one system and pays all retirees from the Cleveland center and all annuitants from the Denver center. DFAS and the military services account for monies from four primary sources. Finance and accounting operations are divided into nine functional areas. DOD’s $240-billion appropriation for fiscal year 1996 was used to pay about 6 million people and about 17 million invoices charged to nearly 12 million contracts. The appropriation also supported the operation of 13 DBOF (now working capital fund) business areas such as depot maintenance, commissaries, distribution depots, and DFAS. In addition, in fiscal year 1996, DOD received about $10 billion through its foreign military sales programs and about $12 billion through the operation of base activities such as child care facilities, golf courses, and the Armed Forces Exchanges. To process financial transactions and account for the receipt and expenditure of funds, DFAS and military services’ finance and accounting operations are generally divided into nine functional activities. Table 5 lists these activities, the reported number of DFAS personnel involved in the activity, and the reported total cost for DFAS to process the transactions in fiscal year 1996. The military services were unable to provide us with comparable information. A more detailed description of the sources and uses of DOD funds and the finance and accounting responsibilities of DFAS and the military services is presented in appendix I. We requested comments on a draft of this report from the Secretary of Defense. On January 15, 1997, officials from the Office of the Under Secretary of Defense Comptroller/Chief Financial Officer and representatives of DFAS, the Air Force, the Army, and the Navy met with us to discuss the report. In general, DOD officials agreed with our description of DOD’s finance and accounting structure and organization. They provided us with some suggested changes, which we have incorporated in our final report where appropriate. We performed our review from July 1996 through January 1997 in accordance with generally accepted government auditing standards. Appendix II contains a description of our scope and methodology. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations; Senate Committee on Armed Services; House Committee on National Security; Senate Committee on Governmental Affairs; House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; the Secretary of Defense; and other interested parties. We will make copies available to others on request. If you or your staff have any questions concerning this report, please contact either James E. Hatcher on (513) 258-7959 or Geoffrey B. Frank on (202) 512-9518. Major contributors to this report are listed in appendix III. This appendix provides an overview of the Department of Defense’s (DOD) finance and accounting operations. DOD has focused its accounting operations primarily on monitoring and controlling the obligation and expenditure of budgetary resources. As discussed in the following sections, DOD carries out these accounting operations for four types of funds —general, working capital, nonappropriated, and security assistance. With the enactment of the Chief Financial Officers Act (CFO) of 1990, the Congress called for audited agency financial statements that would more fully disclose a federal entity’s financial position and results of operations beginning with fiscal year 1996. Such statements are intended to provide for (1) better information for more informed decisions on allocation of budgetary resources and (2) an annual assessment of an agency’s financial performance, including the effectiveness of its execution of its stewardship responsibilities. DOD officials have forthrightly acknowledged that serious financial management problems severely hamper their ability to effectively carry out the full range of accounting and financial reporting responsibilities called for in the CFO Act. DOD has struggled to put in place the financial management operations and controls required to produce the information it needs to ensure adequate accountability and to support decision making. For example, few of DOD’s accounting systems are now integrated with its finance systems or with other systems or databases relied on to carry out its accounting and financial reporting responsibilities. Consequently, DOD prepares required financial reports to account for an estimated 80 percent of its physical assets based on management systems that were not intended for such accounting and financial reporting. The absence of a fully integrated general ledger-controlled system necessitates DOD’s reliance on labor-intensive, error-prone processes to ascertain whether all required items are accounted for and reported. Largely as a result of the CFO Act and other recent legislative initiatives directed at increasing financial management discipline throughout the federal government, DOD has recently begun efforts to broaden the focus of and to bring greater discipline to its accounting operations. DOD’s Chief Financial Officer stated that the CFO Act “has contributed to the recognition and understanding of the scope and depth of the financial management problems that DOD faces and has defined a standard by which the Department can measure its progress.” DOD has characterized its blueprint for financial management reform as the most comprehensive reform of financial management systems and practices in its history. In its efforts to improve its accounting activities, DOD is guided by a set of comprehensive standards that were developed by the Federal Accounting Standards Advisory Board. This Board, which was established in October 1990 by the Comptroller General of the United States, the Director of the Office of Management and Budget, and the Secretary of the Treasury Department, recommends accounting standards after considering the financial and budgetary information needs of the Congress, executive agencies, and other users and comments from the public. The Office of Management and Budget, Treasury, and GAO then decide whether to adopt the recommended standards; if they do, the standards are published by the Office of Management and Budget and GAO and become effective. Recently, a set of comprehensive accounting standards was approved by the three agencies. The new accounting standards and accompanying reporting concepts are central to effectively meeting the financial management improvement goals of the CFO Act of 1990, as amended. Also, improved financial information is necessary to support the strategic planning and performance measurement requirements of the Government Performance and Results Act of 1993. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. Figure I.1 shows the types of funds and the sources and uses of the funds. General funds, the largest category of funds the Defense Finance and Accounting Service (DFAS) must account for, involve monies provided to DOD through congressional appropriations for military personnel; operation and maintenance; military construction; procurement; and research, development, test and evaluation. The Congress appropriated over $240 billion to DOD for fiscal year 1996. Because some of these appropriations involve multiyear funds, DFAS accounted for $338.5 billion in obligated and unobligated balances in general funds monies during fiscal year 1996. As of September 30, 1996, DFAS was required to account for $74.6 billion in obligated and unobligated balances generated by 13 working capital fund (formally DBOF) business areas. These business areas include such activities as depot maintenance, commissaries, distribution depots, and DFAS. In general, these business activities are intended to operate by selling goods and services to the military services and defense agencies at the cost incurred in providing the good or service. Many of the services provided through these business areas, such as the overhaul of ships, tanks, and aircraft, are essential to maintaining the military readiness of our country’s weapon systems. Working capital fund customers pay for the goods and services, primarily, with operations and maintenance funds appropriated by the Congress. DOD’s nonappropriated funds result primarily from the sale of goods and services to DOD military personnel, their dependents, and other qualified persons. Nonappropriated fund activities are divided into two major types—morale, welfare, and recreation activities and the Armed Forces Exchanges. In fiscal year 1995, DOD reported morale, welfare, and recreation activities and Armed Forces Exchanges revenues of $2.5 billion and $9.4 billion, respectively (according to a DOD official, 1996 revenues are expected to be about the same). DFAS, however, has accounting responsibility for only a limited portion of the nonappropriated activities. In fiscal year 1996, DFAS accounted for about $500 million in nonappropriated funds. Morale, welfare, and recreation activities are essentially small businesses such as libraries, gyms, golf courses, child care centers, and officers’ clubs that operate at numerous military installations worldwide. Armed Forces Exchanges are located on military installations worldwide and operate similarly to commercial retail outlets. The exchanges offer a variety of goods and services from military uniforms to fast food. DFAS has accounting responsibility only for a portion of the Army morale, welfare, and recreation workload. The Air Force, the Navy, and the Marine Corps account for these activities through their own nonappropriated fund organizations that are not part of the military service finance and accounting offices. The Armed Forces Exchanges are not included in DFAS’ or the military services’ finance and accounting office workload. DOD also has responsibility for security assistance funds used for congressionally approved sales of military weapon systems and equipment to foreign governments. In some cases, funds accounted for in the security assistance program are received from foreign governments. In addition, the Congress appropriates funds that countries can use as loans or grants to make these purchases. In fiscal year 1996, DOD reported that the security assistance program generated almost $10 billion in new sales. Because many foreign military sales involve procurements over a number of years, in total, DFAS accounted for about $28 billion in obligated and unobligated balances in security assistance funds in fiscal year 1996. DOD’s finance activities generally involve paying the salaries of its employees, paying retirees and annuitants, reimbursing its employees for travel-related expenses, paying contractors and vendors for goods and services, and collecting debts owed to DOD. This section describes DFAS’ and the military services’ involvement in each of these activities. Includes 28 locations and 21 Foreign National Civilian pay systems. Currently, DFAS pays the salaries of 826,000 civilians and about 3 million military personnel. In order for DFAS to pay DOD personnel, it receives information from three sources—military and civilian personnel offices, customer service representatives, and field finance offices or timekeepers within the employee’s unit. Figure I.2 shows an overview of the process by which DFAS obtains information to disburse and account for salary payments made to all DOD employees. The civilian and military pay processes begin with the military service’s personnel office establishing a record in its personnel system for a new hire or recruit by entering personal data such as name, address, and salary. Since the majority of the military services’ personnel systems are not integrated with the payroll systems DFAS uses, entitlement data are sent to DFAS payroll systems through an electronic interface. This interface allows DFAS to establish a pay account for the civilian or military employee. Throughout a person’s employment with DOD, timekeepers, who are usually administrative support personnel or supervisors in a military unit or office, or field finance office staff, submit time and attendance information directly to DFAS. This information is used by DFAS to compute the amount each employee should be paid. After payments are made, the payroll system transmits disbursement information to DFAS accounting units where accounting records are updated and management and budgetary reports are distributed to DOD and external agencies. DFAS also receives information that affects civilian and military pay from customer service representatives. DFAS and the military services’ finance personnel share the responsibility of providing customer service to civilian employees and military members. Customer service duties include input of employee initiated transactions such as bonds, tax withholdings, and address changes; resolving pay-related problems; and responding to inquiries on all aspects of the payment process, such as pay computation and the recording and balancing of annual and sick leave. DFAS assumed retiree and annuitant pay responsibilities from the military services upon its establishment in 1991. In fiscal year 1996, DFAS processed payments to about 2 million retirees and annuitants. Figure I.3 provides an overview of the retiree and annuitant payroll process, identifying duties specific to DFAS and the military services. The military services’ personnel offices process the paperwork required for establishing a retiree pay account. This information is sent electronically to the DFAS Cleveland center where personnel in retired pay operations verify that the retiree’s account has been deleted from the military pay systems (to avoid dual payments to the retiree); compute the retiree’s pay; disburse payment to the retiree; and forward pay information to a DFAS accounting unit that updates accounting records and distributes management and budgetary reports. Upon receipt of a death notice, retired pay operations personnel in Cleveland will suspend or terminate the retirement pay account and electronically transfer the case to the Denver center. Denver personnel in the annuity pay office maintain the annuitant’s pay account, issue surviving annuity payment, provide customer service support, and update accounting records. These personnel also annually verify the annuitant’s eligibility status. Factors that affect entitlement eligibility include, but are not limited to, changes in Social Security benefits, remarriage, and age of children. The travel payment process for both DOD civilian and military employees can be broken down into three stages—travel authorization, actual travel, and travel settlement. Military service finance personnel are involved in the travel authorization process and, in some cases, the travel settlement process. DFAS performs the majority of the responsibilities in the travel settlement step in which the traveler is reimbursed. Annually, DFAS processes about 2.1 million travel settlements. Figure I.4 provides an overview of the travel payment process, distinguishing between activities performed by DFAS and the military services. The travel pay process begins when a DOD employee or supervisor identifies a need for travel. The employee prepares and submits a travel request and cost estimate to the appropriate superior for approval. The administrative support staff within the organization reviews the approved request, obligates funds, and issues a travel order. The administrative support staff includes personnel who have authority to input obligations into the record and may, for example, be personnel in the finance, resource management, or budget offices. At this time, the employee makes travel arrangements and may receive a travel advance through the use of an official government travel card or, when no other means is available, from the appropriate disbursement office. Upon completion of travel, the employee submits a travel voucher to his/her supervisor for reimbursement of expenses, attaching supporting documentation such as receipts. Once the supervisor approves the claim, it is sent to either a DFAS travel pay office or the military service’s finance office where the traveler’s entitlement is computed and an audit is conducted. After entitlement is computed, DFAS or the appropriate military disbursement office makes payment, and DFAS updates the accounting records to reflect the disbursement. DOD finance and accounting personnel are also responsible for making payments to contractors for goods and services such as the production of weapon systems, the purchase of computer equipment, and the shipment of freight and personal property. DFAS has the primary responsibility for processing the transactions, paying the contractor or vendor, and accounting for the disbursement of funds. Military service finance personnel are involved to the extent that they verify that funds are available for use and they enter information into accounting systems to show that funds have been committed or obligated for various goods and services. In fiscal year 1996, DFAS employees made payments on approximately 17 million invoices submitted by contractors and vendors. As shown in figure I.5, while variations exist, the process of acquiring goods and services starts outside of the finance and accounting community, usually with a program manager issuing a request for a procurement of an item or the shipment of freight. Once a requirement for a good or service has been identified, personnel from a military service finance office are contacted to ensure that funds are available for use. If funds are available, the finance personnel set up a commitment on their accounting system. If the supply office has the needed item, it is issued to the requestor. If it is not available through a supply office, the contracting office awards a contract for high-dollar value items or the military service finance office establishes a purchase order for lower value items. For the movement of freight and personal property, DOD either provides the service using its own resources or generates a government bill of lading for the service. Once a supply item is ordered or service has been contracted for, the vendor delivers or performs the service and sends an invoice to the appropriate DFAS office for payment. A receiving report is sent by the requestor to the same office to show that the delivery was received. Personnel at each DFAS location are responsible for matching contract, invoice, and receiving report information prior to making a payment to a contractor/vendor. After a payment is made, accounting personnel at the operating locations are responsible for activities such as matching payment information against obligations and providing status of funds information to the military services. $183 million Federal law requires that all government agencies pursue collection action against individuals or contractors that owe the government money. Within DOD, these debts can result from a wide variety of transactions such as defaulted loans (education or small business) or for various overpayments of pay and benefits. If an individual is employed by DOD or receiving any compensation payment, the military service finance offices attempt to collect the money or process an offset against the individual’s pay account. If the individual is no longer employed by DOD or is not receiving any compensation payment, it is considered an out-of-service debt and DFAS personnel are responsible for collecting the debt. DFAS is also responsible for collecting all debts owed by contractors. As of September 30, 1996, about 319,000 military and civilian debtors owed DOD $464 million and approximately 2,500 contractors owed DOD about $3.5 billion. DFAS personnel closed about 116,000 cases as of the end of fiscal year 1996 during which time they collected approximately $238 million. The military services perform debt management activities at each of their installations. However, we were unable to obtain information related to the number of cases that were processed during fiscal year 1996. Figure I.6 provides an overview of the process used by DOD to collect debts. Upon the initial identification of a debt, many military installation-level organizations, such as a hospital, attempt to collect the debt. If the debt is determined to be uncollectible and is owed by a contractor or someone no longer working for DOD, it is sent to a DFAS center for collection. DFAS is required to send three letters—30 days apart—to debtors in an attempt to collect the money. Then, if the money has not been collected, it can be turned over to a private agency for collection or to the Internal Revenue Service for a potential tax refund offset. The debt may also be sent to the Department of Justice for legal action if research shows the debtor has the ability to pay. If DFAS determines that an individual debtor is employed by another federal agency, it can obtain payment for the outstanding debt through payroll deductions. At any time during the process, the debt can be collected in full, compromised to a lesser amount with the remainder written off, or written off in total if the debt falls below established dollar thresholds. DFAS updates its accounting records to reflect any of these events and reports the information back to the military services. If any debt is collected, it is refunded to the military service that incurred the debt or deposited into the Treasury Miscellaneous Receipts Account. The Subcommittee on Defense, Senate Committee on Appropriations, asked us to provide an overview of DOD finance and accounting activities. We focused our work on describing how DOD is organized to perform finance and accounting, the size of the finance and accounting infrastructure, and the various activities that are performed by DFAS and the military services. To determine how DOD is organized to perform finance and accounting activities, we reviewed documents that discussed the rationale for centralizing accounting activities within DFAS and DFAS and military service finance and accounting organizational charts. We also discussed the organizational structure with officials at DFAS Headquarters and the military services’ Office of the Assistant Secretary for Financial Management. To determine the current size of DOD’s finance and accounting infrastructure, we obtained and reviewed budget, personnel, workload, and cost figures provided by DFAS. The military services did not have comparable information readily available. Therefore, officials from the Army’s and the Marine Corps’ financial management offices sent out a data call to their respective installations to obtain information on the number of personnel currently performing finance and accounting activities. The Air Force updated personnel figures obtained from DOD’s central personnel database. The Navy updated its personnel figures using a variety of Navy reports and DOD’s central personnel database. From these numbers, each of the services estimated the amount of money it spends on personnel costs to perform finance and accounting activities. Given our overall assignment objectives and the descriptive nature of our report, we did not verify the data provided to us by either DFAS or the military services. For purposes of this report, we did not obtain information from defense agencies related to how many personnel are currently performing finance and accounting activities. This decision was based on the lack of a single focal point within DOD that could provide us with the needed information from approximately 24 defense agencies and the small number of personnel involved with defense agency finance and accounting activities prior to the establishment of DFAS in 1991. To determine the type of activities DOD finance and accounting personnel are responsible for performing, we reviewed DOD’s Chief Financial Officer Financial Management 5-Year Plan, the DFAS Customer Service Plan, the responsibility matrices negotiated by DFAS with each of the military services, and work flow descriptions for each finance and accounting activity. To supplement information included in formal reports, we interviewed headquarters and field officials at the following locations: DFAS headquarters in Arlington, Virginia; DFAS centers in Cleveland, Ohio; Columbus, Ohio; Denver, Colorado; and Indianapolis, Indiana; the Army’s and the Navy’s Office of the Assistant Secretary for Financial Management in Arlington, Virginia; the Air Force’s Secretary of the Air Force (Financial Management and Plans) in Arlington, Virginia; and the Marine Corps’ Office of the Deputy Chief of Staff for Program and Resources in Arlington, Virginia. Financial Management: DOD Needs to Lower the Disbursement Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996). DOD Procurement: Millions in Contract Payment Errors Not Detected and Resolved Promptly (GAO/NSIAD-96-8, Oct. 6, 1995). Financial Management: Status of Defense Efforts to Correct Disbursement Problems (GAO/AIMD-95-7, Oct. 5, 1994). DOD Procurement: Overpayments and Underpayments at Selected Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994). DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106, Mar. 14, 1994). Financial Management: Navy Records Contain Billions of Dollars in Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). Financial Management: Air Force Systems Command Is Unaware of Status of Negative Unliquidated Obligations (GAO/AFMD-91-42, Aug. 29, 1991). Defense Business Operations Fund: DOD Is Experiencing Difficulty in Managing the Fund’s Cash (GAO/AIMD-96-54, Apr. 10, 1996). Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, Mar. 1, 1995). Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994). Financial Management: DOD’s Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994). Financial Management: Status of the Defense Business Operations Fund (GAO/AIMD-94-80, Mar. 9, 1994). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). Financial Management: Defense Business Operations Fund Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992). Defense’s Planned Implementation of the $77 Billion Defense Business Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991). Financial Management: DOD Inventory of Financial Management Systems Is Incomplete (GAO/AIMD-97-29, Jan. 31, 1997). DOD Accounting Systems: Efforts to Improve System for Navy Need Overall Structure (GAO/AIMD-96-99, Sept. 30, 1996). Navy Financial Management: Improved Management of Operating Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94, Aug. 16, 1996). CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is Unreliable (GAO/AIMD-96-65, July 8, 1996). CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports (GAO/AIMD-96-7, Mar. 27, 1996). Financial Management: Challenges Facing DOD in Meeting the Goals of the Chief Financial Officers Act (GAO/T-AIMD-96-1, Nov. 14, 1995). Financial Management: Challenges Confronting DOD’s Reform Initiatives (GAO/T-AIMD-95-146, May 23, 1995). Financial Management: Challenges Confronting DOD’s Reform Initiatives (GAO/T-AIMD-95-143, May 16, 1995). Financial Management: Control Weaknesses Increase Risk of Improper Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995). Financial Management: Financial Control and System Weaknesses Continue to Waste DOD Resources and Undermine Operations (GAO/T-AIMD/NSIAD-94-154, Apr. 12, 1994). Financial Management: Strong Leadership Needed to Improve Army’s Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993). Financial Management: Army Real Property Accounting and Reporting Weaknesses Impede Management Decision-Making (GAO/AIMD-94-9, Nov. 2, 1993). Financial Management: Defense’s System for Army Military Payroll Is Unreliable (GAO/AIMD-93-32, Sept. 30, 1993). Financial Management: DOD Has Not Responded Effectively to Serious, Long-Standing Problems (GAO/T-AIMD-93-1, July 1, 1993). Financial Audit: Examination of the Army’s Financial Statements for Fiscal Years 1992 and 1991 (GAO/AIMD-93-1, June 30, 1993). Financial Audit: Examination of the Army’s Financial Statements for Fiscal Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992). Financial Management: Immediate Actions Needed to Improve Army Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992). Financial Audit: Aggressive Actions Needed for Air Force to Meet Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992). Financial Audit: Status of Air Force Actions to Correct Deficiencies in Financial Management Systems (GAO/AFMD-91-55, May 16, 1991). Financial Audit: Financial Reporting and Internal Controls at the Air Logistics Centers (GAO/AFMD-91-34, Apr. 5, 1991). Financial Audit: Air Force’s Base-Level Financial Systems Do Not Provide Reliable Information (GAO/AFMD-91-26, Jan. 31, 1991). Financial Audit: Financial Reporting and Internal Controls at the Air Force Systems Command (GAO/AFMD-91-22, Jan. 23, 1991). DOD Infrastructure: DOD Is Opening Unneeded Finance and Accounting Offices (GAO/NSIAD-96-113, Apr. 24, 1996). DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995). Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Defense Infrastructure: Enhancing Performance Through Better Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995). Military Bases: Analysis of DOD’s Recommendations and Selection Process for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on the Department of Defense's (DOD) management of its financial operations, focusing on: (1) DOD's rationale for creating the Defense Finance and Accounting Service (DFAS); (2) the current size of the DOD finance and accounting infrastructure; and (3) the various finance and accounting activities performed by DOD personnel. GAO reported that: (1) Before fiscal year 1991, the military services and defense agencies independently managed their finance and accounting operations. Because these decentralized operations were highly inefficient and failed to produce reliable information for decision makers, DOD created DFAS to consolidate, standardize, and integrate finance and accounting operations. DFAS inherited 26,000 finance and accounting personnel but about 18,000 personnel remained with the military services to perform managerial accounting and customer service activities at local installations and bases. (2) By the end of fiscal year 1998, DFAS expects that all 332 installation-related finance and accounting offices will be closed and their operations transferred to 5 large centers and no more than 21 new operating locations. This consolidation will help DFAS, between fiscal years 1996 and 2000, reduce its budget from $1.64 billion to about $1.47 billion (in constant 1996 dollars); its personnel from 23,500 to about 20,000; and the number of finance and accounting systems from 217 to about 110. The military services reported that they still have close to 17,000 personnel in their finance and accounting network and are not planning any specific reductions. (3) DOD's finance and accounting activities are generally divided into 9 functional areas (accounting, payroll, contract payments, etc.). Improving these areas is an enormous task, involving the replacement of many antiquated systems and processes. The task is even move difficult considering the volume of transaction that must be continued while improvements are being made. Annually, for example, DOD disburses around $260 billion on 17 million invoices, 6 million payroll accounts, and 2 million travel vouchers.

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The Federal Reserve Act established the Federal Reserve to operate collectively as the country’s central bank. The Federal Reserve Act established the Federal Reserve as an independent agency with a decentralized structure to ensure that monetary policy decisions would be based on a broad economic perspective from all regions of the country. The Federal Reserve’s monetary policy decisions do not have to be approved by the President, the executive branch of the government, or Congress. However, the Federal Reserve is subject to oversight by Congress and conducts monetary policy so as to promote the long-run objectives of maximum employment, stable prices, and moderate long- term interest rates in the United States, as specified by law. The Federal Reserve operates in a unique public and private structure. It consists of the Board of Governors (a federal agency), the 12 Reserve Banks (federally chartered corporations), and FOMC. Board of Governors. The Board of Governors is an independent regulatory federal agency located in Washington, D.C., and has broad interest in monitoring and promoting the stability of financial markets. The Board of Governors’ authorities include: supervising bank and thrift holding companies, state-chartered banks that are members of the Federal Reserve, and the U.S. operations of foreign banking organizations; reviewing and determining discount rates for lending to depository institutions; conducting monetary policy (in cooperation with FOMC); and providing general supervision over the operations of the Reserve Banks. The top officials of the Board of Governors are the seven members who are appointed by the President and confirmed by the Senate. Moreover, the Federal Reserve Act requires the Board of Governors to submit written reports to Congress twice each year containing discussions of the conduct of monetary policy and economic developments and prospects for the future. The act also requires the Chair of the Board of Governors to testify on the conduct of monetary policy twice each year in connection with the monetary policy report, as well as economic development and prospects for the future. Reserve Banks. The Federal Reserve is divided into 12 districts, with each district served by a regional Reserve Bank. In most cases, each regional Reserve Bank also operates one or more branch offices (see fig. 1). The Reserve Banks are not federal agencies; rather, each Reserve Bank is a federally chartered corporation with a board of directors and member banks that are stockholders. Under the Federal Reserve Act, Reserve Banks are subject to the general supervision of the Board of Governors. The Reserve Banks were established by Congress as the operating arms of the Federal Reserve, and they combine both public and private elements in performing a variety of services and operations. These functions include participating in formulating and conducting monetary policy; providing payment services to depository institutions, including transfers of funds, automated clearinghouse services, and check collection; distributing coin and currency; performing fiscal agency functions for Treasury, certain federal agencies, and other entities; providing short-term loans to depository institutions; serving consumers and communities by providing educational materials and information on financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. In addition, certain services are provided to foreign and international monetary authorities, primarily by the Federal Reserve Bank of New York. State-chartered member banks are subject to supervision by the state in which they are chartered and the Board of Governors (through a regional Reserve Bank) as a condition of membership. National banks are chartered and supervised by OCC. State nonmember banks are supervised by the state in which they are chartered and by FDIC. See figure 2 for a chart displaying the number and percentage of commercial banks supervised by each prudential regulator. FOMC. FOMC plays a central role in the execution of the Federal Reserve’s monetary policy mandate to promote price stability, maximum employment, and moderate long-term interest rates in the United States. FOMC is responsible for directing open market operations—the purchase and sale of securities in the open market by a central bank—to influence the total amount of money and credit available in the economy. FOMC has authorized and directed the Federal Reserve Bank of New York to conduct open market operations by engaging in purchases or sales of certain securities, typically U.S. government securities, in the secondary market. FOMC also plays a central role in monetary policy strategy and communication. Reserve Banks derive income from various sources, maintain surplus accounts, and remit earnings in excess of expenses to Treasury. The Reserve Banks derive income primarily from the interest on their holdings of U.S. government securities, agency mortgage-backed securities, and agency debt acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Reserve Banks; interest on loans to depository institutions; reimbursements for services performed as fiscal agent for Treasury and other agencies; and fees received for payment services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations. However, Reserve Banks are not operated for profit. The Reserve Banks use earnings to pay operational expenses and dividends to member banks and to fund their capital surplus accounts. The surplus account is primarily intended to cushion against the possibility that total Reserve Bank capital would be depleted by losses incurred through Federal Reserve operations. Until enactment of the FAST Act, Federal Reserve policy as established in the Financial Accounting Manual for Federal Reserve Banks required the Reserve Banks to retain a surplus balance equal to the 3 percent that commercial banks pay in to purchase Reserve Bank stock. Due to this matching provision, as the value of member banks’ capital and surplus increased over time, so did the values of the Federal Reserve’s surplus account (see fig. 3). The Reserve Banks then transfer earnings in excess of expenses to Treasury. About 95 percent of the Reserve Banks’ net earnings have been transferred to Treasury since the Federal Reserve began operations in 1914. The transfers, known as remittances, have been above historic levels since the 2007—2009 financial crisis (see fig. 4). Under the Federal Reserve Act, a member bank (a national bank or state- chartered bank that applies and is accepted to the Federal Reserve) must subscribe to capital stock of the Reserve Bank of its district in an amount equal to 6 percent of the member bank’s capital and surplus. The member bank will pay for one-half of this subscription upon approval by the Reserve Bank of its application for capital stock (with the remaining half of the subscription subject to call by the Reserve Bank). The capital stock of each Reserve Bank is valued at $100 per share. When a member bank increases its capital stock or surplus, it must subscribe for an additional amount of Reserve Bank stock equal to 6 percent of the increase with half of the stock paid in. Conversely, when a member bank reduces its capital stock or surplus it is to surrender the same amount of stock to its regional Reserve Bank. Shares of the capital stock of Reserve Banks owned by member banks do not carry with them the typical features of control and financial interest conveyed to holders of common stock in for-profit organizations. For example, member banks cannot transfer or sell Reserve Bank stock or pledge it as collateral; voting rights do not change with the number of shares held; and each member bank has only a single vote in those director elections in which they are eligible to vote. Currently, stock ownership provides a dividend payment and the right to vote for two classes of Reserve Bank directors, as discussed later. Under the original Federal Reserve Act, the annual dividend rate was 6 percent on paid-in capital stock and was cumulative. Therefore, member banks would earn a dividend of 0.5 percent per month on the amount of their paid-in capital stock. The Reserve Banks’ long-standing practice is to make dividend payments on the last business days of June and December (that is, a dividend payment of 3 percent twice a year). Provisions in the FAST Act effective January 1, 2016, altered the dividend rate that some member banks receive on paid-in capital. For banks with more than $10 billion in consolidated assets, the dividend rate was reduced from 6 percent per annum to the lesser of 6 percent or the highest accepted yield at the most recent auction of 10-year Treasury notes before the dividend payment date. The high yield of the 10-year Treasury note auctioned on June 30, 2016 (the last auction before the dividend payment) was 1.702 percent, and on December 30, 2016, was 2.233 percent. The dividend rate for member banks with less than $10 billion in consolidated assets remains at 6 percent. The Reserve Banks continue to make dividend payments semiannually. The composition of boards of directors for Reserve Banks is statutorily determined and intended to ensure that each board represents both the public and member banks in its district. The Federal Reserve Act established nine-member boards of directors to govern all 12 Reserve Banks. Each board is split equally into three classes of directors. Class A directors represent the member banks, while Class B and C directors represent the public. For Class B and C directors, the Federal Reserve Act requires “due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.” The Federal Reserve Act also requires that member banks elect Class A and Class B directors and that the Board of Governors appoints Class C directors. The Federal Reserve Act provides that the chairman of the board, like all Class C directors, cannot be an officer, director, employee, or stockholder of any bank. The principal functions of Reserve Bank directors are to play a role in the conduct of monetary policy; oversee the general management of the Reserve Bank, including its branches; and act as a link between the Reserve Bank and the community. The boards of directors of Reserve Banks play a role in the conduct of monetary policy in three primary ways: (1) by providing input on economic conditions to the Reserve Bank president (all 12 Reserve Bank presidents attend and participate in deliberations at each FOMC meeting); (2) by participating in establishing discount rate recommendations (interest rate charged to commercial banks and other depository institutions on loans received from their regional Reserve Bank’s discount window) for Board of Governors’ review and determination; and (3) for the Class B and C directors, by appointing Reserve Bank presidents with the approval of the Board of Governors. A large amount of research has been produced on the attributes and effects of central bank independence. According to the research, a high level of central bank independence is generally considered to be desirable. The research has generally found that countries with high central bank independence have been able to maintain lower levels of inflation. Central bank independence can be divided into three categories (political, instrument, and financial independence), as described in the following bullets. Political independence is based on a central bank’s capacity to define monetary policy strategy (goals) without political interference. Political independence encompasses appointing procedures, relationships with the government, and formal responsibilities. Instrument independence is based on a central bank’s capacity to define monetary policy instruments without political interference. Instrument independence for a central bank includes the ability to avoid financing public spending by money creation, autonomy in setting interest rates, and ability to conduct monetary policy without banking sector oversight responsibilities. Financial independence is based on a central bank’s capacity to govern its own budget. Financial independence encompasses conditions for capitalization and recapitalization, determination of the central bank budget, and arrangements for profit distribution and loss coverage. Independence in the implementation of monetary policy can be a function of the degree of independence in all three categories: political, instrument, and financial. Lower degrees of independence in any of these areas can affect monetary policy independence. Existing research shows that the Federal Reserve is relatively independent overall compared to central banks in other advanced economies. The level of political independence is lower for the Federal Reserve than its instrument or financial independence due in part to existing appointment procedures for the Board of Governors, whose members are appointed by the President and confirmed by the Senate. However, Board of Governors officials stated that Federal Reserve political independence is strengthened by the fact that Reserve Bank presidents are not political appointees. In addition, the instrument independence of the Federal Reserve is high, and the financial independence of the Federal Reserve is also relatively high. According to legislative history and historical accounts that we reviewed, the stock purchase requirement in the Federal Reserve Act established an ownership and control arrangement at Reserve Banks to facilitate a balance of power between the Board of Governors and private interests, capitalized the Reserve Banks, and helped support the new national currency created by the act. Based on our interview with a past Federal Reserve historian and historical accounts, the dividend rate of 6 percent was intended to compensate member banks for the requirement to provide funds to the Reserve Banks to begin operations and the risk of the Federal Reserve not succeeding, as well as to attract state-chartered banks to the Federal Reserve. According to the legislative history and historical accounts related to the Federal Reserve Act, debate over the creation of the Federal Reserve focused on the balance of power among economic regions of the United States and between the private sector and government. The resultant corporate structure of Reserve Banks was intended to help balance the influence of government over the central bank, of different regions, and of small versus large banks, as well as to help fund the Federal Reserve. Many Americans were resistant to the creation of a central bank (dating back to the nation’s founding); thus, early drafts of proposals for a central bank did not include the term “central bank.” However, there was strong recognition that the nation needed a central bank to forestall and mitigate financial panics. There was considerable disagreement about how it should be structured, including considerations about the role of private bankers versus government officials, how centralized the new bank should be, and the extent of its powers. The Federal Reserve Act as proposed in January 1913 by Representative Carter Glass generally was viewed as occupying the middle ground between positions advocating for government control over the Federal Reserve and positions advocating for more control by private commercial banks. The Glass bill proposed creating up to 15 Reserve Banks and the Board of Governors. The Reserve Banks were modeled after clearinghouses or “banker’s banks” and some European central banks in that they would be funded by selling stock shares to commercial banks. In particular, the design adopted for the Federal Reserve was federated, with independent Reserve Banks overseen by the Board of Governors. Under the bill, each Reserve Bank was required to have minimum capital to begin business. According to a past historian of the Federal Reserve, proponents in Congress of a central bank did not want to fund it, but needed to raise cash for capital and gold to back Federal Reserve notes that would serve as the national currency. The original proposal required member banks to purchase stock equal to 20 percent of their paid-in and unimpaired capital, with one-half paid on joining the Reserve Bank and one-half callable from the member bank. The Senate and conference committees agreed to change the capital of the Federal Reserve to 6 percent of member banks’ capital and surplus rather than 20 percent of capital alone as provided in the Glass bill. This change yielded almost the same total capital but satisfied small banks claiming that the Glass bill discriminated against them. Member banks had to pay for the stock in gold or gold certificates, which concentrated gold deposits in the Reserve Banks to support Federal Reserve notes. The bill also required that each national bank subscribe to the stock of the Reserve Bank in its district. Only national banks were compelled to subscribe because their charters were issued by the federal government. State-chartered banks were not required to purchase Reserve Bank stock but were permitted to join the Federal Reserve if they met certain requirements. State-chartered banks opposed mandatory membership because they did not want to be subject to supervision by a federal regulator. The mandatory nature of national bank membership and stock ownership was controversial when the Federal Reserve Act was under debate. But for Glass, “the compulsory and pro rata capital contribution were ‘means to the achievement of a democratic organization constituted by the democratic representation of the several institutions which are members and stockholders of a reserve bank’” and also “considered necessary for the establishment of corporate entities that would act ‘primarily in the public interest.’” In addition, Senator Robert Owen, primary sponsor of the Federal Reserve Act in the Senate, supported the stock purchase requirement because he believed it would ensure that commercial banks would have an incentive to safeguard the Federal Reserve. The rationales for paying a 6 percent dividend rate included compensating banks for opportunity costs for providing capital and reserves to the Reserve Banks and attracting state-chartered banks to Federal Reserve membership. According to the legislative history and other information we reviewed, notable proposals for creating a central bank included stock and dividend payments. One of the early proposals for a central bank was written in 1910 by Paul Warburg and included dividends on central bank stock of 4 percent. The original Federal Reserve Act proposed by Representative Glass provided for a dividend rate of 5 percent. Glass stated in his report on the 1913 bill that 5 percent represented the normal rate of return from current bank investments “considering the high character of the security offered.” Debate in the Senate and conference committee resulted in a 6 percent dividend rate on Reserve Bank stock. This rate was comparable to those of European central banks of the time. Based on our interviews with a past Federal Reserve historian, one of the rationales for creation of the 6 percent dividend rate was to compensate member banks for the opportunity costs of the capital they invested in the Reserve Bank stock. National banks and state-chartered banks that chose to join the Federal Reserve were required to purchase the stock and therefore could not invest this capital in other instruments that might earn a higher return. Also, the 6 percent dividend rate included a risk premium associated with the stock of this new institution. While the Reserve Banks are seen as safe today, during the debates over the Federal Reserve Act there was worry that they would fail, particularly smaller Reserve Banks in rural regions of the country that had less initial capital. However, concerns were raised about making the dividend rate so attractive that member banks would pull too much bank capital away from the local community. Lastly, the dividend was intended to help induce state-chartered banks to join the Federal Reserve. As noted earlier, state-chartered banks were not required to join the Federal Reserve and purchase Reserve Bank stock and therefore would not be subject to supervision by the Federal Reserve. As a result, a low percentage of state-chartered banks initially joined the Federal Reserve and there was a gap in the Board’s knowledge of the safety and soundness of the banking system. Thus, the 6 percent dividend rate was intended as an incentive for state-chartered banks to voluntarily join the Federal Reserve. To examine the comparative value of a dividend rate of 6 percent since the enactment of the Federal Reserve Act, we examined rate of return information on Treasury and certain corporate bonds. (See appendix I for information about our data sources and methodology.) As shown in figure 5, returns on investment-grade and medium-grade corporate bonds and Treasury bonds varied widely from 1900 through 2015. Before enactment of the Federal Reserve Act in 1913, returns for investment-grade corporate bonds and Treasury bonds were around 4 percent and stayed in that range until about 1960, when they began to rise dramatically. Returns for each of the instruments (medium-grade corporate bond data were recorded from the mid-1940s) were consistently above 6 percent from the early 1970s to the early 1990s, and peaked around 1980 at about 16 percent. Returns for each of the bond categories above are now below 6 percent. In addition, we reviewed U.S. stock data and found total returns to average about 6.5 percent over more than a century. However, stocks can pose higher variability in returns than corporate bonds and Treasury securities. We also compared the 6 percent Reserve Bank dividend rate to the federal funds rate and 1-year nominal interest rates. We analyzed the federal funds rate—the interest rate at which depository institutions trade federal funds (balances held at Reserve Banks) to other depository institutions overnight—to consider a member bank’s opportunity costs of holding a share of Reserve Bank stock. The federal funds rate represents a market of interbank lending at low risk. We collected data on the federal funds rate since 1954. In addition, we analyzed a nominal interest rate series to understand opportunity costs prior to 1954. As shown in figure 6, nominal interest rates were between 4 percent and 6 percent in 1913, but dipped dramatically during the Great Depression and World War II. Rates reached 6 percent again in the late 1960s and then peaked around 18 percent in the early 1980s. The federal funds rate has been near zero since the 2007—2009 financial crisis. Based on our interviews with Federal Reserve officials, the cap on the aggregate Reserve Banks’ surplus account had little effect on Federal Reserve operations, and we found that the modification to the Reserve Bank stock dividend rate has had no immediate effect on membership. While it is debatable whether transferring funds from the Federal Reserve to Treasury when the FAST Act also funded specific projects should be viewed any differently than the recurring transfers that occur on a regular basis, some stakeholders raised concerns about future transfers that could ultimately affect, among other things, the Federal Reserve’s financial independence and consequently, autonomy in monetary policy decision making (instrument independence). Although commercial banks and Federal Reserve officials we interviewed raised a number of concerns about the stock dividend rate change, it appears to have had no effect on Reserve Bank membership as of December 2016. According to Board of Governors officials, the statutory requirement to cap the surplus account and transfer excess funds has not impeded Federal Reserve operations as of December 2016. However, according to current and former Federal Reserve officials we interviewed, the nature of the transfer of funds, which were added to Treasury’s General Fund and used as an offset to make up a shortfall in the Highway Trust Fund, raises questions about the possibility of future transfers. They also raised questions that the cap could negatively affect the Federal Reserve’s independence in monetary policy decision making by rendering it dependent on Treasury for recapitalization in the event that total Reserve Bank capital is depleted. The FAST Act, which authorized the Highway Trust Fund for fiscal year 2016 through fiscal year 2020, requires that the aggregate of the Reserve Banks’ surplus funds not exceed $10 billion and directed that amounts in excess of $10 billion be transferred to Treasury’s General Fund. The excess of Reserve Bank surplus over the $10 billion limitation as of the December 4, 2015, enactment date of the FAST Act was $19.3 billion, which was transferred to Treasury on December 28, 2015. The $19.3 billion transferred from the surplus account was part of $117 billion in earnings the Federal Reserve transferred to Treasury in 2015. The FAST Act transferred a total of $70 billion from Treasury’s General Fund to make up a projected shortfall in the Highway Trust Fund through fiscal year 2020. In addition to its annual remittances, the Congressional Budget Office estimates that the Federal Reserve’s transfers to Treasury will be increased by a total of $53.3 billion from 2016 to 2025 as a result of capping the surplus account balance at $10 billion. As we found in our 2002 report on the surplus account, reducing the Federal Reserve capital surplus account creates a one-time increase in federal receipts, but the transfer by itself will have no significant long-term effect on the federal budget or the economy. Because the Federal Reserve is not included in the federal budget, amounts transferred to Treasury from reducing the capital surplus account are treated as a receipt under federal budget accounting but do not produce new resources for the federal government as a whole. The surplus account cap reduces future Reserve Banks’ earnings because the Reserve Banks would hold a smaller portfolio of securities. As a result, the cap reduces their transfers to Treasury in subsequent periods. Since the one-time transfer from the Federal Reserve also increases Treasury’s cash balance over time, Treasury would sell fewer securities to the public and thus pay less interest to the public. Over time, the lower interest payments to the public approximately offset the lower receipts from Federal Reserve earnings. According to Board of Governors officials, the cap on the surplus account had little effect on Federal Reserve operations as of December 2016, and the chances of the cap impeding operations in the long term appear to be small. This is because Federal Reserve operations are funded before remaining excess funds are transferred to the surplus account. In addition, if Reserve Bank earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining the $10 billion surplus account balance, remittances to Treasury are suspended. A deferred asset is recorded in the Federal Reserve’s accounts to represent the amount of net earnings a Reserve Bank will need to realize before remittances to Treasury resume. In our September 2002 report, we found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined. However, according to Board of Governors officials, if a central bank exhausts its capital cushion or its capital position is negative, realized losses that result from asset sales or draining of monetary liabilities would further exacerbate the capital deficiency. According to Federal Reserve officials and academics we interviewed, transferring Federal Reserve funds to address a budgetary shortfall might lead the public and financial markets to question if the Federal Reserve was independent from the executive and legislative branches. In their view, if these actions set a precedent, the public and financial markets might conclude that the central bank was not conducting monetary policy aimed solely at achieving the monetary policy objectives set forth in the Federal Reserve Act (price stability, maximum employment, and moderate long-term interest rates in the United States). Instead, some might believe that the Federal Reserve had been directed to take policy actions that would help fund government spending. Whether transferring funds from the Federal Reserve to address budgetary shortfalls should be viewed any differently than the annual remittances is debatable. Congress has transferred money from the surplus account to Treasury’s General Fund on other occasions, most recently with the Consolidated Appropriations Act of 2000 that directed the Reserve Banks to transfer to Treasury additional surplus funds of $3.752 billion during fiscal year 2000. These transfers are deposited in Treasury’s General Fund and available for appropriation and use for general support of the government. Nevertheless, Federal Reserve officials, an industry association, and some commercial banks we interviewed believed the requirement to transfer funds from the surplus account, which many see as specifically intended to support the Highway Trust Fund, was different and set a worrying precedent. In particular, Board of Governors officials stated that prior transfers from the Reserve Banks to Treasury did not place a cap on the amount of the surplus accounts that could be retained by the Reserve Banks. Several academic experts with whom we spoke noted that countries with independent central banks have strict provisions against transfers of central bank funds by the legislative branch. However, as long as rules regarding the transfer of central bank earnings to the government are clearly defined, such transfers are consistent with best practices associated with central bank financial independence. As we discuss later, concerns may arise if subsequent transfers reduce the capital surplus to zero, which could lead to dependence on Treasury for capital integrity. Since capital integrity is required to support monetary policy autonomy, reliance on Treasury could diminish the independence of the Federal Reserve. As we discuss later in this report, there are ways to preserve Federal Reserve independence under varying capital structures. The FAST Act’s modification of the Reserve Banks’ stock dividend rate for large member banks from 6 percent to a rate pegged at the lesser of 6 percent or the 10-year Treasury rate, which was below 6 percent in June 2016, increased federal receipts and reduced revenues for large member banks, but has had no immediate effect on Federal Reserve membership. In 2015, the Federal Reserve made dividend payments to member banks totaling more than $1.7 billion. Board of Governors officials told us that dividend payments to member banks in 2016 totaled $711 million. The modified dividend rate for the larger member banks reduced the dividend payment for the first half of 2016 by nearly two-thirds from the payment for the first half of 2015 (from approximately $850 million to approximately $300 million). More specifically, the difference between what larger member banks received at June 30, 2015, and what they received at June 30, 2016, ranged from about $185,000 to about $112 million less. While the current interest rate environment is historically low, the difference in dividend income earned by large banks due to the dividend rate modification would decline in a higher interest rate environment, because the 10-year Treasury rate could increase over time to 6 percent (the ceiling on the dividend rate for member banks with more than $10 billion in consolidated assets). Commercial banks and Federal Reserve officials we interviewed expressed some concerns about the dividend rate modification. We interviewed 17 member and nonmember commercial banks, including 6 of the 85 Federal Reserve member banks that held more than $10 billion in assets as of December 31, 2015, and 11 smaller member banks. Four of the 6 large member banks stated that they would likely act to recoup this lost revenue. For example, some mentioned employee layoffs and increased fees on consumers as potential options to recoup the lost revenue. Two large member banks noted that the dividend rate modification was made at a time when these institutions were adjusting to changes in the regulatory and financial environment, and incorporating the revenue cut made adjusting to these changes even more challenging. However, these factors also make it difficult to link the dividend rate modification to any specific effects on employees or consumers. Most of the member and nonmember banks we interviewed argued that the selection of the 10-year Treasury note as a benchmark for the dividend rate does not appropriately compensate member banks. Several commercial banks noted that the decision to use the 10-year Treasury note did not account for the illiquidity of Reserve Bank stock (it cannot be traded while 10-year Treasury notes can). They added that this illiquidity should be accounted for by the addition of a premium to the rate paid on Reserve Bank stock (an illiquidity premium). Additionally, several commercial banks reported that shifting from a fixed dividend rate to a floating rate determined during the month when dividends are paid increased the uncertainty surrounding their business decisions. Several commercial banks also stated that they would have preferred that the dividend rate modification were considered on its own merits rather than utilized to help pay for transportation projects. The American Bankers Association stated in a comment letter on the interim final rule implementing the dividend rate modification that the change represented a breach of contract between the Federal Reserve and member banks and amounted to “an unconstitutional taking of member banks’ property without compensation.” It further stated that the “Takings Clause of the Fifth Amendment provides that ‘private property’ shall not ‘be taken for public use, without just compensation’” and the dividend rate change was in violation of the Fifth Amendment. On February 9, 2017, the American Bankers Association filed a lawsuit against the United States which included a Fifth Amendment Taking Clause claim. Certain Federal Reserve officials with whom we spoke were concerned about increased membership attrition as a result of the dividend rate modification. However, as of December 2016 there was no evidence that banks had dropped their Federal Reserve membership as a result of lower dividend payments. According to data provided by the Board of Governors and Reserve Banks, membership in the Reserve Banks dropped by about 2 percent (46 banks) from December 31, 2015, to June 30, 2016. The Reserve Banks generally attributed this drop to normal attrition and consolidation in the industry. This decrease is consistent with the general decline in the number of banks supervised by the Federal Reserve from 2010 through 2015 (as shown in fig. 2). FDIC officials stated in May 2016 that they had seen no impact of the dividend rate modification on state-chartered member and nonmember banks. OCC officials stated that it was too early to determine the impact of the dividend rate modification on national banks. However, OCC officials noted that the costs associated with changing membership can be significant and can be a decision-making factor. For example, industry association officials said that such costs could include those associated with changing the institution’s name. Furthermore, of the 14 member banks with which we spoke, including 6 banks with assets of more than $10 billion, none indicated that they would drop Federal Reserve membership as a result of the dividend rate modification. But several of the banks with less than $10 billion in assets stated that they were worried that the dividend rate modification would set a precedent for future transfers from the Reserve Banks, and that they would reconsider Federal Reserve membership if the dividend rate threshold were reduced to include banks in their asset range. Modifying the Reserve Bank stock ownership requirement could have a number of wide-ranging policy implications on the structure of the Federal Reserve. We examined potential implications of three scenarios for modifying the purchase requirement: (1) permanently retiring Reserve Bank stock and eliminating the stock ownership requirement, (2) making ownership of Reserve Bank stock voluntary for member banks, and (3) modifying the capital requirement associated with the stock to allow member banks to hold the entire 6 percent capital contribution as callable capital. In scenario 1, permanently retiring Reserve Bank stock could change the existing corporate structure of the Reserve Banks. In scenario 2, Federal Reserve membership would not require stock ownership; however, Reserve Bank stock would remain available for purchase by member banks. In scenario 3, the full capital contribution would be retained by member banks, could be called at any time by the Reserve Banks, and could be available for use by the member bank. The primary benefit to making any of the changes to the stock purchase requirement is that member banks would gain more control over the capital currently committed to ownership of Reserve Bank stock. Banking associations that we interviewed said that the capital contribution for the stock places a burden on member banks. Specifically, the capital is illiquid and cannot be used as collateral, so it represents a significant opportunity cost to member banks. Despite the cost associated with the capital requirement, 11 of the 17 banks we interviewed indicated that the capital requirement is either not an important factor or only somewhat of an important factor in their decision on Federal Reserve membership. More frequently, familiarity with their Reserve Bank as a supervisor was more important to their decision to join the Federal Reserve. The three scenarios are not an exhaustive representation of possible modifications to the structure of the Federal Reserve, nor does our analysis account for all of the potential consequences of such modifications. Our discussion of the implications of each scenario should not be interpreted as a judgment on how or whether the Federal Reserve should be restructured. Instead, our intent is to identify policy implications that warrant full consideration and additional research should changes to the Federal Reserve stock requirement and therefore, the Federal Reserve’s structure, be made. Furthermore, the discussion of the impacts of the three scenarios is limited without identification of the exact replacement structures, which is beyond the scope of this study. As each scenario has a number of potential structures, each structure would have to be evaluated on its own merits to assess its ability to better ensure the benefits Congress seeks to achieve in the central bank, such as price stability and maximum employment. This discussion assumes that the goals reflected in the original construction of the Federal Reserve remain (independence, balance of power, and geographical diversity). Reserve Bank and Board of Governors officials with whom we spoke said that changes to the stock ownership requirement should not be evaluated in isolation because any changes would have ripple effects on the governance structure, financial independence, and Reserve Bank operations that would warrant consideration in any discussion. In the following discussion, we focus on the impacts of modifying the purchase requirement that were of primary concern to regulators, commercial banks, and academics. Many were concerned that such modifications could undermine the governance of a central bank with a combined private and public structure—key attributes of the current structure designed to construct some barriers to political pressures and provide nationwide input for monetary policies. Nevertheless, these governance elements could be maintained through legislation and other mechanisms if the current Federal Reserve structure were altered. Retiring Reserve Bank stock could have a number of implications, including disrupting the Federal Reserve’s public and private balance, but other mechanisms could be used to preserve the structure’s key attributes. As discussed previously, the stock purchase requirement reflects the desire of the founders of the Federal Reserve to strike a balance between control by commercial banks and government control of the Federal Reserve. Under the Federal Reserve Act, the Reserve Banks were established as corporate entities after national banks subscribed to the minimum amount of Reserve Bank stock. Therefore, a structural change could result if Congress decided to retire the stock and the corporate structure of the Reserve Banks were not preserved. The corporate structure, which includes a board of directors to oversee operations, enables the Reserve Banks to maintain a degree of autonomy from the Board of Governors. Furthermore, the stock ownership requirement enables the Federal Reserve to maintain financial independence from the federal government because it allows the Reserve Banks to maintain a capital base that is not funded at the discretion of the government. Retirement of Reserve Bank stock could have implications for the autonomy of the Reserve Banks, the independence of the Federal Reserve, and the operations of the Reserve Banks, all of which would warrant consideration. Diminished Reserve Bank autonomy. One of the policy goals of the Federal Reserve’s structure is to provide Reserve Banks with a degree of autonomy or regional authority in relation to the Board of Governors. Eliminating Reserve Bank stock would have implications for this goal. According to Reserve Bank officials, all else being equal, retirement of the stock coupled with elimination of the current corporate structure of the Reserve Banks could result in removal of Reserve Bank boards of directors or limit the benefits currently provided by their participation. The existence of the boards of directors is tied to member banks’ equity ownership in their regional Reserve Bank. Specifically, this action could limit the diversity of views in monetary policy by weakening the link to regional input in FOMC discussions. Reserve Bank officials said that Reserve Bank boards serve an important function in the Federal Reserve, including providing important business advice and perspectives to the Reserve Banks. In our 2011 report on Federal Reserve governance, we found that directors of the Reserve Bank boards provide a link to the regions that the Reserve Banks serve, and give information on economic conditions to the Reserve Bank presidents who may use it to inform FOMC discussions about regional conditions. With the loss of member bank equity ownership and the absence of Reserve Bank boards, advisory boards or advisory councils are mechanisms that could be used to serve the same function. However, according to Reserve Bank officials and directors, this approach might not be as effective as a formal corporate board. They said that, as appointed directors of a Reserve Bank board, they have a fiduciary responsibility to perform their duties and place the interests of the Reserve Bank and the nation ahead of personal interests. They noted that it may be difficult to attract high-caliber members to an advisory council or board in a different, more removed relationship. However, we found in our 2011 report that existing Reserve Bank branch boards and advisory councils are sometimes a source of director candidates for the Reserve Banks. Reserve Bank officials and directors also said that the level of commitment and engagement from members of an advisory board or council would be less than that of directors of a formal corporate board. Many different mechanisms could be employed to mitigate the effects of eliminating Reserve Bank boards, but without further analysis on specific mechanisms it is difficult to determine whether those mechanisms would be feasible. Reserve Bank officials, academics, and banks said that another potential consequence of retiring Reserve Bank stock and eliminating the incorporated entities could be diminished Reserve Bank autonomy in relation to the Board of Governors. For example, retirement of Reserve Bank stock could result in eliminating the current corporate structure, and one structural option that we examined was to convert the Reserve Banks into field offices of the Board of Governors—that is, Reserve Banks would become part of a federal agency. Reserve Bank presidents currently are appointed by and accountable to Reserve Bank boards of directors. Some officials we interviewed believed that Reserve Bank presidents might feel less comfortable voicing dissenting opinions in FOMC meetings if they were leading field offices directly accountable to the Board of Governors. Therefore, a loss of autonomy could limit the diversity of views in FOMC meetings. More importantly, it could concentrate power and influence within the Board of Governors—for example, by centralizing FOMC decision making in the hands of the Board of Governors. The diversity of economic views that Reserve Bank presidents bring to FOMC meetings is illustrated by dissenting votes at FOMC meetings from July 1996 to July 2016. In that time, Reserve Bank presidents cast 80 dissenting votes while members of the Board of Governors cast 2 dissenting votes. Some academics with whom we spoke pointed out that eliminating the Reserve Bank stock purchase requirement could remove the perception of undue influence from member banks. For example, such perceptions might be removed if member banks (shareholders) no longer vote on Class A and B directors of Reserve Bank boards. We previously reported that the requirement to have representatives of member banks on the Federal Reserve Bank boards creates an appearance of a conflict of interest because the Federal Reserve has supervisory authority over state-chartered member banks and bank holding companies. Conflicts of interest involving directors historically have been addressed through both federal law and Federal Reserve policies and procedures, such as by defining roles and responsibilities and implementing codes of conduct to identify, manage, and mitigate potential conflicts. Federal Reserve officials said that the Board of Governors already restricts Reserve Bank directors’ participation in banking supervision and, therefore, a field-office structure would address perception, not practice. For example, Reserve Bank directors cannot access member banks’ confidential supervisory information. Any application of a Class A director’s financial institution that requires Federal Reserve approval may not be approved by the director’s Reserve Bank, but instead is acted on by the Secretary of the Board of Governors. Class A directors cannot be involved in the selection, appointment, or compensation of Reserve Bank officers whose primary duties involve banking supervision. And Class B directors with certain financial company affiliations are subject to the same prohibition. Class A directors are also not involved in the selection of the Reserve Bank President or First Vice President. To the extent that Congress values the benefits conferred by the current structure characterized by the balance of power and Reserve Bank autonomy, mechanisms would need to be devised to provide assurance these benefits remained if the Reserve Bank stock were retired. Eight of the 14 member banks that we interviewed said that Reserve Bank autonomy is either important or very important. For example, one bank stated that Reserve Bank autonomy is “hyper–important” because it creates a system of checks and balances, limits politicization of monetary policy, and ensures that viewpoints from across the nation are considered. Five of the member banks that we interviewed said that the structural option of converting the Reserve Banks to field offices would diminish the Reserve Banks’ autonomy and some said that the change would harm connections to the local communities. But only 1 of the 14 member banks with which we spoke said that they would be likely or very likely to drop membership if the Reserve Banks became field offices of the Board of Governors. Diminished Federal Reserve financial independence. One of the policy goals of the Federal Reserve System’s structure was to provide it with independence within the federal government. As noted earlier, financial independence supports monetary policy autonomy, which research has shown is important to low levels of inflation. Eliminating Reserve Bank stock, without a mechanism to re-establish financial autonomy, would have implications for this goal. The Reserve Banks’ income is generated primarily through interest on their investments and loans and through fees received for services provided to depository institutions. Reserve Bank officials said that historically the Federal Reserve has received enough income to fund its operations and therefore would be able to capitalize itself. According to the Federal Reserve, if losses were incurred remittances to Treasury would be suspended and a deferred asset would be recorded that represents the amount of net earnings a Reserve Bank would need to realize before remittances to Treasury could resume. Therefore, Reserve Banks do not need capital to fund operations. However, operating without a capital base could exacerbate negative perceptions that the Federal Reserve is insolvent. Alternatively, Treasury could capitalize the Federal Reserve through Treasury-owned stock, which would allow the Reserve Banks to maintain a corporate structure but would result in a central bank dependent, in part, on government funding. Depending on how it is structured, dependence on Treasury for capitalization could diminish the financial independence of the Federal Reserve. In particular, Federal Reserve independence would be diminished if recapitalization (in the event of capital base depletion) were at the discretion of Treasury. One academic we interviewed said that the $10 billion surplus cap introduced under the FAST Act increased the likelihood of the depletion of the Federal Reserve’s capital. Some academics have written that if Treasury capitalized the Federal Reserve, Congress could include provisions for automatic recapitalization of the Federal Reserve in the event that its capital were depleted and provide stronger capital buffers by increasing the surplus account cap. These provisions would preserve the independence of the Federal Reserve by removing the discretion of Treasury in recapitalizing the Federal Reserve. Moreover, according to research, 8 of 166 central banks are capitalized, in whole or in part, by private shareholders. The remaining 158 central banks, some of which are considered to be highly independent, are capitalized by their governments. None of the 17 member and nonmember banks that we interviewed said they would be likely or very likely to change their membership status if Reserve Bank stock were permanently retired. The banks said that the stock ownership is not a major factor in membership considerations. Member banks cited familiarity with and reputation of their regulator, consistency of regulation across the holding company, and their bank structure as the most important factors for making a membership choice. Hindered ability to conduct Reserve Bank operations. The Federal Reserve Act authorized the Federal Reserve Banks to act as depositories and fiscal agents of the United States government, at the direction of the Secretary of the Treasury. Eliminating Reserve Bank stock could have implications for the Reserve Banks’ ability to perform these functions, depending on how the Reserve Banks’ structures and authorities were revised. For example, converting the Reserve Banks to field offices could preclude them from conducting critical banking functions, and the activities they could undertake as fiscal agents for the government if they were to become government entities are unclear. Banking activities conducted by the Reserve Banks, including executing monetary policy through open market operations and providing short-term loans to institutions, are essential to the functioning of the Federal Reserve. Some Reserve Bank officials said that without the stock, the Reserve Banks would no longer be corporations and might not be able to conduct certain banking activities, depending on how the replacement structure and authorities were configured. If the Reserve Banks were to become field offices of the Board of Governors, they would no longer be able to perform certain activities related to their function as Treasury’s fiscal agent because the Board of Governors currently is not authorized to provide these services. Some also said that having the Board of Governors act as Treasury’s fiscal agent could present a conflict of interest. However, other Reserve Bank officials said that the current corporate structure could be maintained without the stock, but would at least require legislation amending the Federal Reserve Act to allow continuing conduct of banking activities. Reserve Bank officials noted that Treasury directs the Reserve Banks, as fiscal agents, to conduct auctions on its behalf and it is unclear whether Treasury could direct another federal agency to do so. Reserve Bank officials also pointed out that the Reserve Banks hold accounts for foreign central banks and it is unclear whether the federal government could hold an account for another government. As discussed earlier, capitalization by Treasury would allow the Reserve Banks to maintain their current corporate structure, through Treasury-owned stock. This could preserve the ability of Reserve Banks to conduct banking operations; however, as discussed earlier, this involves many issues that would need to be considered. Eliminating the current corporate structure and converting the Reserve Banks into field offices of the Board of Governors could lead to more centralized functions, which could further improve the net efficiency of Reserve Bank operations. However, Reserve Bank officials said that innovation often comes from having private-sector voices on their boards. Moreover, Reserve Bank officials said that despite their autonomous structure they have been able to achieve efficiencies in their operations by consolidating certain activities such as retail payment (check and Automated Clearing House) processing, which is conducted through the Federal Reserve Bank of Atlanta; wholesale payment operations (Fedwire funds and securities services) and open-market operations, which are primarily conducted through the Federal Reserve Bank of New York, or information technology and payroll services, which are primarily conducted by the Federal Reserve Bank of Richmond. In contrast, we have reported that some efficiencies in Reserve Bank operations were achieved partly because of external factors such as legislation. Making stock ownership voluntary could have a number of policy implications. Voluntary ownership likely would not significantly affect Federal Reserve membership, but according to Reserve Bank officials, the implications could include concentration of stock ownership and voting rights and a need for more resources to plan for and manage increased fluctuations in paid-in capital. Voluntary ownership of Reserve Bank stock could take many forms. Currently, only nationally chartered banks and state-chartered banks that opt to join the Federal Reserve are required to purchase stock. Such a scenario could entail no ownership requirement for membership and an option for member banks to purchase (or redeem) stock in their regional Reserve Bank at any time. As with permanent retirement of the stock, we did not find evidence that voluntary stock purchase would have a significant impact on Federal Reserve membership. Member banks that we interviewed suggested that making stock ownership voluntary would not affect their Federal Reserve membership decision, but stock ownership could become volatile in certain interest rate environments, as the following examples illustrate. Thirteen of the 14 member banks that we interviewed said that they likely would not change their Federal Reserve membership status if the ownership of stock became voluntary for member banks. Of these 13, all 6 member banks with more than $10 billion in assets also said that they likely would not purchase stock if ownership were voluntary for members. Of those 13, 6 of the 7 member banks with assets below $10 billion indicated they likely would (ranging between somewhat likely, likely, and very likely) purchase the stock if it were voluntary. They added that if they could make a better return than 6 percent on the capital committed to the stock in a higher interest-rate environment, they would redeem the stock. Two of the three nonmember banks that we interviewed said that they likely would not change their Federal Reserve membership status if the ownership of stock became voluntary for member banks. The remaining banks (one member, one nonmember) said that they would be somewhat likely to change their membership status. In a high interest rate environment stock ownership by member banks could be low, because banks could receive a higher return by investing the capital in securities other than the Reserve Bank stock. This would result in a high concentration of voting rights; however, this might not differ much from current practices. Reserve Bank officials stated that if voting rights remained with stock ownership, not membership, and if stock ownership among member banks were low, then the votes to elect board members would be concentrated in just a few banks. Some Reserve Bank officials said that the concentration of votes could lead to undue influence from a few banks. We previously found that, under the current mandatory stock ownership structure, member bank voter turnout was often low during some Reserve Banks’ elections. In these cases, assuming current participation rates persist, voting patterns under voluntary stock ownership might not significantly differ from those of the current arrangement. Reserve Bank officials also said that high volatility of stock ownership would require a higher level of management of the stock. Officials said that the processes for issuing, monitoring, and redeeming the stock would become significantly more complex as a result of a likely increase in the volume of transactions and require additional personnel. While a voluntary stock ownership structure is more complicated than the current structure, it would involve similar stock ownership characteristics as publicly traded stocks and publicly traded companies have systems to manage stock ownership. Reserve Bank officials pointed out that volatility in stock ownership among member banks also would result in fluctuation in the level of paid- in capital held at the Reserve Banks, which could make it more difficult for Reserve Banks to predict and manage their capital. If a large number of member banks chose not to purchase the stock, which member banks suggested would be likely in a high-interest rate environment, then the potential public perception issues associated with having a low capital base, as discussed previously, could apply. However, as we have discussed, the Reserve Banks could operate without capital, or Treasury could capitalize the Reserve Banks. Allowing member banks to hold the full capital contribution on call could have a number of implications. For instance, allowing member banks to hold the entire capital contribution on call would allow Reserve Banks to maintain their current corporate structure, since the member banks would retain their equity stakes. However, this scenario would eliminate the dividend payment to member banks because there would be no Reserve Bank stock outstanding for which dividend payments would be owed. Also, it could cause public perception problems and, in theory, exacerbate financial distress in stressful economic times. Currently, member banks are required to purchase stock in their regional Reserve Bank equal to 6 percent of their capital and surplus, with 3 percent paid-in and 3 percent on call by the Reserve Bank. This scenario would make the entire 6 percent purchase requirement callable, so that member banks would not have to contribute any capital to the Reserve Banks on joining the Federal Reserve. This modification would allow the Reserve Banks to keep their current corporate structure and preserve their ability to conduct banking operations. The change would also eliminate the dividend payment to member banks since the capital associated with the Reserve Bank stock would no longer be paid-in, so there would no longer be a basis to pay member banks a dividend. Similar to the scenario of retiring the stock or making its purchase voluntary for members, the Reserve Banks’ capital base would be reduced—in this case, to the amount of capital held in each Reserve Bank’s surplus account. Reserve Bank officials and some academics said that Reserve Banks can operate without a capital base but, as discussed previously this could cause a public perception problem. Specifically, Reserve Bank officials said that if Reserve Banks incurred losses and called in capital from member banks, the call could send a signal to the broader markets that the Reserve Banks were insolvent. In turn, this perception could lead to negative ripple effects throughout the economy. That is, Reserve Bank officials said that situations in which Reserve Banks would incur losses and need to call capital likely would be situations of economic stress for banks. If banks could not quickly raise sufficient funds to meet the Reserve Bank’s capital call, their lending capacity could fall and a credit crunch could follow. Calling in capital from member banks at such a time could have a procyclical effect; that is, the call would exacerbate financial distress experienced by the member banks. Reserve Bank officials added that because of the potentially severe systemic effects such a capital call would be highly unlikely. Officials pointed out that the Reserve Banks have never called in the 3 percent capital at member banks and that Reserve Banks currently do not have procedures for calling the 3 percent capital held at member banks. As discussed earlier, if losses were incurred remittances to Treasury would be suspended. If the Reserve Banks incurred losses over multiple periods and their capital base were depleted, then the method for recapitalization would need to be addressed (which, as discussed earlier, involves many issues that would need to be considered). Based on our interview responses, most banks would be unlikely to change their membership status as a result of making the entire capital contribution callable. All three of the nonmember banks that we interviewed said that they likely would not become members or would be only somewhat likely to become members in response to this change. Member banks likely would not drop membership as a result of this modification because, as some banks noted, it removes a potential barrier to membership (paying in 3 percent of capital). We provided a draft of this report to FDIC, the Federal Reserve, OCC, and Treasury for review and comment. None of the agencies provided written comments on the draft report. FDIC and the Federal Reserve provided technical comments, which we have incorporated, as appropriate. We are sending copies of this report to FDIC, the Federal Reserve, OCC, and Treasury. 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) 512-8678 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. In this report, we (1) examine the historical rationale for the Reserve Banks’ stock purchase requirement and 6 percent dividend, (2) assess the potential implications of capping the Reserve Banks’ aggregate surplus account and modifying the Reserve Bank stock dividend rate, and (3) analyze the potential policy implications of modifying the Reserve Bank stock ownership requirement for member banks under three scenarios. To address our first objective, we conducted a literature search on the history of the Federal Reserve System (Federal Reserve), including a review of the legislative history of the Federal Reserve Act. See appendix II for a selected bibliography of literature we reviewed. We interviewed a past Federal Reserve historian and selected academics. We also conducted a literature search on rates of return on selected investment products. We specifically identified the following data sources: Roger Ibbotson, 2013 Ibbotson SBBI Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation1926–2012 (Chicago, Ill.: Morningstar, 2013).—We reviewed information describing the rates of return for a number of basic asset classes including large company stocks, small company stocks, long-term corporate bonds, long-term government bonds, intermediate-term government bonds, and Treasury bills. The return rate data include information from 1926 through 2012. Robert Shiller, Market Volatility (Cambridge, Mass.: MIT Press, 1989). —We reviewed annual data on the U.S. stock market specifically concerning prices, dividends, and earnings from 1871 to the present with associated interest rate, price level and consumption data. Frederick R. Macaulay, The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856 (New York: National Bureau of Economic Research, 1938).—We reviewed commercial paper rates in New York City from January 1857 to January 1936. Sidney Homer and Richard Sylla, A History of Interest Rates, 4th ed. (Hoboken, N.J.: John Wiley & Sons, 2005).—We reviewed data on interest rates and yields from prime corporate bonds, medium-grade corporate bonds, and long-term government securities from 1899 to 1989. We determined that these sources were sufficiently reliable for the purposes of our reporting objectives. Our data reliability assessment included reviewing the methodologies employed by the authors of each source and cross-checking certain data from the sources against each other. First, we analyzed return data on investment-grade and medium- grade corporate bonds, and Treasury bonds. We selected these instruments for comparison with Reserve Bank stock because they generally present low risk of default and have relatively long maturity periods. Corporate bonds can be classified according to their credit quality. Medium-grade corporate bonds can indicate a strong capacity to meet financial commitments but also can still be vulnerable to a changing economy. Investment grade corporate bonds are considered more likely than noninvestment grade bonds to be paid on time and have lower investment risk. Treasury bonds are obligations by the U.S. government and are considered to have low investment risk. Second, we analyzed return data on interest rates based on commercial paper and certificates of deposit, and the federal funds rate. We selected these return data for analysis because they are common measures of the value of money in the markets. Commercial paper consists of short-term, promissory notes issued primarily by corporations that mature in about 30 days on average, with a range up to 270 days. A certificate of deposit is a savings account that holds a fixed amount of money for a fixed period of time, such as 6 months, 1 year, or 5 years, and in exchange, the issuing bank pays interest. The federal funds rate is the central interest rate in the U.S. financial market and is the interest rate at which depository institutions trade federal funds with each other overnight. We determined not to include rate of return information on stocks and agency mortgage-backed securities. Stock is a more volatile investment product than Reserve Bank stock, with wide variation in prices from year to year. In addition, stock is a relatively liquid investment product compared to Reserve Bank stock, which cannot be sold or otherwise posted as collateral. Agency mortgage-backed securities are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. We found that agency mortgage-backed securities generally return higher yields than Treasury bonds, but not as high as corporate bonds, which have higher risk. Therefore, by discussing Treasury and corporate bonds, we are illustrating a complete range of possible returns. To assess the potential implications of capping the aggregate Reserve Banks’ surplus account, we reviewed past GAO, Congressional Research Service, and Congressional Budget Office reports and Federal Reserve financial documents on the status of the surplus account. We interviewed Federal Reserve officials, including from the Board of Governors and the Reserve Banks; former members of the Board of Governors who had written about the changes in the Fixing America’s Surface Transportation Act (FAST Act); academics who had written extensively about the Federal Reserve; other federal bank regulators, including the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC); and, banking industry associations. To assess the potential implications of modifying the Reserve Bank stock dividend rate, we reviewed Board of Governors financial documents as of June 30, 2016, for dividend payment information. We conducted structured interviews with 17 commercial banks (including 14 member and 3 nonmember banks) to obtain their perspectives on the dividend rate modification and if it would affect their membership decisions or status. We selected commercial banks for these interviews to ensure representation for all size categories and primary federal banking regulator, using data from SNL Financial. We assessed the reliability of the data by reviewing information about the data and systems that produced them, and by reviewing assessments we did for previous studies. We determined that the data we used remain sufficiently reliable for the purposes of our reporting objectives. To assess the potential implications of modifying the stock ownership requirement, we reviewed academic literature on the structure and independence of central banks. We also interviewed selected academics and economists who had written extensively on central bank independence; the chairpersons of all the Reserve Banks’ boards of directors, who may not be affiliated with commercial banks; officials from FDIC and OCC; and banking industry associations. In the structured interviews with selected commercial banks described above, we also sought to learn what factors might influence the banks’ choice to become a member of the Federal Reserve, and whether potential modifications to the Reserve Banks’ stock ownership structure would affect their choice. We presented three scenarios (of changes to the stock ownership requirement and therefore the Federal Reserve’s structure) in the interviews to which respondents could react and discuss implications. The scenarios are illustrative and do not represent all of the ways in which the Federal Reserve structure might be altered nor does our analysis account for all of the potential consequences of stock ownership modifications. Furthermore, our discussion of the range of consequences is limited to the respondents’ responses and the strategy in the interview, without knowledge of the mechanisms that could be put in place to retain the benefits of the current structure or mitigate any negative effects of the changes. We conducted this performance audit from February 2016 to February 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. Alesina, Alberto, and Lawrence H. Summers. “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence.” Journal of Money, Credit and Banking, vol. 25, no. 2 (May 1993): 151–162. Arnone, Marco, Bernard J. Laurens, Jean-Francois Segalotto. “The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence.” International Monetary Fund Working Paper 06/227 (October 2006). Calomiris, Charles, Matthew Jaremski, Haelim Park, and Gary Richardson. “Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System.” National Bureau of Economic Research Working Paper 21684 (October 2015). Clifford, A. Jerome. The Independence of the Federal Reserve System. Philadelphia, Penn.: University of Pennsylvania Press, 1965. Conti-Brown, Peter. The Power and Independence of the Federal Reserve. Princeton, N.J.: Princeton University Press, 2016. Cukierman, Alex. “Central Bank Finances and Independence – How Much Capital Should a Central Bank Have?” in The Capital Needs of Central Banks, S. Milton and P. Sinclair eds. Sue Milton and Peter Sinclair. London, England and New York, NY: Routledge, 2011. Cukierman, Alex, Steven B. Webb, and Bilin Neyapti. “Measuring the Independence of Central Banks and Its Effects Policy Outcomes.” World Bank Economic Review, vol. 6, no. 3 (September 1992): 353-398. Gorton, Gary. “Clearinghouses and the Origin of Central Banking in the United States.” The Journal of Economic History, vol. 45, no. 2 (June 1985): 277-283. Homer, Sidney and Richard Sylla. A History of Interest Rates. 4th ed. Hoboken, N.J.: John Wiley & Sons, 2005. Ibbotson, Roger. Ibbotson SBBI Classic Yearbook 2013: Market Results for Stocks, Bonds, Bills, and Inflation 1926-2012. Chicago, Ill.: Morningstar, March 2013. Lowenstein, Roger. America’s Bank: The Epic Struggle to Create the Federal Reserve. New York, N.Y.: Penguin Press, 2015. Masciandaro, Donato. “More Than the Human Appendix: Fed Capital and Central Bank Financial Independence.” BAFFI CAREFIN Centre Research Paper 2016-35 (September 2016). Macaulay, Frederick R., The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856. New York: National Bureau of Economic Research, 1938. Moen, Jon R., and Ellis W. Tallman. “Lessons from the Panic of 1907.” Federal Reserve Bank of Atlanta, Economic Review, May/June 1990, pp. 2-13. National Monetary Commission. Report of the National Monetary Commission. Washington, D.C.: Government Printing Office, 1912. Rossouw, Jannie, and Adele Breytenbach. “Identifying Central Banks with Shareholding: A Review of Available Literature.” Economic History of Developing Regions, vol. 26, supplement 1 (January 2011): 123-130. Shiller, Robert J., Market Volatility. Cambridge, Mass.: MIT Press, 1989 (as updated). Stella, Peter, and Åke Lönnberg. “Issues in Central Bank Finance and Independence.” International Monetary Fund working paper 08/37 (Feb. 2008). Timberlake, Richard H., Jr. “The Central Banking Role of Clearinghouse Associations.” Journal of Money, Credit, and Banking, vol. 16, no. 1 (February 1984): 1-15. Todd, Tim. The Balance of Power: The Political Fight for an Independent Central Bank, 1790-Present. 1st ed. Kansas City, Mo.: Federal Reserve Bank of Kansas City, 2009. Warburg, Paul M. The Federal Reserve System: Its Origin and Growth. 2 vols. New York, N.Y.: MacMillan, 1930. GAO staff who made major contributions to this report include Karen Tremba (Assistant Director), Philip Curtin (Analyst-in-Charge), Farrah Graham, Cody Knudsen, Risto Laboski, Barbara Roesmann, Christopher Ross, Jessica Sandler, Jena Sinkfield, and Stephen Yoder.

Member banks of the Federal Reserve must purchase stock in their regional Reserve Bank, but historically received a 6 percent dividend annually on paid-in stock. A provision of the 2015 FAST Act modified the dividend rate formula for 85 larger member banks—and currently reduces the amount these banks receive. The FAST Act also capped the surplus capital the Reserve Banks could hold and directed that any excess be transferred to Treasury's general fund. Congress offset payments into the Highway Trust Fund by, among other things, instituting the Reserve Bank surplus account cap. GAO was asked to report on the effects of these changes and the policy implications of modifying the stock ownership requirement. Among its objectives, this report (1) examines the effects of capping the Reserve Banks' aggregate surplus account and reducing the Reserve Bank stock dividend rate, and (2) evaluates the potential policy implications of modifying the stock ownership requirement for member banks under three scenarios. GAO reviewed legislative history and relevant literature about the Federal Reserve, prior GAO reports, and interviewed academics and current and former officials of the Board of Governors, Reserve Bank, other banking regulators, and industry associations. In addition, GAO conducted structured interviews with 17 commercial banks, selected based on bank size and regulator. GAO makes no recommendations in this report. GAO requested comments from the banking regulators and Treasury, but none were provided. According to Federal Reserve System (Federal Reserve) officials, capping the surplus account had little effect on Federal Reserve operations, and GAO found that modifying the stock dividend rate formula had no immediate effect on membership. Reserve Banks fund operations, pay dividends to member banks, and maintain a surplus account before remitting excess funds to the Department of the Treasury (Treasury). Whether the transfers to Treasury's General Fund in the Fixing America's Surface Transportation Act (FAST Act) when the act also funds specific projects should be viewed any differently than the recurring transfers of Reserve Bank earnings to Treasury is debatable. Some stakeholders raised concerns about setting a precedent—future transfers could affect the Federal Reserve's independence and, consequently, autonomy in monetary policymaking. Dividend payments to 85 banks decreased by nearly two-thirds (first half of 2016 over first half of 2015), but GAO found no shifts in Reserve Bank membership as of December 2016. Some member banks affected by the rate change told GAO they had a few concerns with it and some said they might try to recoup the lost revenue, but none indicated they would drop membership. Assuming that the policy goals—independence, balance of power, and geographical diversity—reflected in the original private-public Federal Reserve structure remain important, the implications of modifying the stock ownership requirement and therefore the Federal Reserve structure could be considerable. The scenarios discussed in this report are illustrative and do not represent all the ways in which the Federal Reserve structure might be altered. Also, the discussion of effects is limited because exact replacement structures are unknown. Retiring the stock could result in changes to the existing corporate structure of the 12 Reserve Banks. These changes could diminish Reserve Bank autonomy in relation to the Board of Governors of the Federal Reserve System (Board of Governors) by removing or changing Reserve Banks' boards of directors, which could limit the diversity of economic viewpoints in monetary policy discussions and centralize monetary policy decision making in the hands of the Board of Governors, eliminate the private corporate characteristics of Reserve Banks and convert them to government entities (such as field offices of the Board of Governors), which could lead to less private sector involvement and reduced financial independence of the Federal Reserve, and remove the authority the Reserve Banks currently have to conduct activities critical to the Federal Reserve, such as executing monetary policy through open market operations and those related to the Reserve Banks' role as fiscal agents for the federal government. Making stock ownership voluntary could increase fluctuations in outstanding shares, affecting Federal Reserve governance and complicating the Reserve Banks' processes for managing their balance sheets. While modifying the stock ownership requirement could give member banks greater control of the capital tied to the stock, member and nonmember banks with which GAO spoke indicated that they likely would not change their membership in response to any modifications discussed in this report.

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According to 1992 congressional testimony, thieves turn stolen cars into money in three ways. The most common way is for a thief to take a car to a “chop shop,” where the car is dismantled and its parts are sold as replacement parts for other vehicles. The second way is for a thief to obtain an apparently valid title for the car and then sell it to a third party. Finally, the third way is for a thief to export the vehicles for sale abroad. The 1992 Act contains several approaches for dealing with these criminal activities. Title I directed the establishment of, among other things, a task force to study problems that may affect motor vehicle theft and created a new federal crime for armed car jacking. The task force was to be made up of representatives of related federal and state agencies and associations. Title II called for establishment of the National Motor Vehicle Title Information System to enable state departments of motor vehicles to check the validity of out-of-state titles before issuing new titles. Title II authorized grants up to 25 percent of a state’s start-up costs, with a limit of $300,000 per state. Title III expanded the parts marking program established in the Theft Act of 1984. The program was intended to reduce the selling of stolen parts. Major component parts of designated passenger motor vehicles are to be marked with identification numbers so that stolen parts can be identified. Title III also required the Attorney General to develop and maintain a national information system, known as the National Stolen Passenger Motor Vehicle Information System (NSPMVIS), that is to contain the identification numbers of stolen passenger motor vehicles and stolen passenger motor vehicle component parts. This system is to be maintained within the Federal Bureau of Investigation’s (FBI) National Crime Information Center (NCIC), unless the Attorney General determines that it should be operated separately. The 1992 Act also required that the Departments of Justice and Transportation prepare studies on various sections of the 1992 Act. To determine the implementation status of the marking and information systems parts of the 1992 Act, we reviewed the 1992 Act, including its legislative history, and the Theft Act of 1984. We also interviewed officials and reviewed documentation from the Departments of Justice and Transportation, the federal agencies responsible for implementing the 1992 Act’s marking and information systems provisions. Specifically, we obtained information from Justice’s FBI, National Institute of Justice, Criminal Division, and Office of Legislative Affairs and from Transportation’s National Highway Traffic Safety Administration (NHTSA). We also interviewed officials from the American Association of Motor Vehicle Administrators (AAMVA) and the National Insurance Crime Bureau (NICB), which are involved in developing information systems called for in the 1992 Act’s provisions. To identify any issues that may impede the implementation or influence the effectiveness of the marking and information systems parts of the 1992 Act, we developed a list of possible issues affecting the implementation or effectiveness of these parts of the act by reviewing documents and interviewing the same officials from these agencies. We then discussed this list with the officials and revised it on the basis of their comments. We did not determine the validity of these issues or verify the data provided to us. We performed our work in Washington, D.C., from November 1995 to February 1996 in accordance with generally accepted government auditing standards. On February 27, 1996, we requested comments on a draft of this report from the Attorney General, the Secretary of Transportation, the NICB Project Manger, and the AAMVA Director of Vehicle Services. We discussed this report, separately, with representatives of these organizations, including NHTSA’s Highway Safety Specialist; AAMVA Director of Vehicle Services; Executive Director of NICB-FACTA, Inc.; and the Director, Justice’s Audit Liaison Office; on March 7, 11, and 14, 1996, respectively. They generally agreed with the factual information in the report. Their comments have been incorporated where appropriate. The 1992 Act required Transportation to, among other things establish a task force by April 25, 1993, to study problems related to motor vehicle titling, registration, and salvage, which may affect motor vehicle theft, and to recommend (1) ways to solve these problems, including obtaining any national uniformity that it determines is necessary in these areas and related resources and (2) other needed legislative or administrative actions; review by January 1, 1994, state systems for motor vehicle titling and determine each state’s costs for providing a titling information system; and establish the title information system by January 31, 1996, unless Transportation determines that an existing system meets the statute’s requirement, and by January 1, 1997, report to Congress on those states that elected to participate in the information system and on those states not participating, including the reasons for nonparticipation. The title information system is intended to enable states and other users (e.g., law enforcement officials) to instantly and reliably determine, among other things, (1) the validity of title documents, (2) whether an automobile bearing a known identification number is titled in a particular state, and (3) whether an automobile titled in a particular state is, or has been, junked or salvaged. The task force, established in April 1993, reported in February 1994 its recommendations on the legislative and administrative actions needed to address problems in the areas of titling, registration, and controls over salvage to deter motor vehicle theft. The task force recommended, among other things, (1) the passage of federal legislation that would require uniform definitions for terms such as salvage vehicles and uniform methods for titling vehicles, (2) possible funding sources to pay for and maintain the titling system, and (3) penalties to enforce compliance by the participating states. The recommendations are detailed in appendix I. According to the task force chairman, the recommendations would have to be implemented to achieve the uniformity needed to ensure that the titling system would operate as envisioned. In October 1994, Transportation accepted most of the task force’s recommendations (see app. I regarding Transportation’s views on the task force recommendations). NHTSA contracted with AAMVA to identify the states’ costs for a titling system. AAMVA surveyed the 50 states and the District of Columbia to obtain their estimated costs for implementing the titling system. On January 31, 1994, NHTSA’s survey report stated that for the 37 states that provided cost estimates, the cost ranged from zero (1 state) to $12.2 million. For example, some states would have to modify their existing titling systems. In March 1996, AAMVA officials estimated that about $19 million in federal grants would be needed to fund states’ implementation costs. NHTSA officials said that since 13 states and the District of Columbia did not provide a cost estimate, they did not believe that the total costs to the states could be accurately determined. AAMVA pointed out that about 80 percent of the nation’s motor vehicle population is in the states that responded to the survey. In May 1994, Transportation sent proposed legislation to Congress to allow the Secretary of Transportation to extend the target date (from January 1996 to October 1997) for implementation of the national title information system. According to NHTSA officials, the proposed legislation was not introduced in Congress. Transportation requested the authority to extend the implementation date for the titling system because it understood that AAMVA was planning a pilot study of a titling information system, using only state and private sector funds and resources, and Transportation wanted to evaluate the study results. Subsequently, AAMVA requested funding from NHTSA for the pilot. In December 1994, NHTSA denied AAMVA’s request for funds to conduct a pilot study because, in NHTSA’s view, such a study would have been premature without first having uniformity in state titling laws and regulations. However, Congress provided $890,000 for a pilot study by NHTSA as part of Transportation’s fiscal year 1996 appropriation. NHTSA officials said that AAMVA would have responsibility for the pilot. According to AAMVA officials, as of January 1996, they were in the process of acquiring contractors to conduct the pilot, using AAMVA’s commercial driver’s license information system as the pilot’s model. According to NHTSA, the pilot should assist in determining the feasibility of a national titling system and identifying any needed uniform titling requirements for an efficient and cost-effective system. In addition, NHTSA expects the pilot to assist in determining the estimated costs for full implementation, the time frame to implement a nationwide system, the current status of titling information exchange between states, and possible barriers, in particular the absence of uniform system definitions, that could impede the states from participating in a national system. NHTSA said that the pilot study may not be able to identify all costs associated with a national titling system. It also said the complexity of implementing a titling system on a nationwide basis may call for additional resources above those identified in the pilot. NHTSA prepared legislation in response to the task force’s recommendations. Its Office of Safety Assurance submitted a legislative proposal to NHTSA’s Office of Chief Counsel in October 1994. The NHTSA Administrator approved the draft legislation for review by Transportation in May 1995. According to NHTSA, the draft legislative package contains two bills. One bill would provide (1) uniform definitions for categories of severely damaged passenger cars and their titles and (2) titling requirements for rebuilt salvage passenger vehicles. The other bill would remove the January 1996 implementation date and instead make the system contingent upon uniformity in state laws regarding the titling and control of severely damaged passenger vehicles. As of February 1, 1996, the bills were being reviewed by Transportation officials. Legislation (H.R. 2803, Anti-Car Theft Improvements Act of 1995), introduced in December 1995 by the Chairman and the Ranking Minority Member of the House Judiciary Subcommittee on Crime and others would, among other things, (1) transfer Transportation’s responsibilities for the titling area to Justice, (2) extend the implementation date of the titling system from January 31, 1996, to October 1, 1997, and (3) provide immunity for those participants (e.g., system operators, insurers, and salvagers) who make good faith efforts to comply with the 1992 Act’s titling requirements. On the basis of discussions with NHTSA and AAMVA officials, issues that may affect the 1992 Act’s implementation or effectiveness are concerns about the size and scope of the pilot study, uniformity, funding for the states, responsibility for the titling system, and other factors, including states’ willingness to participate and the complexity of the titling system. NHTSA officials said that the pilot study needs to develop information on the ability to establish a national system and operate the system. For example, NHTSA and AAMVA officials told us that the congressionally authorized pilot may demonstrate whether the titling system can be implemented without the uniformity recommended by the task force. However, NHTSA officials noted that the size and scope of the pilot study could limit the amount of information the pilot will be able to provide. The size and scope are to be determined by the number of participating states and system operators. Therefore, the study may not enable NHTSA to identify or resolve all barriers or problems that would arise in creating and operating a national system. NHTSA said that it will have to ensure to the best of its ability that the lessons learned will enable it to develop a national system that meets the 1992 Act’s requirements. NHTSA and AAMVA officials also stated that the pilot study could provide more information on other possible impediments to full implementation of the national title information system. According to NHTSA officials, the task force recommendations have not been implemented. NHTSA officials said that a national titling system should not be implemented until uniformity existed among the states. NHTSA added that the titling system would be inherently defective without uniformity in titling definitions and titling control procedures. Also, according to NHTSA, uniform definitions and motor vehicle titling procedures need to be addressed by all states before a national titling system could function effectively. AAMVA and NICB, however, said that uniformity among the states is not necessary to implement the titling system. AAMVA officials said that a titling system can be 85 to 90 percent effective without the existence of uniform definitions and motor vehicle titling procedures. AAMVA also said that the existence of a titling system would cause states to implement uniform definitions and motor vehicle titling procedures. AAMVA officials added that they have experience dealing with systems containing nonuniform data, including the commercial driver’s license information system upon which the pilot is to be based. NHTSA and AAMVA officials identified lack of federal and state funding as an impediment to full implementation of the titling information system. The 1992 Act placed a $300,000 limit on federal funds that could be granted to each state for start-up costs for the new titling system. H.R. 2803 would eliminate this limit and allow the Attorney General to make “necessary and reasonable” grants to the states that implement the system. However, according to NHTSA officials, no funds had been provided by the federal government to the states for implementing the titling system. NHTSA added that federal resources for system development, start up, and ongoing operations are harder to find each year. NHTSA officials told us that they are proceeding with the 1992 Act’s implementation, even though the responsibility for the titling area may be transferred to Justice. However, they pointed out that the question of responsibility for the 1992 Act could be an emerging issue regarding its implementation. As of January 1996, neither Transportation nor Justice had adopted an official position on the transfer of responsibilities. Other issues that may affect the 1992 Act’s implementation or effectiveness are as follows: Prosecution Immunity: NHTSA said concern outside Transportation has been raised about providing immunity to those individuals (e.g., system operators, insurers, and salvagers) acting in good faith to comply with the 1992 Act. H.R. 2803 could grant such immunity. AAMVA emphasized that the immunity language was intended for system operators, not participants such as salvagers. AAMVA told us that the need for immunity would not be an issue unless it affected a state’s decision to participate in the system. NICB officials stated that immunity is needed for all participants who will participate in any activities related to the database. Major Vehicle Damage Disclosure: Consumer groups may not support implementation of the titling system if the system, besides disclosing whether a vehicle had been previously junked or salvaged, does not identify vehicles that have sustained major damage. NHTSA said that the titling task force did not address this issue other than to note further study was needed. States’ Participation: Presently, the 1992 Act does not mandate the participation of the states. In NHTSA’s view, all states need to participate in the system to ensure the 1992 Act’s effectiveness in preventing title fraud. NHTSA noted that the uniformity needs of the system would require many states to enact legislation at a time when they have strongly opposed federal “mandates” and “burdens.” AAMVA officials said that it does not believe that states will need to pass new legislation to implement a titling system. Technological Challenges: According to NHTSA officials, the system envisioned by the 1992 Act would be extraordinarily complex. They said that the technology required to implement a large-scale system, which provides instantaneous response to inquiries, may take additional time or call for additional resources beyond those currently estimated. AAMVA officials said they recognize the complexity of the system but said that, by modeling the pilot after the commercial driver’s license information system, many potential concerns would be lessened. They said that the pilot will identify the necessary requirements, technology, and costs to process the anticipated larger volume of transactions of the national titling system in a timely manner. NICB officials pointed out that proven technology exists to develop and implement the system. Therefore, the challenge is not technical but is procedural and philosophical—i.e., states will need to establish policies and procedures to act on identified problems and correct them. The Theft Act of 1984 identified the parts subject to marking and allowed NHTSA to identify others that were to be marked. NHTSA issued regulations on marking major original and replacement component parts of high-theft lines of passenger motor vehicles. NHTSA could exempt some lines from marking if the vehicles included antitheft devices that NHTSA determined were likely to be as effective as marking in deterring thefts. The 1992 Act broadened and extended the 1984 Act’s marking provisions. Specifically, the 1992 Act broadened the definition of the types of passenger motor vehicles to be marked to include any multipurpose vehicle and light duty trucks rated at 6,000 pounds (gross vehicle weight) or less. It extended the marking requirement to designated vehicles, except for light duty trucks, regardless of their theft rate. However, the trucks could be subject to marking if the major parts were interchangeable with high-theft passenger vehicles. No limit was placed on the number of parts that NHTSA could require to be marked, except that the marking costs are not to exceed $15 per vehicle (in 1984 dollars). According to an NHTSA official, local law enforcement officials look for markings when investigating stolen vehicles and parts. The additional marking of passenger vehicles was to be done in two phases. By October 25, 1994, NHTSA was to issue regulations governing the marking for half of these additional passenger motor vehicles (excluding the light duty trucks), and by October 25, 1997, for the remaining additional vehicles. These regulations were to be issued provided the Attorney General did not determine that further marking would not be effective (i.e., would not substantially inhibit chop shop operations and motor vehicle thefts). Justice’s National Institute of Justice will be responsible for conducting the required study upon which the Attorney General will make the determination concerning effectiveness. Like the earlier legislation, the 1992 Act also permitted exemptions from marking. The 1992 Act required a number of additional evaluations. NHTSA was required to report on theft rate-related issues and marking effectiveness by October 25, 1995, and October 25, 1997, respectively. (The 1984 Act contained similar reporting requirements for Transportation.) Furthermore, the Attorney General is to report by December 31, 1999, on the long-range effectiveness of parts marking and on the effectiveness of the antitheft devices permitted as alternatives to marking. NHTSA issued the regulations for the first phase on December 13, 1994. With respect to the study that was due on October 25, 1995, NHTSA was preparing its report for public comment as of January 1996. According to an NHTSA official responsible for the marking requirements, the results will not be made public until about May or June 1996. According to the National Institute of Justice, it was to receive grant proposals to carry out its study on March 29, 1996. The Institute expects work to begin on this study in May 1996. A determination of the effectiveness of the marking of major components of passenger motor vehicles is not expected to be made until the Justice and Transportation reports are completed. However, on the basis of a study done in response to the 1984 Act’s reporting requirements, NHTSA reported that it was unable to statistically prove that marking reduced motor vehicle thefts. NHTSA noted, however, that there was wide support for parts marking in the law enforcement community. Further, according to NHTSA and FBI officials, marking effectiveness could be adversely affected by confusion that exists within the law enforcement community regarding those vehicles whose parts are to be marked. This confusion could occur when law enforcement officials investigate stolen vehicles and parts, for example, at chop shops. The NHTSA official said that during discussions with some federal prosecutors, the prosecutors were not aware of the marking provisions. The official said that NHTSA will provide guidance when requested by law enforcement officials. NHTSA and FBI officials also noted that some of the markings for certain major component parts were able to be removed from the parts, thus preventing checking the part against NSPMVIS. The NHTSA marking official told us that the manufacturer of the involved marking stickers had agreed to fix the problem. The 1992 Act required that by July 25, 1993, the Attorney General establish and maintain in NCIC an information system that was to contain vehicle identification numbers and other related data for stolen passenger motor vehicles and parts. If the Attorney General determined that NCIC was not able to perform the required functions, then the 1992 Act permitted the Attorney General to enter into an agreement for the operation of the system separate from NCIC. The Attorney General is to prescribe procedures for the NSPMVIS verification system under which persons/entities intending to transfer vehicles or parts would check the system to determine if the vehicle or part had been reported as stolen. These persons/entities include insurance carriers when transferring titles to junk or salvage vehicles and motor vehicle salvagers, dismantlers, recyclers, or repairers when selling, transferring, or installing a major part marked with an identification number. The 1992 Act also required the Attorney General to establish an advisory committee by December 24, 1992, which was to issue a report by April 25, 1993, with recommendations on developing and carrying out NSPMVIS. The effectiveness of this system may also be addressed in the NHTSA studies that are to be completed on parts marking by October 25, 1995, and October 25, 1997, respectively. The Attorney General authorized NICB to operate NSPMVIS on January 18, 1995. The FBI said that the authorization was the result of the Attorney General’s approval of the final report and recommendations of the NSPMVIS Federal Advisory Committee. (The advisory committee recommendations are detailed in app. II.) According to FBI officials, all of the advisory committee’s recommendations, including system administration activities, system security, theft status determination, and visual sight checks were addressed during the pilot study, as described below. However, according to the FBI, several of the recommendations cannot be implemented until regulations are developed to implement the system nationwide. According to the FBI, NICB received approval from the NCIC Advisory Policy Board in June 1993 to receive a copy of the NCIC vehicle file to establish the system. According to the FBI, the resulting system became operational in June 1994, providing the NICB with the capability to process vehicle identification numbers against the NCIC vehicle records. In March 1995, Justice established a 6-month pilot study in Texas to examine the concept and feasibility of implementing NSPMVIS nationwide. In July 1995, the pilot was extended another 6 months and included another state, Illinois. According to the FBI, the pilot study was completed in December 1995. As of April 1, 1996, the FBI said that its report is to be issued by mid-to-late April 1996. FBI officials said that the pilot showed that the system is feasible but many issues, such as funding, will have to be addressed. FBI also said it will not proceed with implementing the system until further direction is provided by Congress. On the basis of discussions with FBI officials and review of the advisory committee report and FBI-provided information, a number of issues were identified regarding NSPMVIS. According to the FBI, these issues are related to the system’s feasibility and effectiveness and will be addressed in its pilot study report. The FBI added that the response by law enforcement to NSPMVIS thefts is a state and local issue. It is impossible to predict the level of response from law enforcement to NSPMVIS thefts because the response is likely to vary on a case-by-case basis. However, there is no provision in the 1992 Act to fund NSPMVIS, including parts inspections, salvage vehicle inspections, or law enforcement participation and assistance. NICB officials stated that local law enforcement officials would need more resources to report stolen parts and follow up on possible thefts identified through NSPMVIS. Also, according to FBI officials, the implementation of NSPMVIS might have an adverse economic impact on insurance companies and smaller businesses involved in vehicle parts. For example, insurance carriers would have to identify the vehicle identification number of each vehicle part that is disposed. The FBI added that the insurance industry is concerned about the cost of inspecting parts. The insurance industry cooperated with the FBI throughout the pilot study and conducted parts inspections. owever, the FBI stated that industry officials have said that it may be too time-consuming and costly for insurance adjustors to inspect vehicle identification numbers on all total-loss, high-theft vehicles. According to FBI officials, the parts inspections are a major concern to all of the affected industries because of the potential costs associated with the process. NICB officials stated that the pilot study should not be the basis for assuming that the entire insurance industry would not support a parts identification process. According to FBI and NICB officials, there is a need to provide immunity from prosecution to participants acting in good faith to comply with the NSPMVIS requirements. H.R. 2803 would grant such immunity. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies to the Departments of Justice and Transportation, AAMVA, and NICB and make copies available to others upon request. The major contributors to this report are listed in appendix III. If you need additional information, please contact me on (202) 512-8777. The following information is based on the Final Report of the Motor Vehicle Titling, Registration, and Salvage Task Force, dated February 10, 1994. (1) Uniform Definitions: The task force recommended the enactment of federal legislation to require the following definitions be used nationwide to describe seriously damaged vehicles and to require all states to use these definitions. Salvage Vehicle: Any vehicle that has been wrecked, destroyed, or damaged to the extent total estimated or actual cost to rebuild exceeds 75 percent of the vehicle retail value as set forth in a nationally recognized compilation of retail values approved by Transportation. Salvage Title: Issued by the state to the owner of a salvage vehicle. The title document will be conspicuously labeled with the word “salvage” across its front. Rebuilt Salvage Title: Issued by the state to the owner of a vehicle that was previously issued a salvage title. The vehicle has passed antitheft and safety inspections by the state. The title document will be conspicuously labeled with the words “rebuilt salvage - inspections passed” across its front. Nonrepairable Vehicle: A vehicle incapable of safe operation and has no resale value other than as source for parts or scrap only. Such vehicle will be issued a nonrepairable vehicle certificate and shall never be titled or registered. Nonrepairable Vehicle Certificate: Issued for nonrepairable vehicle. The certificate will be conspicuously labeled with “nonrepairable” across its front. Flood Vehicle: Any vehicle that has been submerged in water over door sill. Any subsequent titles will carry brand “flood.” (2) Titling and Control Methods: The task force recommended the enactment of federal legislation to require the following. If an insurance company is not involved in a damage settlement, the owner must apply for a salvage title or nonrepairable vehicle certificate. If an insurance company is involved, it must apply. State records shall be noted when nonrepairable vehicle certificate is issued. When a vehicle has been flattened, baled, or shredded, the title or nonrepairable vehicle certificate is to be returned to the state. State records will show the destruction, and no further ownership transactions for the vehicle will be permitted. State records shall be noted when a salvage title is issued. The vehicle cannot be titled without a certificate of inspection. After a vehicle with a salvage title has passed antitheft and safety inspections, a decal will be affixed to left front door, and a certificate will be issued indicating that inspections were passed. Owner of a vehicle with a salvage title may obtain a rebuilt salvage title by presenting the salvage title and certificate that inspections were passed. (3) Duplicate Title Issuance: The task force recommended the states strengthen and have uniform controls on the issuance of duplicate titles as follows. If duplicate titles are issued over the counter, they will be issued only to the vehicle owner and only after proof of ownership and personal identification are presented. Applications for duplicate titles should be multipart forms with sworn statements as to truth of the contents. When power of attorney is involved, the duplicate title should be mailed to a street address, and not to a post office box. Also, states should consider mailing one part of the multipart application form to the owner of record. Fees are to be set to offset costs of adoption of these recommendations. Criminal penalty for offenses in this area should be a felony crime. Duplicate titles should be conspicuously marked as duplicate. (4) National Uniform Antitheft Inspection for Rebuilt Salvage Vehicles: The Task Force recommended the following specific steps. Requesters for inspections provide declaration of vehicle damages and replacement parts, supported by vehicle titles, etc. Component parts and/or vehicles, if unidentified, having an altered, defaced, or falsified vehicle identification number be contraband and destroyed. Provide minimum selection and training standards for certified inspectors who are employed by the states. The inspectors should be afforded immunity when acting in good faith. Inspection program should be self-supported by fees. (5) National Uniform Safety Inspection for Rebuilt Salvage Vehicles: The Task Force recommended the following. All states institute a safety inspection for rebuilt salvage vehicles. (The Task Force recommended criteria that it said should be considered as the minimum standards.) If contracted to a private enterprise, the entity must meet Transportation-established training and equipment standards. The vehicles be inspected and certified with respect to individual repair and inspections, but not with respect to the states’ obligation to license and audit the performance of private enterprise chosen as licensees. (6) Exportation of Vehicles: The task force recommended the following. No exportation without proof of ownership being provided U.S. Customs Service. Customs will provide vehicle identification numbers to the titling information system. (7) Funding: The task force recommended that the federal, state, and local costs be funded from the following sources: — federal appropriations and grants, — state revenues and user fees, — federally mandated fees, and — money obtained from enforcement penalties and from sale of seized contraband. (8) Enforcement: The task force recommended the following. Investigative authority and sanctions should parallel those contained in Title IV of the Motor Vehicle Information and Cost Savings Act. A portion of federal highway funds should be withheld if a state does not comply with federal legislation implementing the task force’s recommendations, within 3 years after enactment. Transportation agreed with all task force recommendations except the exportation (recommendation 6) and highway fund sanctions recommendations (part of recommendation 8). It took no position on the exportation recommendations, saying that was the responsibility of the U.S. Customs Service. Transportation opposed using the highway fund as an enforcement tool. The following information was excerpted from the Final Report of the National Stolen Auto Part Information System (NSAPIS) Federal Advisory Committee, dated November 10, 1994. (1) The Committee recommends that the National Insurance Crime Bureau (NICB) serve as the System Administrator for NSAPIS, and the Attorney General enter into an agreement with NICB, at no cost or a nominal cost to the government, for the operation of NSAPIS. The Committee believes that NICB possesses the necessary resources, skills, and infrastructure to successfully maintain and administer NSAPIS. (2) The Committee recommends that a written agreement be developed that clearly defines the role, responsibilities, and requirements for NICB as the NSAPIS Administrator. (3) The Committee recommends that Congress enact legislation establishing an Oversight Committee to work with NICB to develop and maintain NSAPIS. The Committee recommends that the NSAPIS Oversight Committee be formed immediately. In addition, the Committee recommended a list of pre-and post-implementation functions that the NSAPIS Oversight Committee should handle. (4) The Committee strongly recommends that the Oversight Committee have representation from all affected elements of the automobile industry, insurance industry, and law enforcement. Specific industries and organizations the Committee believes should have representation on the Oversight Committee include the NSAPIS Administrator, Justice, NHTSA, Consumer Affairs Group, and two members each representing the Automobile Recycling Industry, Automobile Repair Industry, Automobile Insurance Industry, Law Enforcement Agencies, and Automobile Parts Rebuilders Industry. (5) The Committee recognizes that NICB may establish a Vehicle Parts History File. The Committee said that tracking recycled parts data may deter using stolen auto parts in repairing vehicles. The information in the NICB’s Vehicle Parts History File would be supplied to law enforcement for investigative purposes. (6) The Committee recommends that any organization serving as the NSAPIS Administrator be prohibited from engaging in a parts locating service. The Committee wants to ensure that the NSAPIS Administrator does not compete with current parts locating services as a result of their NSAPIS association and activity. (7) The Committee recommends that the FBI, in conjunction with Transportation and affected associations, engage in a comprehensive training and awareness program to educate manufacturers, repairers, insurers, safety inspectors, and law enforcement officials on relevant issues, which affect the success of NSAPIS, such as parts marking regulations and enforcement tactics. (1) The Committee recommends that NSAPIS provide automatic notification to a law enforcement agency having investigative jurisdiction over the locality in which the inquiring NSAPIS user is located, on stolen vehicle and vehicle part NSAPIS hits. The notification should include a message to the law enforcement agency to “confirm the current theft status through NCIC and conduct a logical investigation.” (2) The Committee recommends, in the case of an NSAPIS hit, the following message be sent to the person attempting to sell, transfer, or install the vehicle part: “THE VEHICLE OR PART QUERIED HAS BEEN REPORTED STOLEN AND THE SALE, TRANSFER, OR INSTALLATION OF THIS VEHICLE OR PART MUST BE TERMINATED. YOUR LOCAL LAW ENFORCEMENT AGENCY HAS BEEN PROVIDED THE DETAILS OF THIS TRANSACTION.” (3) The Committee recommends, in the case where there is no NSAPIS hit, that the person or organization attempting to sell, transfer, or install the vehicle or part receive an NSAPIS-generated authorization number. (1) The Committee recommends that NSAPIS, at minimum, meet the C2 level security requirements as stated in the Department of Defense Trusted Computer System Evaluation Criteria (DOD 5200.28-STD), commonly referred to as the Orange Book. (1) The Committee recommends that manufacturers be encouraged to provide updated information to NICB, including component numbering sequences. (2) The Committee recommends that efforts be undertaken to further encourage law enforcement officials to dutifully report and verify data for the NCIC Vehicle file. (3) The Committee recommends that NSAPIS documentation include information that informs inquirers of what occurs following both a positive and a negative hit from NSAPIS. (1) The Committee suggests that any vehicle that sustains damage equal to or greater than 100 percent of its predamaged actual cash value be declared “unrepairable - parts only.” The NSAPIS Committee said that the number of motor vehicle thefts can be significantly reduced by eliminating the availability of salvage and junk vehicle identification numbers and related paperwork. (1) The Committee recommends that the theft status determination occur through an electronic verification process that provides an NSAPIS-generated authorization number to the inquirer. (2) The Committee recommends that the only exception to electronic verification be in those instances where NSAPIS cannot provide a response within a “timely manner.” (3) The Committee recommends that in those instances where NSAPIS cannot provide insurers a theft status verification in a timely manner, a certificate be provided to the insurer, or a contracting agent for the insurer, which allows for the sale or transfer of the vehicle or part. The certificate shall be generated by the NSAPIS Administrator. The Committee listed specific information that at a minimum should be contained on the certificate. (4) The Committee recommends that Congress enact legislation that would provide for limited immunity (e.g., persons or organizations authorized to receive or disseminate information from NSAPIS) to protect NSAPIS participants acting in good faith. (1) The NSAPIS Committee recommends that any person engaged in business as an insurance carrier shall, if such carrier obtains possession of and transfers a junk motor vehicle or a salvage motor vehicle (a) verify, after performing a visual sight check on all applicable major parts, whether any of those major parts are reported stolen. The applicable major parts are those parts that have been designated by NHTSA. (b) provide verification to whomever such carrier transfers or sells any such salvage or junk motor vehicle. (2) The Committee recommends that insurers be allowed to contract out the verification tasks, but the insurer must still be identified on the certificate, when necessary, to the purchaser. (3) The Committee recommends that all self-insured entities be required to perform vehicle and parts verifications in the same manner that insurance companies are required to do. (4) The Committee recommends that salvage and junk vehicles that are impounded and to be sold at government auction be verified through NSAPIS before any sale or transfer takes place. Nancy M. Donnellan, 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. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on the implementation of the Anti-Car Theft Act, focusing on the: (1) status of national information systems on motor vehicle titles and stolen passenger cars and parts; (2) marking of major component parts of passenger cars with identification numbers; and (3) issues that may impede the act's implementation. GAO found that: (1) the Department of Justice (DOJ) and the Department of Transportation (DOT) have begun developing information systems and DOT has issued initial parts-marking regulations; (2) a DOT task force has made recommendations on the legislative and administrative actions needed to address problems in titling, registration, and controls over salvage to deter motor vehicle theft; (3) states need about $19 million in federal grants to implement their part of the titling system; (4) the National Highway Traffic Safety Administration has proposed legislation to implement the task force's recommendations; (5) issues affecting the implementation or effectiveness of the proposed titling information system include prosecution immunity, major vehicle damage disclosure, the system's complexity, and state participation, funding, and responsibility; (6) the association that DOJ authorized to set up the stolen vehicle and parts database and complete a pilot study on the database's concept and maintenance feasibility expects to begin studying parts-marking effectiveness in May 1996; and (7) potential barriers to the implementation or effectiveness of the act's parts marking provisions include state funding for the database, confusion over what vehicles and parts are to be marked, whether local law enforcement agencies have the resources necessary to follow up on identified stolen vehicles and parts, and the potential adverse economic impact on insurance companies and small businesses.

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The distribution of and payment for prescription drugs involves interactions among multiple entities. These entities include drug wholesalers, independent pharmacies, PSAOs, and third-party payers and their PBMs. Interactions among these entities facilitate the flow of and payment for drugs from manufacturers to consumers. Drug wholesalers (hereafter referred to as wholesalers) purchase bulk quantities of drugs from pharmaceutical manufacturers and then distribute them to pharmacies, including independent pharmacies. For example, a wholesaler may fill an order from an independent pharmacy for a specified quantity of drugs produced by manufacturers and deliver the order to the pharmacy. In addition to supplying drugs, some wholesalers offer ancillary services to independent pharmacies such as helping them manage their inventory. Three wholesalers—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health Inc.— accounted for over 80 percent of all drug distribution revenue in the United States in 2011. Independent pharmacies are a type of retail pharmacy with a store-based location—often in rural and underserved areas—that dispense medications to consumers, including both prescription and over-the- counter drugs. In this report, we define independent pharmacies as one to three pharmacies under common ownership. Approximately 21,000 independent pharmacies constituted almost 34 percent of the retail pharmacies operating in the United States in 2010. Although independent pharmacies offer other products such as greeting cards and cosmetics, prescription drugs account for the majority of independent pharmacy sales. These sales accounted for almost 17 percent of the $266 billion in prescription drug sales in the United States in 2010. In addition to products, independent pharmacies provide patient-care services such as patient education to encourage patients’ appropriate use of medications. According to a 2009 survey of pharmacists, independent pharmacies spend the majority of their time dispensing prescription drugs and providing patient-care services. Independent pharmacies primarily purchase drugs from wholesalers (although they may also purchase them directly from manufacturers) and represented slightly over 15 percent of wholesalers’ total sales to retail pharmacies in 2010. Independent pharmacies are an important part of a wholesaler’s customer portfolio because, in addition to purchasing drugs, independent pharmacies may also pay the wholesaler to provide logistical functions and ancillary services such as direct delivery of drugs to individual stores and inventory management. Thus, a wholesaler’s relationship with an independent pharmacy may result in multiple business opportunities for the wholesaler and administrative efficiencies for the pharmacy. After receipt of drugs from a wholesaler or manufacturer, pharmacies then fill and dispense prescriptions to consumers, such as health plan enrollees. These latter prescriptions are dispensed according to contractual terms agreed upon with each enrollee’s health plan, that is, with each third-party payer or its PBM. According to the National Community Pharmacists Association (NCPA), payments based on the contractual terms of third-party payers or their PBMs significantly affect the financial viability of independent pharmacies. Consequently, these pharmacies must carefully choose which contracts to accept or reject. Accordingly, most independent pharmacies rely on PSAOs to negotiate directly, or to make recommendations for negotiating contracts on their behalf with third-party payers or their PBMs. When a PSAO enters into a contract with a third-party payer or its PBM, the pharmacies in its network gain access to the third-party payer or PBM contract—and the individuals it covers—by virtue of belonging to the PSAO’s network. Third-party payers accounted for almost 80 percent of drug expenditures in 2010, which represents a significant shift from 30 years ago when payment from individual consumers accounted for the largest portion of expenditures. Third-party payers include private and public health plans such as those offered by large corporations and the federal government through Medicare and the FEHBP, many of which use PBMs to help them manage their prescription drug benefits. As part of the management of these benefits, PBMs assemble networks of retail pharmacies, including independent pharmacies, where the health plan’s enrollees can fill prescriptions.or its PBM’s network by entering into an agreement with the third-party payer or its PBM. It does so either directly or through a PSAO that has negotiated with that third-party payer or its PBM on the pharmacy’s behalf. Contract terms and conditions may include specifics about A pharmacy becomes a member of a third-party payer’s reimbursement rates (how much the pharmacy will be paid for dispensed drugs), payment terms (e.g., the frequency with which the third-party payer or its PBM will reimburse the pharmacy for dispensed drugs), and audit provisions (e.g., the frequency and parameters of audits conducted by the third-party payer, its PBM, or designee), among other things. The reimbursement rate that third-party payers or their PBMs pay pharmacies significantly affects pharmacy revenues. Retail pharmacies participating in a PBM’s network are reimbursed for prescriptions below the level paid by cash-paying customers (those whose prescriptions are not covered by a third-party payer). In addition, pharmacies must undertake additional administrative tasks related to transactions for customers who are covered by third-party payers that are not required for cash-paying customer transactions. For example, for customers covered by third-party payers, pharmacy staff must file claims electronically and may be required to counsel them on their health plan’s benefits. However, most retail pharmacies participate in PBM networks because of the large market share PBMs command, which represents potential pharmacy customers. The five largest PBMs operating in the first quarter of 2012 represented over 330 million individuals.benefit from the prescription and nonprescription sales generated by customers that PBMs help bring into their stores. (See fig. 1 for a diagram of the network of entities in the distribution of and payment for pharmaceuticals.) At least 22 PSAOs, which varied in the number and location of pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these 22 PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012. (See table 1.) The number of pharmacies contracted with each PSAO across these sources ranged from 24 to 5,000 pharmacies; however, according to NCPDP data most contracted with fewer than 1,000 pharmacies. The largest 5 PSAOs combined contracted with more than half of all pharmacies that were represented by a PSAO in 2011 or 2012. Because pharmacies may change their PSAO, the number of pharmacies contracting with each PSAO fluctuates as For example, according to one PSAOs enroll and disenroll pharmacies.PSAO, member pharmacies will change PSAOs whenever they think that another PSAO can negotiate better contract terms with third-party payers or their PBMs. Some PSAOs contracted primarily with pharmacies located in a particular region. These PSAOs generally represented fewer pharmacies than PSAOs representing pharmacies across the United States. For example, the Northeast Pharmacy Service Corporation represented 250 independent pharmacies while the RxSelect Pharmacy Network represented from 451 to 569 independent pharmacies. According to NCPDP data, PSAOs provide services primarily to independent pharmacies. Of the 21,511 pharmacies associated with PSAOs in the 2011 NCPDP database, 18,103 were identified as independent pharmacies. These independent pharmacies represent nearly 75 percent of the total number of independent pharmacies in the 2011 NCPDP database. This is close to an estimate reported by NCPA and the HHS OIG, both of which conducted surveys in which approximately 80 percent of responding independent pharmacies were represented by PSAOs. In addition to independent pharmacies, some PSAOs also contracted with small chains and franchise pharmacy members.small chain pharmacies ranging in size from 25 to 150 pharmacies under For example, Managed Care Connection provides services to common ownership, and the Medicine Shoppe only offers its PSAO services to its franchise pharmacies. PSAOs provide a broad range of services to independent pharmacies including negotiating contractual agreements and providing communication and help-desk services. These and other services are intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundled set of services and separate fees for additional services. While PSAOs provide a broad range of services to independent pharmacies and vary in how they offer these services, we found that PSAOs consistently offer contract negotiation, communication, and help- desk services. Several entities, including industry experts, trade associations, and PSAOs we spoke with, referred to one or all of these services as a PSAO’s “key service(s)”—meaning that a PSAO can be distinguished from other entities in the pharmaceutical industry by its provision of these services. In addition, PSAOs may provide many other services that assist their member pharmacies—the majority of which are independent pharmacies—in interacting with third-party payers or their PBMs, although those PSAOs we spoke with did not provide these other services as consistently as their key services. On behalf of pharmacies, PSAOs may negotiate and enter into contracts with third-party payers or their PBMs. Both the HHS OIG and an industry study reported that small businesses such as independent pharmacies generally lack the legal expertise and time to adequately review and negotiate third-party payer or PBM contracts, which can be lengthy and complex.independent pharmacies that we reviewed indicated, and all of the PSAOs we spoke with stated, that the PSAO was explicitly authorized to negotiate and enter into contracts with third-party payers on behalf of member pharmacies. By signing the agreement with the PSAO, a member pharmacy acknowledges and agrees that the PSAO has the right to negotiate contracts with third-party payers or their PBMs on its behalf. All of the model agreements between PSAOs and PSAOs we spoke with had different processes for negotiating and entering into contracts with third-party payers or their PBMs. These processes included following guidance or parameters established by a governing body such as a board of directors composed partially or entirely of representatives from the PSAO’s member pharmacies. In addition, some PSAOs’ decisions about entering into contracts are made by their contracting department or executive staff that base the decision on factors such as analyses of the contract’s proposed reimbursement rate and the efficiencies and value that the PSAO’s member pharmacies would provide to the particular market in which the contracts are offered. Decisions about entering into contracts may also include consultation with a PSAO’s advisory board composed of representatives from the PSAO’s member pharmacies. While PSAOs may review and negotiate a wide range of contract provisions, PSAOs we spoke with reported negotiating a variety of provisions including reimbursement rates, payment terms, audits of pharmacies by third-party payers or their PBMs, price updates and appeals, and administrative requirements.areas, PBMs and PSAOs we spoke with reported that audits and reimbursement rates were of particular concern to pharmacies. One Regarding these contract PSAO reported that its negotiations about a contract’s audit provisions were intended to minimize member pharmacies’ risks and burdens as audit provisions can include withholding reimbursement on the basis of audit findings. In addition, according to some PSAOs that we spoke with, reimbursement rates to pharmacies have decreased over time, and PSAOs and other sources we spoke with reported that PSAOs’ ability to negotiate reimbursement rates has also decreased over time. Over half of the PSAOs we spoke with reported having little success in modifying certain contract terms as a result of negotiations. This may be due to PBMs’ use of standard contract terms and the dominant market share of the largest PBMs. Many PBM contracts contain standard terms and conditions that are largely nonnegotiable. According to one PSAO, this may be particularly true for national contracts, in which third-party payers or their PBMs have set contract terms for all pharmacies across the country that opt into the third-party payer’s, or its PBM’s network. For example, a national contract exists for some federal government programs, such as TRICARE. In addition, several sources told us that the increasing consolidation of entities in the PBM market has resulted in a few PBMs having large market shares, which has diminished the ability of PSAOs to negotiate with them, particularly over reimbursement rates. In contrast, PBMs we spoke with reported that PSAOs can and do negotiate effectively. PBMs and PSAOs reported that several factors may affect negotiations in favor of PSAOs and their members, including the number and location of pharmacies represented and the services provided by those pharmacies in relation to the size and needs of the third-party payer or its PBM. For example, a third-party payer or its PBM may be more willing to modify its contract terms in order to sign a contract with a PSAO that represents pharmacies in a rural area in order to expand the PBM’s network in that area. In addition, a third-party payer or its PBM may be more willing to negotiate in order to add pharmacies in a PSAO’s network that offer a specialized service such as diabetes care needed by a health plan’s enrollees. One PSAO also reported that small PBMs wishing to increase their network’s size may be more willing to negotiate contract terms. We found that PSAOs vary in their requirements for their member pharmacies. Two PSAO-pharmacy model agreements that we reviewed stated that member pharmacies must participate in all contracts in which the PSAO entered on behalf of members. These PSAOs and six additional PSAOs we spoke with reported that their member pharmacies must participate in all contracts between the PSAO and third-party payers or their PBMs. The remaining two PSAOs we spoke with reported that they build a portfolio of contracts from which member pharmacies can choose. These PSAOs negotiate contracts with various third-party payers or their PBMs and member pharmacies review the terms and conditions of each contract and select specific contracts to enter into. Most of the PSAO-pharmacy model agreements we reviewed contained provisions expressly authorizing member pharmacies to contract with a third-party payer independent of the PSAO. Two additional PSAOs we spoke with confirmed that they do not restrict member pharmacies from entering into contracts independent of the PSAO. All three PBMs we spoke with confirmed that pharmacies may contract with them if their PSAO did not sign a contract with them on the pharmacies’ behalf. PSAOs serve as a communication link between member pharmacies and third-party payers or their PBMs. Such communication may include information regarding contractual and regulatory requirements as well as general news and information of interest to pharmacy owners. All of the PSAOs we spoke with provided communication services to pharmacies such as reviewing PBMs’ provider manuals to make member pharmacies Communication with pharmacies was provided aware of their contents.by means of newsletters and the PSAOs’ Internet sites. In addition to communicating contractual requirements, PSAOs may also communicate applicable federal and state regulatory updates. For example, one PSAO we spoke with told us that it provides its member pharmacies with regulatory updates from the Centers for Medicare & Medicaid Services by publishing this information in its newsletter. Another PSAO we spoke with provided regulatory analyses that included examining and briefing its member pharmacies on durable medical equipment accreditation requirements, and fraud, waste, and abuse training requirements. According to the PSAO, this was to ensure that its member pharmacies were taking the right steps to comply with applicable regulations. PSAOs provide general assistance to pharmacies and assistance with issues related to third-party payers and their PBMs such as questions about claims, contracting, reimbursement, and audits. PSAOs may provide such assistance by means of a help-desk (or customer service department) or a dedicated staff person. For example, one PSAO we spoke with reported that it provides general pharmacy support services to help pharmacies with any needs they may have in the course of operating their businesses. This PSAO also had a staff person responsible for providing support services to member pharmacies including answering their questions about claims and each contract’s reimbursement rate or payment methodology. A PSAO may also help a pharmacy identify why a certain claim was rejected. PSAOs provide many other services that assist member pharmacies in interacting with third-party payers or their PBMs. For example, PSAOs may provide services that help the pharmacy with payment from a third- party payer or its PBM, comply with third-party payer requirements, or develop services that make the pharmacy more appealing to third-party payers or their PBMs. (See table 2 for a list and description of these services.) The PSAOs we spoke with varied in their provision of these other services although 9 of the 10 PSAOs we spoke with provided central payment and reconciliation services or access to reconciliation vendors that provided the service. However, other services were not provided as consistently across PSAOs. For example, only 1 PSAO reported that it provided inventory management or front store layout assistance. PSAO services have changed over time to meet member pharmacies’ interests. In some cases, this has meant adding new services, while in other cases PSAOs have expanded existing services. Several PSAOs we spoke with reported adding services intended to increase cost efficiencies and member pharmacies’ revenues. For example, three PSAOs we spoke with reported that they began offering central pay services and two of these PSAOs and an additional PSAO reported that they began offering reconciliation services. PSAOs we spoke with also reported expanding existing services. For example, one PSAO reported adding electronic funds transfers, while two other PSAOs reported that although they were already providing electronic funds transfers, they increased the frequency of transfers to five days per week. This increase was made to improve pharmacies’ cash flow by giving them quicker access to funds owed them by third-party payers or their PBMs. Two PSAOs we spoke with reported adding certification programs, particularly vaccination/immunization certification programs, because of the needs of third-party payers or their PBMs for this service to be provided through their network pharmacies. PSAOs provide services intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. PSAO services enable pharmacy staff, including pharmacists, to focus on patient-care services rather than administrative issues that pharmacists may not have the time to address. PSAO services also reduce the number of resources that PBMs must direct toward developing and maintaining relationships with multiple independent pharmacies. PSAO services are intended to help independent pharmacies achieve efficiencies particularly in contract negotiation. For example, independent pharmacies and PBMs we spoke with told us that PSAO contract negotiation services eased their contracting burden and allowed them to expand the number of entities with which they contracted. As a member of a PSAO, pharmacies may no longer have to negotiate contracts with multiple third-party payers or their PBMs operating in any given market. Independent pharmacies also told us that PSAOs provide other services that create both administrative and cost efficiencies for them. For example, one pharmacist told us that the marketing services provided by his PSAO relieved him of advertising costs because the PSAO provided advertising circulars to its PSAO-franchise members. Another independent pharmacy reported that its PSAO provides services such as claims reconciliation less expensively than the pharmacy could perform on its own. Similar to independent pharmacies, PBMs we spoke with reported that PSAO services create administrative efficiencies for them, including efficiencies in contracting, payment, and their call centers. PSAO services create contracting efficiencies because they provide PBMs with a single point through which they can reach multiple independent pharmacies. For example, the PBMs we spoke with each had over 20,000 independent pharmacies in their networks, however, each PBM only negotiated contracts with 15 to 19 PSAOs, representing a majority of the pharmacies in its network. PBMs also reported that PSAO services create payment efficiencies when PSAOs provide central payment services. One PBM reported that instead of mailing checks to hundreds of individual pharmacies, the PBM made one electronic funds transfer to the PSAO, which then distributed the payments to its members. Finally, PBMs benefit from reduced call center volume because PSAOs often provide similar support directly to member pharmacies. For example, a call that may have gone to the PBM about a claim that was not paid may instead go to the pharmacy’s PSAO, which will help the pharmacy understand any issues with the claim. PSAOs may also aggregate member pharmacies’ issues and contact the PBM to discuss issues on behalf of multiple pharmacies and relay pertinent information back to those pharmacies. While creating efficiencies by acting on behalf of multiple pharmacies, PSAOs must ensure that their arrangements do not unreasonably restrain trade, thereby raising antitrust concerns. The FTC and the Antitrust Division of the Department of Justice (DOJ) are the federal agencies responsible for determining whether a particular collaborative arrangement may be unlawful and for enforcing applicable prohibitions. According to FTC officials, such a determination is dependent on multiple factors including the geographic region that a PSAO is operating in and the health care program (e.g., Medicare Part D) with which a PSAO is contracting. These factors affect the PSAO’s ability (and the abilities of the pharmacies the PSAO represents) to affect the terms of a contract or the pricing of a good. For example, a group of rural pharmacies may more effectively influence contract negotiations than a single pharmacy operating in an urban area with many competitors. PSAOs we spoke with were aware of potential antitrust issues and reported taking measures to minimize them. For example, two of the PSAOs we spoke with reported developing their PSAO’s organizational structure to ensure compliance with antitrust laws. Although PSAOs’ charges to member pharmacies for their services may vary depending on how the services are provided, 8 of the 10 PSAOs we spoke with charged a monthly fee for a bundled set of services. For example, 1 PSAO charged $40 to $80 per month for a bundle of services that included contract negotiation, communication with member pharmacies, help-desk services, business advice, and limited audit support. In comparison, another PSAO’s monthly fee ranged from $59 to $149 per month depending on the combination of services that the pharmacy requested. One of the remaining PSAOs we spoke with charged an annual fee rather than a monthly fee, while the other PSAO did not charge any fees for its PSAO services. The latter PSAO provided PSAO services as a value-added service to members of its group purchasing organization, for which it charged a monthly fee. Other services that are offered by most, but not all, PSAOs we spoke with are either provided within the bundle or as separate add-on services. PSAOs may also charge fees for individual services that are based on the type or value of that service. Virtually all of the fees for PSAO services are paid for by member pharmacies. All of the PSAOs we spoke with reported that they did not receive any type of fees from other entities such as an administrative fee from a third-party payer or its PBM. Similarly, all of the PBMs we spoke with told us that they did not pay PSAOs for their services. However 1 of the 3 PBMs we spoke with reported that it paid part of a pharmacy’s dispensing fee to 1 of the 16 PSAOs with which it contracted rather than to the pharmacy. The majority of PSAOs in operation in 2011 or 2012 were owned by wholesalers and independent pharmacy cooperatives.PSAO owners varied as to whether they require member pharmacies to also use the non-PSAO services they offer. Wholesalers and independent pharmacy cooperatives owned the majority of the PSAOs in operation in 2011 or 2012. Specifically, of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives (“member-owned”), 4 were owned by group purchasing organizations, and 3 were stand- alone PSAOs owned by other private entities. (See table 3.) Three of the 5 largest PSAOs were owned by the 3 largest wholesalers in the U.S.: AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson Corporation. Across all sources included in our review, the PSAOs owned by these wholesalers represented 9,575 to 12,080 pharmacies, and PSAOs owned by independent pharmacies represented 4,883 to 8,882 pharmacies. According to one industry report, the services provided by member-owned PSAOs are similar to those offered by wholesaler-owned PSAOs. One PBM we spoke with noted that because of the financial backing of wholesaler-owned PSAOs, their PSAOs generally offer central payment services more often than PSAOs owned by other types of entities. This strong financial backing is necessary to offer these services because there is a considerable liability and risk in providing a central payment service. PSAO owners may operate PSAOs for a number of reasons, including to benefit another, non-PSAO line of their business. The wholesalers we spoke with provided various reasons for offering PSAO services, such as wanting to assist independent pharmacies in gaining access to third-party payer or PBM contracts, or to help pharmacies operate more efficiently. Additionally, one wholesaler noted that it created its PSAO because third- party payers and independent pharmacies indicated there was a need for PSAO services in the market. These third-party payers wanted a sole source for reaching multiple pharmacies, while independent pharmacies wanted a facilitator to assist them with reviewing third-party payer contracts. Other pharmaceutical entities noted that wholesalers may have an interest in developing relationships with independent pharmacies, which are potential customers of the wholesaler’s drug distribution line of business. By obtaining multiple services from a wholesaler, an independent pharmacy may be less likely to switch wholesalers. Additionally, by having their PSAOs assist independent pharmacies with entering multiple third-party payer or PBM contracts, wholesalers may benefit from the increased drug volume needed by independent pharmacies to serve the third-party payer’s or PBM’s enrollees. Other types of PSAO owners also provided a number of reasons for providing PSAO services, for instance, a number of these owners stated that they began offering PSAO services as a market-driven response to the growth of third-party payers and PBMs. In fact, one PSAO owner we spoke with stated that it reluctantly began offering these services at the request of customers of its group purchasing services, who wanted help navigating the issues and complexities of third-party payer and PBM contracting. The owners of PSAOs we spoke with varied as to whether they require PSAO member pharmacies to also use services from a separate non- PSAO line of their business. Of the nine PSAO owners we spoke with that had a separate non-PSAO line of business (e.g., drug distribution or group purchasing), six did not require their PSAO member pharmacies to use services from that non-PSAO line of business. Of the remaining three, one wholesaler-owned PSAO limited its offer of services to pharmacies that were existing customers of its drug distribution line of business, while two member-owned PSAOs reported requiring their PSAO member pharmacies to join their group purchasing organizations. Officials from the wholesaler-owned PSAO stated that their limiting the availability of PSAO services to existing customers ensures that their PSAO already has basic information about their member pharmacies and a salesperson who serves as each member pharmacy’s point of contact. While most PSAO owners do not require their member pharmacies to use services from their primary line of business, member pharmacies may choose to do so. In this case, a pharmacy must contract and pay for PSAO and other services separately. In fact, according to one wholesaler we spoke with, approximately 36 percent of its drug distribution customers were also members of its PSAOs. required to submit an application to join a PSAO network. PSAO applications we reviewed requested information about the pharmacy’s licensing, services provided, and insurance. Additionally, applications asked pharmacies to indicate whether they had been investigated by the HHS OIG, had filed for bankruptcy, or had their pharmacy’s state license limited, suspended, or revoked. PSAOs stated they used the information provided in applications to verify that the pharmacies applying for membership in their network are licensed by their state and in good standing. Pharmacies may choose to obtain PSAO services from their wholesaler, but not all do so. Instead, some pharmacies may choose to join another PSAO. Most PSAOs we spoke with operated their PSAO separately from any separate non-PSAO line of business. For example, most wholesalers we spoke with stated their PSAO staff and drug distribution staff are distinct and do not interact. One of these wholesalers reported its PSAO has a distinct corporate structure, management team, sales organization and financial component from its drug distribution line of business. However, nearly all of the PSAO owners we spoke with operate their PSAO as a subsidiary of their non-PSAO line of business. For example, two PSAOs were organized as subsidiaries of a member-owned buying group, while another PSAO operated as a branded service under the owner’s non- PSAO line of business. Most PSAO owners reported that PSAO services are not a profitable line of business. Only 1 of the 10 PSAO owners we spoke with stated that its PSAO service was profitable. Other PSAO owners reported little to no profit earned from the PSAO services they provided. For those PSAOs that are not profitable, the cost of operating them may be subsidized by the owner’s non-PSAO lines of business. As previously noted, it may be the case that offering PSAO services may benefit the owner’s non-PSAO line of business even if the PSAO service itself is not profitable. For example, one member-owned PSAO we spoke with also owned a group purchasing organization to which its members must belong in order to obtain PSAO services. The group purchasing organization may benefit from increased membership driven by pharmacies that want to obtain its PSAO services. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Chairman of the Federal Trade Commission, and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact John E. Dicken 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. GAO staff members who made key contributions to this report are listed in appendix I. In addition to the contact named above, Rashmi Agarwal and Robert Copeland, Assistant Directors; George Bogart; Zhi Boon; Jennel Lockley; Laurie Pachter; and Brienne Tierney made key contributions to this report.

Independent pharmacies dispensed about 17 percent of all prescription drugs in the United States in 2010. To obtain, distribute, and collect payment for drugs dispensed, pharmacies interact with a network of entities, including drug wholesalers and third-party payers. With limited time and resources, independent pharmacies may need assistance in interacting with these entities, particularly with third-party payers that include large private and public health plans. Most use a PSAO to interact on their behalf. PSAOs develop networks of pharmacies by signing contractual agreements with each pharmacy that authorizes them to interact with third-party payers on the pharmacy's behalf by, for example, negotiating contracts. While specific services provided by PSAOs may vary, PSAOs can be identified and distinguished from other entities in the pharmaceutical distribution and payment system by their provision of intermediary or other services to assist pharmacies with third-party payers. GAO was asked to review the role of PSAOs. In this report, GAO describes: (1) how many PSAOs are in operation and how many pharmacies contract with PSAOs for services; (2) the services PSAOs offer and how they are paid for these services; and (3) entities that own PSAOs and the types of relationships that exists between owners and the pharmacies they represent. GAO analyzed data on PSAOs in operation in 2011 and 2012, reviewed literature on PSAOs and model agreements from 8 PSAOs, and interviewed federal agencies and entities in the pharmaceutical industry. At least 22 pharmacy services administrative organizations (PSAO), which varied in the number and location of the pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012, most of which were independent pharmacies. While the number of pharmacies with which each PSAO contracted ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other services to fewer than 1,000 pharmacies. Additionally, some PSAOs contracted with pharmacies primarily located in a particular region rather than contracting with pharmacies located across the United States. While PSAOs provide a broad range of services to independent pharmacies, and vary in how they offer these services, PSAOs consistently provide contract negotiation, communication, and help-desk services. All of the model agreements between PSAOs and independent pharmacies that GAO reviewed stated that the PSAO will negotiate and enter into contracts with third-party payers on behalf of member pharmacies. PSAOs may also contract with pharmacy benefit managers (PBM), which many third-party payers use to manage their prescription drug benefit. In addition to contracting, PSAOs also communicate information to members regarding contractual and regulatory requirements, and provide general and claims-specific assistance to members by means of a help-desk or a dedicated staff person. They may also provide other services to help member pharmacies interact with third-party payers or their PBMs, such as managing and analyzing payment and drug-dispensing data to identify claims unpaid or incorrectly paid by a third-party payer. PSAO services are intended to achieve administrative efficiencies, including contract and payment efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundle of services and may charge additional fees for other services provided to its member pharmacies. Virtually all of the fees paid for PSAO services are paid by member pharmacies, with PSAOs receiving no administrative fees from other entities such as third-party payers or their PBMs. The majority of PSAOs in operation in 2011 or 2012 were owned by drug wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 were stand-alone PSAOs owned by other private entities. These owners varied in their requirements for PSAO member pharmacies to also use services from their separate, non-PSAO line of business. Three PSAO owners GAO spoke with required PSAO members to also use their non-PSAO services. For example, one wholesaler-owned PSAO limited its offer of PSAO services to existing customers of its drug distribution line of business. All but one PSAO owner GAO spoke with reported that their PSAO line of business earned little to no profit. However, PSAO owners may operate PSAOs for a number of reasons, including helping pharmacies gain access to third-party payer contracts and to provide benefits to the owner's non-PSAO line of business.

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An enterprise architecture is a blueprint that describes the current and desired state of an organization or functional area in both logical and technical terms, as well as a plan for transitioning between the two states. Enterprise architectures are a recognized tenet of organizational transformation and IT management in public and private organizations. Without an enterprise architecture, it is unlikely that an organization will be able to transform business processes and modernize supporting systems to minimize overlap and maximize interoperability. The concept of enterprise architectures originated in the mid-1980s; various frameworks for defining the content of these architectures have been published by government agencies and OMB. Moreover, legislation and federal guidance requires agencies to develop and use architectures. For more than a decade, we have conducted work to improve agency architecture efforts. To this end, we developed an enterprise architecture management maturity framework that provides federal agencies with a common benchmarking tool for assessing the management of their enterprise architecture efforts and developing improvement plans. An enterprise can be viewed as either a single organization or a functional area that transcends more than one organization (e.g., financial management, homeland security). An architecture can be viewed as the structure (or structural description) of any activity. Thus, enterprise architectures are basically systematically derived and captured descriptions—in useful models, diagrams, and narrative. More specifically, an architecture describes the enterprise in logical terms (such as interrelated business processes and business rules, information needs and flows, and work locations and users) as well as in technical terms (such as hardware, software, data, communications, and security attributes and performance standards). It provides these perspectives both for the enterprise’s current or “as-is” environment and for its target or “to- be” environment, as well as a transition plan for moving from the “as-is” to the “to-be” environment. The importance of enterprise architectures is a basic tenet of both organizational transformation and IT management, and their effective use is a recognized hallmark of successful public and private organizations. For over a decade, we have promoted the use of architectures, recognizing them as a crucial means to a challenging end: optimized agency operations and performance. The alternative, as our work has shown, is the perpetuation of the kinds of operational environments that burden most agencies today, where a lack of integration among business operations and the IT resources supporting them leads to systems that are duplicative, poorly integrated, and unnecessarily costly to maintain and interface. Employed in concert with other important IT management controls (such as portfolio-based capital planning and investment control practices), architectures can greatly increase the chances that the organizations’ operational and IT environments will be configured so as to optimize mission performance. During the mid-1980s, John Zachman, widely recognized as a leader in the field of enterprise architecture, identified the need to use a logical construction blueprint (i.e., an architecture) for defining and controlling the integration of systems and their components. Accordingly, Zachman developed a structure or framework for defining and capturing an architecture, which provides for six perspectives or “windows” from which to view the enterprise. Zachman also proposed six abstractions or models associated with each of these perspectives. Zachman’s framework provides a way to identify and describe an entity’s existing and planned component parts and the parts’ relationships before the entity begins the costly and time-consuming efforts associated with developing or transforming itself. Since Zachman introduced his framework, a number of frameworks have emerged within the federal government, beginning with the publication of the National Institute of Standards and Technology (NIST) framework in 1989. Since that time, other federal entities have issued frameworks, including the Department of Defense (DOD) and the Department of the Treasury. In September 1999, the federal Chief Information Officers (CIO) Council published the Federal Enterprise Architecture Framework (FEAF), which was intended to provide federal agencies with a common construct for their architectures, thereby facilitating the coordination of common business processes, technology insertion, information flows, and system investments among federal agencies. The FEAF described an approach, including models and definitions, for developing and documenting architecture descriptions for multi-organizational functional segments of the federal government. More recently, OMB established the Federal Enterprise Architecture Program Management Office (FEAPMO) to develop a federal enterprise architecture according to a collection of five reference models (see table 1). These models are intended to facilitate governmentwide improvement through cross-agency analysis and the identification of duplicative investments, gaps, and opportunities for collaboration, interoperability, and integration within and across government agencies. OMB has identified multiple purposes for the Federal Enterprise Architecture, such as the following: informing agency enterprise architectures and facilitating their development by providing a common classification structure and vocabulary; providing a governmentwide framework that can increase agency awareness of IT capabilities that other agencies have or plan to acquire, so that they can explore opportunities for reuse; helping OMB decision makers identify opportunities for collaboration among agencies through the implementation of common, reusable, and interoperable solutions; and providing the Congress with information that it can use as it considers the authorization and appropriation of funding for federal programs. Although these post-Zachman frameworks differ in their nomenclatures and modeling approaches, each consistently provides for defining an enterprise’s operations in both logical and technical terms, provides for defining these perspectives for the enterprise’s current and target environments, and calls for a transition plan between the two. Several laws and regulations address enterprise architecture. For example, the Clinger-Cohen Act of 1996 directs the CIOs of major departments and agencies to develop, maintain, and facilitate the implementation of information technology architectures as a means of integrating agency goals and business processes with information technology. Also, OMB Circular A-130, which implements the Clinger-Cohen Act, requires that agencies document and submit their initial enterprise architectures to OMB and that agencies submit updates when significant changes to their enterprise architectures occur. The circular also directs OMB to use various reviews to evaluate the adequacy and efficiency of each agency’s compliance with the circular. We began reviewing federal agencies’ use of enterprise architectures in 1994, initially focusing on those agencies that were pursuing major systems modernization programs that were high risk. These included the National Weather Service systems modernization, the Federal Aviation Administration (FAA) air traffic control modernization, and the Internal Revenue Service tax systems modernization. Generally, we reported that these agencies’ enterprise architectures were incomplete, and we made recommendations that they develop and implement complete enterprise architectures to guide their modernization efforts. Since then, we have reviewed enterprise architecture management at other federal agencies, including the Department of Education (Education), the Customs Service, the Immigration and Naturalization Service, the Centers for Medicare and Medicaid Services, FAA, and the Federal Bureau of Investigation (FBI). We have also reviewed the use of enterprise architectures for critical agency functional areas, such as the integration and sharing of terrorist watch lists across key federal departments and DOD financial management, logistics management, combat identification, and business systems modernization. These reviews continued to identify the absence of complete and enforced enterprise architectures, which in turn has led to agency business operations, systems, and data that are duplicative, incompatible, and not integrated; these conditions have either prevented agencies from sharing data or forced them to depend on expensive, custom-developed system interfaces to do so. Accordingly, we made recommendations to improve the respective architecture efforts. In some cases progress has been made, such as at DOD and FBI. As a practical matter, however, considerable time is needed to completely address the kind of substantive issues that we have raised and to make progress in establishing more mature architecture programs. In 2002 and 2003, we also published reports on the status of enterprise architectures governmentwide. The first report (February 2002) showed that about 52 percent of federal agencies self-reported having at least the management foundation that is needed to successfully develop, implement, and maintain an enterprise architecture, and that about 48 percent of agencies had not yet advanced to that basic stage of maturity. We attributed this state of architecture management to four management challenges: (1) overcoming limited executive understanding, (2) inadequate funding, (3) insufficient number of skilled staff, and (4) organizational parochialism. Additionally, we recognized OMB’s efforts to promote and oversee agencies’ enterprise architecture efforts. Nevertheless, we determined that OMB’s leadership and oversight could be improved by, for example, using a more structured means of measuring agencies’ progress and by addressing the above management challenges. The second report (November 2003) showed the percentage of agencies that had established at least a foundation for enterprise architecture management was virtually unchanged. We attributed this to long-standing enterprise architecture challenges that had yet to be addressed. In particular, more agencies reported lack of agency executive understanding of enterprise architecture and the scarcity of skilled architecture staff as significant challenges. OMB generally agreed with our findings and the need for additional agency assessments. Further, it stated that fully implementing our recommendations would require sustained management attention, and that it had begun by working with the CIO Council to establish the Chief Architect Forum and to increase the information OMB reports on enterprise architecture to Congress. Since then, OMB has developed and implemented an enterprise architecture assessment tool. According to OMB, the tool helps better understand the current state of an agency’s architecture and assists agencies in integrating architectures into their decision-making processes. The latest version of the assessment tool (2.0) was released in December 2005 and includes three capability areas: (1) completion, (2) use, and (3) results. Table 2 describes each of these areas. The tool also includes criteria for scoring an agency’s architecture program on a scale of 0 to 5. In early 2006, the major departments and agencies were required by OMB to self assess their architecture programs using the tool. OMB then used the self assessment to develop its own assessment. These assessment results are to be used in determining the agency’s e- Government score within the President’s Management Agenda. In 2002, we developed version 1.0 of our Enterprise Architecture Management Maturity Framework (EAMMF) to provide federal agencies with a common benchmarking tool for planning and measuring their efforts to improve enterprise architecture management, as well as to provide OMB with a means for doing the same governmentwide. We issued an update of the framework (version 1.1) in 2003. This framework is an extension of A Practical Guide to Federal Enterprise Architecture, Version 1.0, published by the CIO Council. Version 1.1 of the framework arranges 31 core elements (practices or conditions that are needed for effective enterprise architecture management) into a matrix of five hierarchical maturity stages and four critical success attributes that apply to each stage. Within a given stage, each critical success attribute includes between one and four core elements. Based on the implicit dependencies among the core elements, the EAMMF associates each element with one of five maturity stages (see fig. 1). The core elements can be further categorized by four groups: architecture governance, content, use, and measurement. Stage 1: Creating EA awareness. At stage 1, either an organization does not have plans to develop and use an architecture, or it has plans that do not demonstrate an awareness of the value of having and using an architecture. While stage 1 agencies may have initiated some enterprise architecture activity, these agencies’ efforts are ad hoc and unstructured, lack institutional leadership and direction, and do not provide the management foundation necessary for successful enterprise architecture development as defined in stage 2. Stage 2: Building the EA management foundation. An organization at stage 2 recognizes that the enterprise architecture is a corporate asset by vesting accountability for it in an executive body that represents the entire enterprise. At this stage, an organization assigns enterprise architecture management roles and responsibilities and establishes plans for developing enterprise architecture products and for measuring program progress and product quality; it also commits the resources necessary for developing an architecture—people, processes, and tools. Specifically, a stage 2 organization has designated a chief architect and established and staffed a program office responsible for enterprise architecture development and maintenance. Further, it has established a committee or group that has responsibility for enterprise architecture governance (i.e., directing, overseeing, and approving architecture development and maintenance). This committee or group membership has enterprisewide representation. At stage 2, the organization either has plans for developing or has started developing at least some enterprise architecture products, and it has developed an enterprisewide awareness of the value of enterprise architecture and its intended use in managing its IT investments. The organization has also selected a framework and a methodology that will be the basis for developing the enterprise architecture products and has selected a tool for automating these activities. Stage 3: Developing the EA. An organization at stage 3 focuses on developing architecture products according to the selected framework, methodology, tool, and established management plans. Roles and responsibilities assigned in the previous stage are in place, and resources are being applied to develop actual enterprise architecture products. At this stage, the scope of the architecture has been defined to encompass the entire enterprise, whether organization-based or function-based. Although the products may not be complete, they are intended to describe the organization in terms of business, performance, information/data, service/application, and technology (including security explicitly in each) as provided for in the framework, methodology, tool, and management plans. Further, the products are to describe the current (as-is) and future (to-be) states and the plan for transitioning from the current to the future state (the sequencing plan). As the products are developed and evolve, they are subject to configuration management. Further, through the established enterprise architecture management foundation, the organization is tracking and measuring its progress against plans, identifying and addressing variances, as appropriate, and then reporting on its progress. Stage 4: Completing the EA. An organization at stage 4 has completed its enterprise architecture products, meaning that the products have been approved by the enterprise architecture steering committee (established in stage 2) or an investment review board, and by the CIO. The completed products collectively describe the enterprise in terms of business, performance, information/data, service/application, and technology for both its current and future operating states, and the products include a plan for transitioning from the current to the future state. Further, an independent agent has assessed the quality (i.e., completeness and accuracy) of the enterprise architecture products. Additionally, evolution of the approved products is governed by a written enterprise architecture maintenance policy approved by the head of the organization. Stage 5: Leveraging the EA to manage change. An organization at stage 5 has secured senior leadership approval of the enterprise architecture products and a written institutional policy stating that IT investments must comply with the architecture, unless granted an explicit compliance waiver. Further, decision makers are using the architecture to identify and address ongoing and proposed IT investments that are conflicting, overlapping, not strategically linked, or redundant. As a result, stage 5 entities avoid unwarranted overlap across investments and ensure maximum systems interoperability, which in turn ensures the selection and funding of IT investments with manageable risks and returns. Also, at stage 5, the organization tracks and measures enterprise architecture benefits or return on investment, and adjustments are continuously made to both the enterprise architecture management process and the enterprise architecture products. Attribute 1: Demonstrates commitment. Because the enterprise architecture is a corporate asset for systematically managing institutional change, the support and sponsorship of the head of the enterprise are essential to the success of the architecture effort. An approved enterprise policy statement provides such support and sponsorship, promoting institutional buy-in and encouraging resource commitment from participating components. Equally important in demonstrating commitment is vesting ownership of the architecture with an executive body that collectively owns the enterprise. Attribute 2: Provides capability to meet commitment. The success of the enterprise architecture effort depends largely on the organization’s capacity to develop, maintain, and implement the enterprise architecture. Consistent with any large IT project, these capabilities include providing adequate resources (i.e., people, processes, and technology), defining clear roles and responsibilities, and defining and implementing organizational structures and process management controls that promote accountability and effective project execution. Attribute 3: Demonstrates satisfaction of commitment. Satisfaction of the organization’s commitment to develop, maintain, and implement an enterprise architecture is demonstrated by the production of artifacts (e.g., the plans and products). Such artifacts demonstrate follow through—that is, actual enterprise architecture production. Satisfaction of commitment is further demonstrated by senior leadership approval of enterprise architecture documents and artifacts; such approval communicates institutional endorsement and ownership of the architecture and the change that it is intended to drive. Attribute 4: Verifies satisfaction of commitment. This attribute focuses on measuring and disclosing the extent to which efforts to develop, maintain, and implement the enterprise architecture have fulfilled stated goals or commitments of the enterprise architecture. Measuring such performance allows for tracking progress that has been made toward stated goals, allows appropriate actions to be taken when performance deviates significantly from goals, and creates incentives to influence both institutional and individual behaviors. The framework’s 31 core elements can also be placed in one of four groups of architecture related activities, processes, products, events, and structures. The groups are architecture governance, content, use, and measurement. These groups are generally consistent with the capability area descriptions in the previously discussed OMB enterprise architecture assessment tool. For example, OMB’s completion capability area addresses ensuring that architecture products describe the agency in terms of processes, services, data, technology, and performance and that the agency has developed a transition strategy. Similarly, our content group includes developing and completing these same enterprise architecture products. In addition, OMB’s results capability area addresses performance measurement as does our measurement group, and OMB’s use capability area addresses many of the same elements in our governance and use groups. Table 3 lists the core elements according to EAMMF group. Most of the 27 major departments and agencies have not fully satisfied all the core elements associated with stage 2 of our maturity framework. At the same time, however, most have satisfied a number of core elements at stages 3, 4, and 5. Specifically, although only seven have fully satisfied all the stage 2 elements, the 27 have on average fully satisfied 80, 78, 61, and 52 percent of the stage 2, 3, 4, and 5 elements, respectively. Of the core elements that have been fully satisfied, 77 percent of those related to architecture governance have been fully satisfied, while 68, 52, and 47 percent of those related to architecture content, use, and measurement, respectively, have been fully satisfied. Most of the 27 have also at least partially satisfied a number of additional core elements across all the stages. For example, all but 7 have at least partially satisfied all the elements required to achieve stage 3 or higher. Collectively, this means efforts are underway to mature the management of most agency enterprise architecture programs, but overall these efforts are uneven and still a work- in-progress and they face numerous challenges that departments and agencies identified. It also means that some architecture programs provide examples from which less mature programs could learn and improve. Without mature enterprise architecture programs, some departments and agencies will not realize the many benefits that they attributed to architectures, and they are at risk of investing in IT assets that are duplicative, not well-integrated, and do not optimally support mission operations. To qualify for a given stage of maturity under our architecture management framework, a department or agency had to fully satisfy all of the core elements at that stage. Using this criterion, three departments and agencies are at stage 2, meaning that they demonstrated to us through verifiable documentation that they have established the foundational commitments and capabilities needed to manage the development of an architecture. In addition, four are at stage 3, meaning that they similarly demonstrated that their architecture development efforts reflect employment of the basic control measures in our framework. Table 4 summarizes the maturity stage of each architecture program that we assessed. Appendix IV provides the detailed results of our assessment of each department and agency architecture program against our maturity framework. While using this criterion provides an important perspective on the state of department and agency architecture programs, it can mask the fact that the programs have met a number of core elements across higher stages of maturity. When the percentage of core elements that have been fully satisfied at each stage is considered, the state of the architecture efforts generally shows both a larger number of more robust architecture programs as well as more variability across the departments and agencies. Specifically, 16 departments and agencies have fully satisfied more than 70 percent of the core elements. Examples include Commerce, which has satisfied 87 percent of the core elements, including 75 percent of the stage 5 elements, even though it is at stage 1 because its enterprise architecture approval board does not have enterprisewide representation (a stage 2 core element). Similarly, SSA, which is also a stage 1 because the agency’s enterprise architecture methodology does not describe the steps for developing, maintaining, and validating the agency’s enterprise architecture (a stage 2 core element), has at the same time satisfied 87 percent of all the elements, including 63 percent of the stage 5 elements. In contrast, the Army, which is also in stage 1, has satisfied but 3 percent of all framework elements. Overall, 10 agency architecture programs fully satisfied more than 75 percent of the core elements, 14 between 50 and 75 percent, and 4 fewer than 50 percent. These four included the three military departments. Table 5 summarizes for each department and agency the percentage of core elements fully satisfied in total and by maturity stage. Notwithstanding the additional perspective that the percentage of core elements fully satisfied across all stages provides, it is important to note that the staged core elements in our framework represent a hierarchical or systematic progression to establishing a well-managed architecture program, meaning that core elements associated with lower framework stages generally support the effective execution of higher maturity stage core elements. For instance, if a program has developed its full suite of “as- is” and “to-be” architecture products, including a sequencing plan (stage 4 core elements), but the products are not under configuration management (stage 3 core element), then the integrity and consistency of the products will be not be assured. Our analysis showed that this was the case for a number of architecture programs. For example, State has developed certain “as-is” and “to-be” products for the Joint Enterprise Architecture, which is being developed in collaboration with USAID, but an enterprise architecture configuration management plan has not yet been finalized. Further, not satisfying even a single core element can have a significant impact on the effectiveness of an architecture program. For example, not having adequate human capital with the requisite knowledge and skills (stage 2 core element), not using a defined framework or methodology (stage 2 core element), or not using an independent verification and validation agent (stage 4 core element), could significantly limit the quality and utility of an architecture. The DOD’s experience between 2001 and 2005 in developing its BEA is a case in point. During this time, we identified the need for the department to have an enterprise architecture for its business operations, and we made a series of recommendations grounded in, among other things, our architecture management framework to ensure that it was successful in doing so. In 2005, we reported that the department had not implemented most of our recommendations. We further reported that despite developing multiple versions of a wide range of architecture products, and having invested hundreds of millions of dollars and 4 years in doing so, the department did not have a well-defined architecture and that what it had developed had limited utility. Among other things, we attributed the poor state of its architecture products to ineffective program governance, communications, program planning, human capital, and configuration management, most of which are stage 2 and 3 foundational core elements. To the department’s credit, we recently reported that it has since taken a number of actions to address these fundamental weaknesses and our related recommendations and that it is now producing architecture products that provide a basis upon which to build. The significance of not satisfying a single core element is also readily apparent for elements associated with the framework’s content group. In particular, the framework emphasizes the importance of planning for, developing, and completing an architecture that includes the “as-is” and the “to-be” environments as well as a plan for transitioning between the two. It also recognizes that the “as-is” and “to-be” should address the business, performance, information/data, application/service, technology, and security aspects of the enterprise. To the extent these aspects are not addressed in this way, the quality of the architecture and thus its utility will suffer. In this regard, we found examples of departments and agencies that were addressing some but not all of these aspects. For example, HUD has yet to adequately incorporate security into its architecture. This is significant because security is relevant to all the other aspects of its architecture, such as information/data and applications/services. As another example, NASA’s architecture does not include a plan for transitioning from the “as-is” to the “to-be” environments. According to the administration’s Chief Enterprise Architect, a transition plan has not yet been developed because of insufficient time and staff. Looking across all the departments and agencies at core elements that are fully satisfied, not by stage of maturity, but by related groupings of core elements, provides an additional perspective on the state of the federal government’s architecture efforts. As noted earlier, these groupings of core elements are architecture governance, content, use, and measurement. Overall, departments and agencies on average have fully satisfied 77 percent of the governance-related elements. In particular, 93 and 96 percent of the agencies have established an architecture program office and appointed a chief architect, respectively. In addition, 93 percent have plans that call for their respective architectures to describe the “as-is” and the “to-be” environments, and for having a plan for transitioning between the two (see fig. 2). In contrast, however, the core element associated with having a committee or group with representation from across the enterprise directing, overseeing, and approving the architecture was fully satisfied by only 57 percent of the agencies. This core element is important because the architecture is a corporate asset that needs to be enterprisewide in scope and accepted by senior leadership if it is to be leveraged for organizational change. In contrast to governance, the extent of full satisfaction of those core elements that are associated with what an architecture should contain varies widely (see fig. 3). For example, the three content elements that address prospectively what the architecture will contain, either in relation to plans or some provision for including needed content, were fully satisfied about 90 percent of the time. However, the core elements addressing whether the products now contain such content were fully satisfied much less frequently (between 54 and 68 percent of the time, depending on the core element), and the core elements associated with ensuring the quality of included content, such as employing configuration management and undergoing independent verification and validation, were also fully satisfied much less frequently (54 and 21 percent of the time, respectively). The state of these core elements raises important questions about the quality and utility of the department and agency architectures. The degree of full satisfaction of those core elements associated with the remaining two groups—use and measurement—is even lower (see figs. 4 and 5, respectively). For example, the architecture use-related core elements were fully satisfied between 39 and 64 percent of the time, while the measurement-related elements were satisfied between 14 and 71 percent. Of particular note is that only 39 percent of the departments and agencies could demonstrate that IT investments comply with their enterprise architectures, only 43 percent of the departments and agencies could demonstrate that compliance with the enterprise architecture is measured and reported, and only 14 percent were measuring and reporting on their respective architecture program’s return on investment. As our work and related best practices show, the value in having an architecture is using it to affect change and produce results. Such results, as reported by the departments and agencies include improved information sharing, increased consolidation, enhanced productivity, and lower costs, all of which contribute to improved agency performance. To realize these benefits, however, IT investments need to comply with the architecture and measurement of architecture activities, including accrual of expected benefits, needs to occur. In those instances where departments and agencies have not fully satisfied certain core elements in our framework, most have at least partially satisfied these elements. To illustrate, 4 agencies would improve to at least stage 4 if the criterion for being a given stage was relaxed to only partially satisfying a core element. Moreover, 11 of the remaining agencies would advance by two stages under such a less demanding criterion, and only 6 would not improve their stage of maturity under these circumstances. A case in point is Commerce, which could move from stage 1 to stage 5 under these circumstances because it has fully satisfied all but four core elements and these remaining four (one each at stages 2 and 4 and two at stage 5) are partially satisfied. Another case in point is the SSA, which has fully satisfied all but four core elements (one at stage 2 and three at stage 5) and has partially satisfied three of these remaining four. If the criterion used allowed advancement to the next stage by only partially satisfying core elements, the administration would be stage 4. (See fig. 6 for a comparison of department and agency program maturity stages under the two criteria.) As mentioned earlier, departments and agencies can require considerable time to completely address issues related to their respective enterprise architecture programs. It is thus important to note that even though certain core elements are partially satisfied, fully satisfying some of them may not be accomplished quickly and easily. It is also important to note the importance of fully, rather than partially, satisfying certain elements, such as those that fall within the architecture content group. In this regard, 18, 18, and 21 percent of the departments and agencies partially satisfied the following stage 4 content-related core elements, respectively: “EA products describe ‘as-is’ environment, ‘to-be’ environment and sequencing plan”; “Both ‘as-is’ and ‘to-be’ environments are described in terms of business, performance, information/data, application/service, and technology”; and “These descriptions fully address security.” Not fully satisfying these elements can have important implications for the quality of an architecture, and thus its usability and results. Seven departments or agencies would meet our criterion for stage 5 if each was to fully satisfy one to five additional core elements (see table 6). For example, Interior could achieve stage 5 by satisfying one additional element: “EA products and management processes undergo independent verification and validation.” In this regard, Interior officials have drafted a statement of work intended to ensure that independent verification and validation of enterprise architecture products and management processes is performed. The other six departments and agencies are HUD and OPM, which could achieve stage 5 by satisfying two additional elements; Commerce, Labor, and SSA, which could achieve the same by satisfying four additional elements; and Education which could be at stage 5 by satisfying five additional elements. Of these seven, five have not fully satisfied the independent verification and validation core element. Notwithstanding the fact that five or fewer core elements need to be satisfied by these agencies to be at stage 5, it is important to note that in some cases the core elements not being satisfied are not only very important, but also neither quickly nor easily satisfied. For example, one of the two elements that HUD needs to satisfy is having its architecture products address security. This is extremely important as security is an integral aspect of the architecture’s performance, business, information/data, application/service, and technical models, and needs to be reflected thoroughly and consistently across each of them. The challenges facing departments and agencies in developing and using enterprise architectures are formidable. The challenge that most departments and agencies cited as being experienced to the greatest extent is the one that having and using an architecture is intended to overcome— organizational parochialism and cultural resistance to adopting an enterprisewide mode of operation in which organizational parts are sub- optimized in order to optimize the performance and results of the enterprise as a whole. Specifically, 93 percent of the departments and agencies reported that they encountered this challenge to a significant (very great or great) or moderate extent. Other challenges reported to this same extent were ensuring that the architecture program had adequate funding (89 percent), obtaining staff skilled in the architecture discipline (86 percent), and having the department or agency senior leaders understand the importance and role of the enterprise architecture (82 percent). As we have previously reported, sustained top management leadership is the key to overcoming each of these challenges. In this regard, our enterprise architecture management maturity framework provides for such leadership and addressing these and other challenges through a number of core elements. These elements contain mechanisms aimed at, for example, establishing responsibility and accountability for the architecture with senior leaders and ensuring that the necessary institutional commitments are made to the architecture program, such as through issuance of architecture policy and provision of adequate resources (both funding and people). See table 7 for a listing of the reported challenges and the extent to which they are being experienced. A large percentage of the departments and agencies reported that they have already accrued numerous benefits from their respective architecture programs (see table 8). For example, 70 percent said that have already improved the alignment between their business operations and the IT that supports these operations to a significant extent. Such alignment is extremely important. According to our IT investment management maturity framework, alignment between business needs and IT investments is a critical process in building the foundation for an effective approach to IT investment management. In addition, 64 percent responded that they have also improved information/knowledge sharing to a significant or moderate extent. Such sharing is also very important. In 2005, for example, we added homeland security information sharing to our list of high-risk areas because despite the importance of information to fighting terrorism and maintaining the security of our nation, many aspects of homeland security information sharing remain ineffective and fragmented. Other examples of mission-effectiveness related benefits reported as already being achieved to a significant or moderate extent by roughly one-half of the departments and agencies included improved agency management and change management and improved system and application interoperability. Beyond these benefits, departments and agencies also reported already accruing, to a significant or moderate extent, a number of efficiency and productivity benefits. For example, 56 percent reported that they have increased the use of enterprise software licenses, which can permit cost savings through economies of scale purchases; 56 percent report that they have been able to consolidate their IT infrastructure environments, which can reduce the costs of operating and maintaining duplicative capabilities; 41 percent reported that they have been able to reduce the number of applications, which is a key to reducing expensive maintenance costs; and 37 percent report productivity improvements, which can free resources to focus on other high priority matters. Notwithstanding the number and extent of benefits that department and agency responses show have already been realized, these same responses also show even more benefits that they have yet to realize (see table 8). For example, 30 percent reported that they have thus far achieved, to little or no extent, better business and IT alignment. They similarly reported that they have largely untapped many other effectiveness and efficiency benefits, with between 36 and 70 percent saying these benefits have been achieved to little or no extent, depending on benefit. Moreover, for all the cited benefits, a far greater percentage of the departments and agencies (74 to 93 percent) reported that they expect to realize each of the benefits to a significant or moderate extent sometime in the future. What this suggests is that the real value in the federal government from developing and using enterprise architecture remains largely unrealized potential. Our architecture maturity framework recognizes that a key to realizing this potential is effectively managing department and agency enterprise architecture programs. However, knowing whether benefits and results are in fact being achieved requires having associated measures and metrics. In this regard, very few (21 percent) of the departments and agencies fully satisfied our stage 5 core element, “Return on EA investment is measured and reported.” Without satisfying this element, it is unlikely that the degree to which expected benefits are accrued will be known. If managed effectively, enterprise architectures can be a useful change management and organizational transformation tool. The conditions for effectively managing enterprise architecture programs are contained in our architecture management maturity framework. While a few of the federal government’s 27 major departments and agencies have fully satisfied all the conditions needed to be at stage 2 or above in our framework, many have fully satisfied a large percentage of the core elements across most of the stages, particularly those elements related to architecture governance. Nevertheless, most departments and agencies are not yet where they need to be relative to architecture content, use, and measurement and thus the federal government is not as well positioned as it should be to realize the significant benefits that a well-managed architecture program can provide. Moving beyond this status will require most departments and agencies to overcome some significant obstacles and challenges. The key to doing so continues to be sustained organizational leadership. Without such organizational leadership, the benefits of enterprise architecture will not be fully realized. To assist the 27 major departments and agencies in addressing enterprise architecture challenges, managing their architecture programs, and realizing architecture benefits, we recommend that the Administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the Attorney General; the Commissioners of the Nuclear Regulatory Commission and Social Security Administration; the Directors of the National Science Foundation and the Office of Personnel Management; and the Secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, State, Transportation, Treasury, and Veterans Affairs ensure that their respective enterprise architecture programs develop and implement plans for fully satisfying each of the conditions in our enterprise architecture management maturity framework. We received written or oral comments on a draft of this report from 25 of the departments and agencies in our review. Of the 25 departments and agencies, all but one department fully agreed with our recommendation. Nineteen departments and agencies agreed and six partially agreed with our findings. Areas of disagreement for these six centered on (1) the adequacy of the documentation that they provided to demonstrate satisfaction of certain core elements and (2) recognition of steps that they reported taking to satisfy certain core elements after we concluded our review. For the most part, these isolated areas of disagreement did not result in any changes to our findings for two primary reasons. First, our findings across the departments and agencies were based on consistently applied evaluation criteria governing the adequacy of documentation, and were not adjusted to accommodate any one particular department or agency. Second, our findings represent the state of each architecture program as of March 2006, and thus to be consistent do not reflect activities that may have occurred after this time. Beyond these comments, several agencies offered suggestions for improving our framework, which we will consider prior to issuing the next version of the framework. The departments’ and agencies’ respective comments and our responses, as warranted, are as follows: Agriculture’s Associate CIO provided e-mail comments stating that the department will incorporate our recommendation into its enterprise architecture program plan. Commerce’s CIO stated in written comments that the department concurred with our findings and will consider actions to address our recommendation. Commerce’s written comments are reproduced in appendix V. DOD’s Director, Architecture and Interoperability, stated in written comments that the department generally concurred with our recommendation to the five DOD architecture programs included in our review. However, the department stated that it did not concur with the one aspect of the recommendation directed at the GIG architecture concerning independent verification and validation (IV&V) because it believes that its current internal verification and validation activities are sufficient. We do not agree for two reasons. First, these internal processes are not independently performed. As we have previously reported, IV&V is a recognized hallmark of well managed programs, including architecture programs, and to be effective, it must be performed by an entity that is independent of the processes and products that are being reviewed. Second, the scope of the internal verification and validation activities only extends to a subset of the architecture products and management processes. The department also stated that it did not concur with one aspect of our finding directed at BEA addressing security. According to DOD, because GIG addresses security and the GIG states that it extends to all defense mission areas, including the business mission area, the BEA in effect addresses security. We do not fully agree. While we acknowledge that GIG addresses security and states that it is to extend to all DOD mission areas, including the business mission area, it does not describe how this will be accomplished for BEA. Moreover, nowhere in the BEA is security addressed, either through statement or reference, relative to the architecture’s performance, business, information/data, application/service, and technology products. DOD’s written comments, along with our responses, are reproduced in appendix VI. Education’s Assistant Secretary for Management and Acting CIO stated in written comments that the department plans to address our findings. Education’s written comments are reproduced in appendix VII. Energy’s Acting Associate CIO for Information Technology Reform stated in written comments that the department concurs with our report. Energy’s written comments are reproduced in appendix VIII. DHS’s Director, Departmental GAO/OIG Liaison Office, stated in written comments that the department has taken, and plans to take, steps to address our recommendation. DHS’s written comments, along with our responses to its suggestions for improving our framework, are reproduced in appendix IX. DHS also provided technical comments via e-mail, which we have incorporated, as appropriate, in the report. HUD’s CIO stated in written comments that the department generally concurs with our findings and is developing a plan to address our recommendation. The CIO also provided updated information about activities that the department is taking to address security in its architecture. HUD’s written comments are reproduced in appendix X. Interior’s Assistant Secretary, Policy, Management and Budget, stated in written comments that the department agrees with our findings and recommendation and that it has recently taken action to address them. Interior’s written comments are reproduced in appendix XI. DOJ’s CIO stated in written comments that our findings accurately reflect the state of the department’s enterprise architecture program and the areas that it needs to address. The CIO added that our report will help guide the department’s architecture program and provided suggestions for improving our framework and its application. DOJ’s written comments, along with our responses to its suggestions, are reproduced in appendix XII. Labor’s Deputy CIO provided e-mail comments stating that the department concurs with our findings. The Deputy CIO also provided technical comments that we have incorporated, as appropriate, in the report. State’s Assistant Secretary for Resource Management and Chief Financial Officer provided written comments that summarize actions that the department will take to fully satisfy certain core elements and that suggest some degree of disagreement with our findings relative to three other core elements. First, the department stated that its architecture configuration management plan has been approved by both the State and USAID CIOs. However, it provided no evidence to demonstrate that this was the case as of March 2006 when we concluded our review, and thus we did not change our finding relative to architecture products being under configuration management. Second, the department stated that its enterprise architecture has been approved by State and USAID executive offices. However, it did not provide any documentation showing such approval. Moreover, it did not identify which executive offices it was referring to so as to allow a determination of whether they were collectively representative of the enterprise. As a result, we did not change our finding relative to whether a committee or group representing the enterprise or an investment review board has approved the current version of the architecture. Third, the department stated that it provided us with IT investment score sheets during our review that demonstrate that investment compliance with the architecture is measured and reported. However, no such score sheets were provided to us. Therefore, we did not change our finding. The department’s written comments, along with more detailed responses, are reproduced in appendix XIII. Treasury’s Associate CIO for E-Government stated in written comments that the department concurs with our findings and discussed steps being taken to mature its enterprise architecture program. The Associate CIO also stated that our findings confirm the department’s need to provide executive leadership in developing its architecture program and to codify the program into department policy. Treasury’s written comments are reproduced in appendix XIV. VA’s Deputy Secretary stated in written comments that the department concurred with our recommendation and that it will provide a detailed plan to implement our recommendation. VA’s written comments are reproduced in appendix XV. EPA’s Acting Assistant Administrator and CIO stated in written comments that the agency generally agreed with our findings and that our assessment is a valuable benchmarking exercise that will help improve agency performance. The agency also provided comments on our findings relative to five core elements. For one of these core elements, the comments directed us to information previously provided about the agency’s architecture committee that corrected our understanding and resulted in us changing our finding about this core element. With respect to the other four core elements concerning use of an architecture methodology, measurement of progress against program plans, integration of the architecture into investment decision making, and management of architecture change, the comments also directed us to information previously provided but this did not result in any changes to our findings because evidence demonstrating full satisfaction of each core element was not apparent. EPA’s written comments, along with more detailed responses to each, are reproduced in appendix XVI. GSA’s Administrator stated in written comments that the agency concurs with our recommendation. The Administrator added that our findings will be critical as the agency works towards further implementing our framework’s core elements. GSA’s written comments are reproduced in appendix XVII. NASA’s Deputy Administrator stated in written comments that the agency concurs with our recommendation. NASA’s written comments are reproduced in appendix XVIII. NASA’s GAO Liaison also provided technical comments via e-mail, which we have incorporated, as appropriate, in the report. NSF’s CIO provided e-mail comments stating that the agency will use the information in our report, where applicable, for future planning and investment in its architecture program. The CIO also provided technical comments that we have incorporated, as appropriate, in the report. NRC’s GAO liaison provided e-mail comments stating that the agency substantially agrees with our findings and describing activities it has recently taken to address them. OPM’s CIO provided e-mail comments stating that the agency agrees with our findings and describing actions it is taking to address them. SBA’s GAO liaison provided e-mail comments in which the agency disagreed with our findings on two core elements. First, and notwithstanding agency officials’ statements that its architecture program did not have adequate resources, the liaison did not agree with our “partially satisfied” assessment for this core element because, according to the liaison, the agency has limited discretionary funds and competing, but unfunded, federal mandates to comply with that limit discretionary funding for an agency of its size. While we acknowledge SBA’s challenges, we would note that they are not unlike the resource constraints and competing priority decisions that face most agencies, and that while the reasons why an architecture program may not be adequately resourced may be justified, the fact remains that any assessment of the architecture program’s maturity, and thus its likelihood of success, needs to recognize whether adequate resources exist. Therefore, we did not change our finding on this core element. Second, the liaison did not agree with our finding that the agency did not have plans for developing metrics for measuring architecture progress, quality, compliance, and return on investment. However, our review of documentation provided by SBA and cited by the liaison showed that while such plans address metric development for architecture progress, quality, and compliance, they do not address architecture return on investment. Therefore, we did not change our finding that this core element was partially satisfied. SSA’s Commissioner stated in written comments that the report is both informative and useful, and that the agency agrees with our recommendation and generally agrees with our findings. Nevertheless, the agency disagreed with our findings on two core elements. First, the agency stated that documentation provided to us showed that it has a methodology for developing, maintaining, and validating its architecture. We do not agree. In particular, our review of SSA provided documentation showed that it did not adequately describe the steps to be followed relative to development, maintenance, or validation. Second, the agency stated that having the head of the agency approve the current version of the architecture is satisfied in SSA’s case because the Clinger-Cohen Act of 1996 vests its CIO with enterprise architecture approval authority and the CIO has approved the architecture. We do not agree. The core element in our framework concerning enterprise architecture approval by the agency head is derived from federal guidance and best practices upon which our framework is based. This guidance and related practices, and thus our framework, recognize that an enterprise architecture is a corporate asset that is to be owned and implemented by senior management across the enterprise, and that a key characteristic of a mature architecture program is having the architecture approved by the department or agency head. Because the Clinger-Cohen Act does not address approval of an enterprise architecture, our framework’s core element for agency head approval of an enterprise architecture is not inconsistent with, and is not superseded by, that act. SSA’s written comments, along with more detailed responses, are reproduced in appendix XIX. USAID’s Acting Chief Financial Officer stated in written comments stated that the agency will work with State to implement our recommendation. USAID’s written comments are reproduced in appendix XX. 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 Administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the Attorney General; the Commissioners of the Nuclear Regulatory Commission and Social Security Administration; the Directors of the National Science Foundation and the Office of Personnel Management; and the Secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, State, Transportation, Treasury, and Veterans Affairs. 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 concerning this information, please contact me at (202) 512-3439 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 are listed in appendix XXI. Department- and agency-reported data show wide variability in their costs to develop and maintain their enterprise architectures. Generally, the costs could be allocated to several categories with the majority of costs attributable to contractor support and agency personnel. As we have previously reported, the depth and detail of the architecture to be developed and maintained is dictated by the scope and nature of the enterprise and the extent of enterprise transformation and modernization envisioned. Therefore, the architecture should be tailored to the individual enterprise and that enterprise’s intended use of the architecture. Accordingly, the level of resources that a given department or agency invests in its architecture is likely to vary. Departments and agencies reported that they have collectively invested a total of $836 million to date on enterprise architecture development. Across the 27 departments and agencies, these development costs ranged from a low of $2 million by the Department of the Navy to a high of $433 million by the Department of Defense (DOD) on its Business Enterprise Architecture (BEA). Department and agency estimates of the costs to complete their planned architecture development efforts collectively total about $328 million. The department and agencies combined estimates of annual architecture maintenance costs is about $146 million. These development and maintenance estimates, however, do not include the Departments of the Army and Justice because neither provided these cost estimates. Figures 7 through 9 depict the variability of cost data reported by the departments and agencies. All of the departments and agencies reported developing their architecture in-house using contractor support. All but two of the departments and agencies allocated their respective architecture development costs to the following cost categories: contractor support, agency personnel, tools, methodologies, training, and other. These 26 agencies accounted for about $741 million of the $836 million total development costs cited above. The vast majority (84 percent) of the $741 million were allocated to contractor services ($621 million), followed next by agency personnel (13 percent or $94 million). The remaining $26 million were allocated as follows: $12 million (2 percent) to architecture tools; $9 million (1 percent) to “other” costs; $4 million (1 percent) to architecture methodologies; and $2 million (less than 1 percent) to training. (See fig. 10.) The departments and agencies allocated the reported $621 million in contractor-related costs to the following five contractor cost categories: architecture development, independent verification and validation, methodology, support services, and other. Of these categories, architecture development activities accounted for the majority of costs— about $594 million (87 percent). The remaining $85 million was allocated as follows: $51 million (7 percent) to support services, $13 million (2 percent) to “other” costs, $11 million (2 percent) to independent verification and validation, and $10 million (1 percent) to methodologies. (See fig. 11.) Departments and agencies reported additional information related to the implementation of their enterprise architectures. This information includes architecture tools and frameworks. As stated in our enterprise architecture management maturity framework, an automated architecture tool serves as the repository of architecture artifacts, which are the work products that are produced and used to capture and convey architectural information. An agency’s choice of tool should be based on a number of considerations, including agency needs and the size and complexity of the architecture. The departments and agencies reported that they use various automated tools to develop and maintain their enterprise architectures, with 12 reporting that they use more than one tool. In descending order of frequency, the architecture tools identified were System Architect (18 instances), Microsoft Visio (17), Metis (12), Rational Rose (8), and Enterprise Architecture Management System (EAMS) (4). In addition, 21 departments and agencies reported using one or more other architecture tools. Figure 12 shows the number of departments and agencies using each architecture tool, including the other tools. The departments and agencies also reported various levels of satisfaction with the different enterprise architecture tools. Specifically, about 75 percent of those using Microsoft Visio were either very or somewhat satisfied with the tool, as compared to about 67 percent of those using Metis, about 63 percent of those using Rational Rose, about 59 percent of those using System Architect, and 25 percent of those using EAMS. This means that the percentage of departments and agencies that were dissatisfied, either somewhat or very, with their respective tools ranged from a high of 75 percent of those using EAMS, to a low of about 6 percent of those using System Architect. No departments or agencies that used Metis, Rational Rose, or Microsoft Visio reported any dissatisfaction. See table 9 for a summary of department and agency reported satisfaction with their respective tools. As we have previously stated, an enterprise architecture framework provides a formal structure for representing the architecture’s content and serves as the basis for the specific architecture products and artifacts that the department or agency develops and maintains. As such, a framework helps ensure the consistent representation of information from across the organization and supports orderly capture and maintenance of architecture content. The departments and agencies reported using various frameworks to develop and maintain their enterprise architectures. The most frequently cited frameworks were the Federal Enterprise Architecture Program Management Office (FEAPMO) Reference Models (25 departments and agencies), the Federal Enterprise Architecture Framework (FEAF) (19 departments and agencies), and the Zachman Framework (17 departments and agencies), with 24 reporting using more than one framework. Other, less frequently reported frameworks were the Department of Defense Architecture Framework (DODAF), the National Institute of Standards and Technology (NIST) framework, and The Open Group Architecture Framework (TOGAF). See figure 13 for a summary of the number of departments and agencies that reported using each framework. Departments and agencies also reported varying levels of satisfaction with their respective architecture. Specifically, about 72 percent of those using the FEAF indicated that they were either very or somewhat satisfied, and about 67 and 61 percent of those using the Zachman framework and the FEAPMO reference models, respectively, reported that they were similarly satisfied. As table 10 shows, few of the agencies that responded to our survey reported being dissatisfied with any of the frameworks. Our objective was to determine the current status of federal department and agency enterprise architecture efforts. To accomplish this objective, we focused on 28 enterprise architecture programs relating to 27 major departments and agencies. These 27 included the 24 departments and agencies included in the Chief Financial Officers Act. In addition, we included the three military services (the Departments of the Army, Air Force, and Navy) at the request of Department of Defense (DOD) officials. For the DOD, we also included both of its departmentwide enterprise architecture programs—the Global Information Grid and the Business Enterprise Architecture. The U.S. Agency for International Development (USAID), which is developing a USAID enterprise architecture and working with the Department of State (State) to develop a Joint Enterprise Architecture, asked that we evaluate its efforts to develop the USAID enterprise architecture. State officials asked that we evaluate their agency’s enterprise architecture effort based the Joint Enterprise Architecture being developed with USAID. We honored both of these requests. Table 11 lists the 28 department and agency enterprise architecture programs that formed the scope of our review. To determine the status of each of these architecture programs, we developed a data collection instrument based on our Enterprise Architecture Management Maturity Framework (EAMMF), and related guidance, such as OMB Circular A-130 and guidance published by the federal Chief Information Officers (CIO) Council, and our past reports and guidance on the management and content of enterprise architectures. We pretested this instrument at one department and one agency. Based on the results of the pretest, we modified our instrument as appropriate to ensure that our areas of inquiry were complete and clear. Next, we identified the Chief Architect or comparable official at each of the 27 departments and agencies, and met with them to discuss our scope and methodology, share our data collection instrument, and discuss the type and nature of supporting documentation needed to verify responses to our instrument questions. On the basis of department and agency provided documentation to support their respective responses to our data collection instrument, we analyzed the extent to which each satisfied the 31 core elements in our architecture maturity framework. To guide our analysis, we defined detailed evaluation criteria for determining whether a given core element was fully satisfied, partially satisfied, or not satisfied. The criteria for the stage 2, 3, 4, and 5 core elements are contained in tables 12, 13, 14, and 15 respectively. To fully satisfy a core element, sufficient documentation had to be provided to permit us to verify that all aspects of the core element were met. To partially satisfy a core element, sufficient documentation had to be provided to permit us to verify that at least some aspects of the core element were met. Core elements that were neither fully nor partially satisfied were judged to be not satisfied. Our evaluation included first analyzing the extent to which each department and agency satisfied the core elements in our framework, and then meeting with department and agency representatives to discuss core elements that were not fully satisfied and why. As part of this interaction, we sought, and in some cases were provided, additional supporting documentation. We then considered this documentation in arriving at our final determinations about the degree to which each department and agency satisfied each core element in our framework. In applying our evaluation criteria, we analyzed the results of our analysis across different core elements to determine patterns and issues. Our analysis made use of computer programs that were developed by an experienced staff; these programs were independently verified. Through our data collection instrument, we also solicited from each department and agency information on enterprise architecture challenges and benefits, including the extent to which they had been or were expected to be experienced. In addition, we solicited information on architecture costs, including costs to date and estimated costs to complete and maintain each architecture. We also solicited other information, such as use of and satisfaction with architecture tools and frameworks. We analyzed these additional data to determine relevant patterns. We did not independently verify these data. The results presented in this report reflect the state of department and agency architecture programs as of March 8, 2006. We conducted our work in the Washington, D.C., metropolitan area, from May 2005 to June 2006, in accordance with generally accepted government auditing standards. Table 16 shows USDA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. version 1.1 of GAO’s EAMMF. Table 18 shows Army’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 19 shows Commerce’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 20 shows the BEA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 21 shows the GIG’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 22 shows Education’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 23 shows Energy’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 24 shows HHS’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 25 shows DHS’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 26 shows HUD’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 27 shows DOI’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 28 shows DOJ’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 29 shows Labor’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 30 shows Navy’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 31 shows State’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 32 shows Transportation’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 33 shows the Treasury’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 34 shows VA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 35 shows EPA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 36 shows GSA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 37 shows NASA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 38 shows NSF’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 39 shows NRC’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 40 shows OPM’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 41 shows SBA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 42 shows SSA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 43 shows USAID’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. 1. We do not agree for two reasons. First, DOD’s internal processes for reviewing and validating the Global Information Grid (GIG), while important and valuable to ensuring architecture quality, are not independently performed. As we have previously reported, independent verification and validation is a recognized hallmark of well-managed programs, including architecture programs. To be effective, it should be performed by an entity that is independent of the processes and products that are being reviewed to help ensure that it is done in an unbiased manner and that is based on objective evidence. Second, the scope of these internal review and validation efforts only extends to a subset of GIG products and management processes. According to our framework, independent verification and validation should address both the architecture products and the processes used to develop them. 2. While we acknowledge that GIG program plans provide for addressing security, and our findings relative to the GIG reflect this, this is not the case for DOD’s Business Enterprise Architecture (BEA). More specifically, how security will be addressed in the BEA performance, business, information/data, application/service, and technology products is not addressed in the BEA either by explicit statement or reference. This finding relative to the BEA is consistent with our recent report on DOD’s Business System Modernization. 1. We acknowledge this recommendation and offer three comments in response. First, we have taken a number of steps over the last 5 years to coordinate our framework with OMB. For example, in 2002, we based version 1.0 of our framework on the OMB-sponsored CIO Council Practical Guide to Federal Enterprise Architecture, and we obtained concurrence on the framework from the practical guide’s principal authors. Further, we provided a draft of this version to OMB for comment, and in our 2002 report in which we assessed federal departments and agencies against this version, we recommended that OMB use the framework to guide and assess agency architecture efforts. In addition, in developing the second version of our framework in 2003, we solicited comments from OMB as well as federal departments and agencies. We also reiterated our recommendation to OMB to use the framework in our 2003 report in which we assessed federal departments and agencies against the second version of the framework. Second, we have discussed alignment of our framework and OMB’s architecture assessment tool with OMB officials. For example, after OMB developed the first version of its architecture assessment tool in 2004, we met with OMB officials to discuss our respective tools and periodic agency assessments. We also discussed OMB’s plans for issuing the next version of its assessment tool and how this next version would align with our framework. At that time, we advocated the development of comprehensive federal standards governing all aspects of architecture development, maintenance, and use. In our view, neither our framework nor OMB’s assessment tool provide such comprehensive standards, and in the case of our framework, it is not intended to provide such standards. Nevertheless, we plan to continue to evolve, refine, and improve our framework, and will be issuing an updated version that incorporates lessons learned from the results of this review. In doing so, we will continue to solicit comments from federal departments and agencies, including OMB. Third, we believe that while our framework and OMB’s assessment tool are not identical, they nevertheless consist of a common cadre of best practices and characteristics, as well as other relevant criteria that, taken together, are complementary and provide greater direction to, and visibility into, agency architecture programs than either does alone. 1. See DHS comment 1 in appendix IX. Also, while we do not have a basis for commenting on the content of the department’s OMB evaluation submission package because we did not receive it, we would note that the information that we solicit to evaluate a department or agency against our framework includes only information that should be readily available as part of any well-managed architecture program. 2. We understand the principles of federated and segmented architectures, but would emphasize that our framework is intentionally neutral with respect to these and other architecture approaches (e.g., service-oriented). That is, the scope of the framework, by design, does not extend to defining how various architecture approaches should specifically be pursued, although we recognize that supplemental guidance on this approach would be useful. Our framework was created to organize fundamental (core) architecture management practices and characteristics (elements) into a logical progression. As such, it was intended to fill an architecture management void that existed in 2001 and thereby provide the context for more detailed standards and guidance in a variety of areas. It was not intended to be the single source of all relevant architecture guidance. 3. We agree, and believe that this report, by clearly identifying those departments and agencies that have fully satisfied each core element, serves as the only readily available reference tool of which we are aware for gaining such best practice insights. 1. We acknowledge the comment that both CIOs approved the configuration management plan. However, the department did not provide us with any documentation to support this statement. 2. We acknowledge the comment that the architecture has been approved by State and USAID executive offices. However, the department did not provide any documentation describing to which executive offices the department is referring to allow a determination of whether they were collectively representative of the enterprise. Moreover, as we state in the report, the chief architect told us that a body representative of the enterprise has not approved the current version of the architecture, and according to documentation provided, the Joint Management Council is to be responsible for approving the architecture. 3. We acknowledge that steps have been taken and are planned to treat the enterprise architecture as an integral part of the investment management process, as our report findings reflect. However, our point with respect to this core element is whether the department’s investment portfolio compliance with the architecture is being measured and reported to senior leadership. In this regard, State did not provide the score sheets referred to in its comments, nor did it provide any other evidence that such reporting is occurring. 1. We agree and have modified our report to recognize evidence contained in the documents. 2. We do not agree. The 2002 documents do not contain steps for architecture maintenance. Further, evidence was not provided demonstrating that the recently prepared methodology documents were approved prior to the completion of our evaluation. 3. We do not agree. While we do not question whether EPA’s EA Transition Strategy and Sequencing Plan illustrates how annual progress in achieving the target architectural environment is measured and reported, this is not the focus of this core element. Rather, this core element addresses whether progress against the architecture program management plan is tracked and reported. While we acknowledge EPA’s comment that it tracks and reports such progress against plans on a monthly basis, neither a program plan nor reports of progress against this plan were provided as documentary evidence to support this statement. 4. We do not agree. First, while EPA’s IT investment management process provides for consideration of the enterprise architecture in investment selection and control activities, no evidence was provided demonstrating that the process has been implemented. Second, while EPA provided a description of its architecture change management process, no evidence was provided that this process has been approved and implemented. 1. We do not agree. Neither the governance committee charter nor the configuration management plan explicitly describe a methodology that includes detailed steps to be followed for developing, maintaining, and validating the architecture. Rather, these documents describe, for example, the responsibilities of the architecture governance committee and architecture configuration management procedures. 2. We do not agree. The core element in our framework concerning enterprise architecture approval by the agency head is derived from federal guidance and best practices upon which our framework is based. This guidance and related practices, and thus our framework, recognize that an enterprise architecture is a corporate asset that is to be owned and implemented by senior management across the enterprise, and that a key characteristic of a mature architecture program is having the architecture approved by the department or agency head. Because the Clinger-Cohen Act does not address approval of an enterprise architecture, our framework’s core element for agency head approval of an enterprise architecture is not inconsistent with, and is not superseded by, that act. In addition to the person named above, Edward Ballard, Naba Barkakati, Mark Bird, Jeremy Canfield, Jamey Collins, Ed Derocher, Neil Doherty, Mary J. Dorsey, Marianna J. Dunn, Joshua Eisenberg, Michael Holland, Valerie Hopkins, James Houtz, Ashfaq Huda, Cathy Hurley, Cynthia Jackson, Donna Wagner Jones, Ruby Jones, Stu Kaufman, Sandra Kerr, George Kovachick, Neela Lakhmani, Anh Le, Stephanie Lee, Jayne Litzinger, Teresa M. Neven, Freda Paintsil, Altony Rice, Keith Rhodes, Teresa Smith, Mark Stefan, Dr. Rona Stillman, Amos Tevelow, and Jennifer Vitalbo made key contributions to this report.

A well-defined enterprise architecture is an essential tool for leveraging information technology (IT) to transform business and mission operations. GAO's experience has shown that attempting to modernize and evolve IT environments without an architecture to guide and constrain investments results in operations and systems that are duplicative, not well integrated, costly to maintain, and ineffective in supporting mission goals. In light of the importance of enterprise architectures, GAO developed a five stage architecture management maturity framework that defines what needs to be done to effectively manage an architecture program. Under GAO's framework, a fully mature architecture program is one that satisfies all elements of all stages of the framework. As agreed, GAO's objective was to determine the status of major federal department and agency enterprise architecture efforts. The state of the enterprise architecture programs at the 27 major federal departments and agencies is mixed, with several having very immature programs, several having more mature programs, and most being somewhere in between. Collectively, the majority of these architecture efforts can be viewed as a work-in-progress with much remaining to be accomplished before the federal government as a whole fully realizes their transformational value. More specifically, seven architecture programs have advanced beyond the initial stage of the GAO framework, meaning that they have fully satisfied all core elements associated with the framework's second stage (establishing the management foundation for developing, using, and maintaining the architecture). Of these seven, three have also fully satisfied all the core elements associated with the third stage (developing the architecture). None have fully satisfied all of the core elements associated with the fourth (completing the architecture) and fifth (leveraging the architecture for organizational change) stages. Nevertheless, most have fully satisfied a number of the core elements across the stages higher than the stage in which they have met all core elements, with all 27 collectively satisfying about 80, 78, 61, and 52 percent of the stage two through five core elements, respectively. Further, most have partially satisfied additional elements across all the stages, and seven need to fully satisfy five or fewer elements to achieve the fifth stage. The key to these departments and agencies building upon their current status, and ultimately realizing the benefits that they cited architectures providing, is sustained executive leadership, as virtually all the challenges that they reported can be addressed by such leadership. Examples of the challenges are organizational parochialism and cultural resistance, adequate resources (human capital and funding), and top management understanding; examples of benefits cited are better information sharing, consolidation, improved productivity, and reduced costs.

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AU.S. free trade agreement (FTA) with Oman was concluded on October 13, 2005, after seven months of negotiation, and was signed by U.S. Trade Representative (USTR) Bob Portman and Omani Minister of Commerce and Industry Maqbool bin Ali Sultan on January 19, 2006. The U.S.-Oman (FTA) is the fifth U.S. bilateral free trade agreement with a country in the proposed Middle East Free Trade Area (MEFTA). MEFTA would consist of 16 entities in the Middle East and four in North Africa. The entire proposed MEFTA is included in the map in Figure 1 , with Oman, heavily shaded, in the lower right hand corner. Completion of a MEFTA by 2013 was proposed by President George W. Bush in 2003, as part of a plan to fight terrorism by supporting Middle East economic growth and democracy through trade. To date, besides Oman, the Administration has negotiated and Congress has implemented free trade agreements with four other MEFTA political entities: Israel and Jordan (before MEFTA was announced), Morocco, and Bahrain. A sixth FTA is being negotiated with the United Arab Emirates (UAE). Congressional consideration of the U.S.-Oman FTA is governed by the timeline set forth in the Trade Act of 2002 ( P.L. 107-210 ). Under this law, which lays out the President's trade promotion authority (TPA), the President must give Congress a 90-day prenotification of his intent to enter into the trade agreement. After that, the President must submit to Congress—under no particular time constraints, but on a day when both houses of Congress are in session—both the agreement itself and the implementing legislation. Any House or Senate committees to which the legislation is referred will have 45 days to report (or not report) the bill; and each house has 15 days after the bill is reported (or the 45 days expire) to consider the legislation. If the House passes its bill to the Senate, the Senate has an additional 15 days to consider the legislation. Floor debate in either house is limited to 20 hours, divided equally between supporters and opponents. For final passage, both houses must vote the legislation up or down by a simple majority, and neither the implementing legislation nor the agreement itself may be amended. Figure 1. Oman's Geographic Location in the Proposed MEFTASource: Map Resources. Adapted by CRS. U.S. interest in Oman stems from a number of factors. Oman is a small exporter of oil and natural gas that is strategically located at the entrance to the Persian Gulf, 35 miles directly opposite Iran. It is not a member of the Organization of the Petroleum Exporting Countries (OPEC). Oman is a moderate Islamic country which has sought to maintain good relations with all Middle East countries. It also has a 170 year history of political and economic cooperation with the United States, and has supported the U.S. war on terrorism. Oman is an important gateway to the Persian Gulf region. Oman has many reasons for wanting to negotiate an FTA with the United States. It is a country whose proven oil reserves could be exhausted within 15 or 20 years; yet, almost 40% of the country's GDP, two-thirds of its export earnings and three-fourth of its government revenues currently come from oil revenues. It is therefore trying to liberalize and diversify its trade regime as it seeks to broaden economic opportunities for a fast-growing workforce. As a result, it is looking to expand its economy beyond oil and gas exports. It sees the United States as an important ally in the venture to prepare itself for a time when its economic and social challenges intersect. Oman is a small U.S. trade partner, ranking 88 th among all U.S. trade partners. Total U.S.-Oman trade at $1 billion in 2005 ($593 million in U.S. exports and $555 million in U.S. imports) accounts for 0.04% (four one-hundredths of one percent) of all U.S. trade. As a trading partner it is also 11 th among the 20 MEFTA entities, which together represent 4% of U.S. trade for 2005. The United States, on the other hand, ranks fourth in importance among Oman's trading partners, behind the United Arab Emirates (UAE), Japan, and the United Kingdom for 2004 (most recent data). In 2005, the most important U.S. imports from Oman (see Table 1 ) were oil and natural gas (75%, constituting 1% of all U.S. oil and gas imports from MEFTA countries), and apparel (10%). The most important U.S. exports to Oman were various types of transport equipment and road vehicles (totaling 56%), and various types of machinery (24%). Since 2001, U.S. exports to Oman have almost doubled to $593 million, for various reasons, while U.S. imports from Oman, at $555 million, have increased by about a third, primarily because of increases in the price of petroleum imports. As a result, for 2005, the United States had a small trade surplus with Oman. Total U.S. foreign direct investment in Oman was $358 million in 2003, nearly double the $193 million investment in 2002. The Bureau of Economic Analysis does not report on investment by sector for Oman, when investment is highly concentrated in a small number of investors, and such reporting might reveal the identity of individual investors. However, most of it is likely invested in oil and gas-related facilities. However, the Department of Commerce's Country Commercial Guide for Oman reported that the largest investor in Oman is Royal Dutch Shell Oil which holds 34% of Petroleum Development in Oman, the state oil company, and 30% of Oman Liquid Natural Gas. In addition, U.S. firms, Gorman Rupp (water pumps) and FMC (wellhead equipment), have entered into industrial joint ventures with Omani firms, and Dow Chemical announced a joint venture with Oman Oil Company and the government of Oman in July 2004 to develop a large petrochemical plant in Sohar. The Country Commercial Guide for Oman also reported that total investment in listed Omani companies with foreign participation was $2.4 billion in September 2004, of which 8.94% ($215 million) was (worldwide) foreign investment. Foreign capital also constituted 7.5% of all capital invested in finance, 3% of all capital invested in manufacturing, and 9% of all capital invested in insurances and services. The FTA with Oman is similar to other recent FTAs with MEFTA countries (Morocco and Bahrain), with slight variations. The U.S.-Oman FTA has three basic parts: new tariff schedules for each country, broad commitments to open markets and provisions to support these commitments, and protections for labor and the environment. The USITC argues that the economic effect of the agreement on the U.S. economy is expected to be small but positive, and that the impact on U.S. workers is likely to be minimal because trade with Oman is low. U.S. apparel workers are a group that is potentially adversely affected. Apparel imports from Oman declined by 57% in 2005 over 2004, because the World Trade Organization (WTO) Agreement on Clothing and Textiles (ACT) expired in January of 2005, ending the trade quota system among WTO partner countries. The USITC reports that tariff reductions and elimination under the U.S.-Oman FTA should restore some of the competitiveness of Oman's apparel exports among U.S. purchasers—and estimates that the resulting increase in imports would come at the expense of workers elsewhere in the world, not U.S. workers. Under the U.S.-Oman FTA, the United States and Oman will provide each other immediate duty-free access for tariff lines covering almost all consumer and industrial goods, with special provisions for agriculture and textiles and apparel. For agricultural products, Oman will provide immediate duty-free access for current U.S. exports in 87% of agricultural tariff lines; and the United States will provide immediate duty-free access for 100% of Oman's current exports of agricultural products to the United States. Both countries will phase out all tariffs on the remaining eligible goods within 10 years. Textile and apparel products are divided into three categories. Most U.S. imports from Oman are category A (cotton and manmade fibers) for which duties will be eliminated immediately so long as the goods meet the FTA rules of origin requirements. On category B products (home furnishings—mainly bed and kitchen linens) tariffs will be reduced over five years, and for category C products (wool goods), tariffs will be reduced over 10 years. Most apparel must be assembled in an FTA party from inputs (yarn and fabric) made in an FTA party. At present, virtually all U.S. textile and apparel imports from Oman are dutiable, with an average tariff rate of 15.4% in 2005. At the same time, only 11% of U.S. agricultural imports from Oman are dutiable. These dutiable products carried an average tariff of 10.4% in 2005. Most U.S. exports to Oman incurred the common external Gulf Communications Council (GCC) tariff of 5% to all non-GCC members. The GCC includes, besides Oman, Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE. The U.S.-Oman FTA contains broad commitments to open markets in sectors such as banking, insurance, securities, and telecommunications. It also includes protections for U.S. investors, and for holders of copyrights, trademarks, patents, and trade secrets. It includes enforcement measures for intellectual property rights infringement. In addition it contains transparent sanitary and phytosanitary measures, government procurement disciplines, streamlined and transparent customs procedures, commitments to combat bribery, and tools to enforce the trade agreement. More specifically: Oman provides market access across its entire services regime, including audiovisual, express delivery, telecommunications, computer, distribution, and healthcare; and services incidental to mining, construction, architecture and engineering. The agreement will enhance Oman's commitment to the WTO General Agreement on Trade in Services (GATS). Annexes I and II of the agreement indicate the exceptions to the coverage of the agreement that each country has reserved for itself in the case of services. U.S. financial service suppliers have the right to establish subsidiaries, branches, and joint ventures in Oman, to expand their operations throughout Oman, and to offer the full range of financial services. Annex III of the agreement lists the exceptions to the coverage of the agreement that each county has reserved for itself in the area of trade in financial services. All forms of investment are protected under the agreement, including enterprises, debt concessions, contracts, and intellectual property. U.S. investors will have, in most circumstances, the right to establish, acquire, and operate investments in Oman on an equal footing with Omani investors and with investors of other countries. Annexes I and II of the agreement indicate the exceptions to the coverage of the agreement that each country has reserved for itself in the case of foreign investment. U.S. phone companies will have the right to interconnect with a dominant carrier in Oman at nondiscriminatory rates. U.S. firms seeking to build a physical network in Oman will have nondiscriminatory access to key facilities such as telephone switches and submarine cable landing stations. Each government commits to nondiscriminatory treatment of digital products and agrees not to impose customs duties on digital products transmitted electronically. Each government commits to protect copyrighted works, including phonograms, for extended terms consistent with U.S. standards and international trends. Grounds for revoking a patent are limited to the same grounds required to originally refuse a patent, thus protecting against arbitrary revocation. Patent terms can be adjusted to compensate for unreasonable delays in granting the original patent, consistent with U.S. practice. The FTA applies the principle of "first-in-time, first-in-right" to trademarks and geographical indications, so the first person who acquires a right to a trademark or geographical indication will be the person who has the right to use it. Each government will be required to establish transparent procedures for the registration of trademarks. The FTA requires each government to criminalize end-user piracy, providing a strong deterrence against piracy and counterfeiting. The FTA mandates both statutory and actual damages under Omani law for IPR violations. Oman commits to a science-based regime for sanitary and phytosanitary measures and to transparent procedures for developing and implementing technical regulations. U.S. suppliers are granted nondiscriminatory rights to bid on contracts to supply most Omani government entities; and Omani government purchasers may not discriminate against U.S. firms or in favor of Omani firms when making government purchases above a threshold monetary level. The FTA requires transparency and efficiency in customs administration, including publication of laws and regulations on the Internet and procedural certainty and fairness. Each government will publish its laws and regulations governing trade, and will publish proposed measures in advance, and provide an opportunity for public comment on them. Each government will ensure that a trader from the other country can obtain prompt and fair review of a final administrative decision affecting its interest. Each government is required to prohibit bribery, including bribery of foreign officials, and to establish appropriate criminal penalties to punish violators. All core obligations of the FTA, including enforceable labor and environmental provisions, are subject to the dispute settlement provisions of the agreement. Dispute panel proceedings are subject to requirements for openness and transparency. Each government is required to effectively enforce its own labor laws, as with other FTAs negotiated under the presidential trade promotional authority or "fast track" authority of the Trade Act of 2002 ( P.L. 107-210 ). This is the only labor provision enforceable through the agreement's dispute resolution process, and the maximum penalty for each violation is limited to $15 million per violation per year. If the Party complained against fails to pay a monetary assessment, the complaining Party can take other steps to collect the assessment (or otherwise secure compliance), including by the suspension of tariff benefits under the FTA. However, the labor section of the U.S.-Oman FTA also contains other provisions, which are subject to consultation rather than actual enforcement: Each country agrees not to weaken or reduce its labor laws to attract trade and investment. Each government reaffirms its obligations as a member of the International Labor Organization (ILO, which requires it to uphold ILO core labor standards) and commit to "strive to ensure" that its laws provide for labor standards consistent with internationally recognized labor rights (which are defined in the FTA to reflect U.S. trade law, and are slightly different from ILO core labor standards.) Labor ministries together with other appropriate agencies agree to establish priorities and develop specific cooperative activities. (See section below on "The Labor Debate" for a discussion of most recent labor issues.) Each government is required to effectively enforce its own environmental laws. This is the only environmental provision enforceable through the agreement's dispute resolution process, and as with labor provisions, the maximum fine is limited to $15 million per violation per year. Each country also agrees not to weaken or reduce its environmental laws to attract trade and investment. As a complement to the agreement, the governments sign a Memorandum of Understanding on Environmental Cooperation that establishes a Joint Forum on Environmental Cooperation, develop a plan of action, and set priorities for future environment-related projects. Support for the agreement is broad in the business community. Among businesses, support is led by the National Foreign Trade Council and the Business Council for International Understanding which heads up the Middle East Free Trade Coalition (MEFTC), an alliance of about 120 companies and associations including the U.S. Chamber of Commerce, and the National Association of Manufacturers. Support also comes from 24 out of 27 trade advisory committees representing business labor, environment, state and local government, agriculture, various industries, and functional areas (e.g., consumer goods, distribution services, small and minority businesses, customs matters, intellectual property, and standards and technical trade barriers.) Congressional support on the House side was led by the Congressional Middle East Economic Partnership Caucus (MEEPC), a bipartisan group of lawmakers which began with 16 members and six co-chairs including Representatives Ben Chandler, Phil English, Darrell Issa, William Jefferson, Gregory Meeks, and Paul Ryan. Congressional support on the Senate side was led by Senator Charles Grassley, Chairman of the Senate Finance Committee, and by Senator Craig Thomas, Chairman of the Subcommittee on International Trade, which held hearings on the U.S.-Oman FTA on March 6, 2006. USTR Portman asserted that the U.S.-Oman FTA will contribute to economic growth and trade between both countries, generate export opportunities for U.S. companies, farmers, and ranchers, help create jobs in both countries, and help American consumers save money while offering them greater choices. He pointed out that in addition to eliminating tariffs on U.S. exports, Oman will provide substantial market access across the entire services regime, provide a secure, predictable legal framework for U.S. investors operating in Oman, provide for effective enforcement of labor and environmental laws, and protect intellectual property. Furthermore, he argues that this agreement will support and accelerate the market liberalization that Oman started as part of its accession to the WTO in 2000. Portman contends that joint U.S.-Omani efforts will advance economic growth and democracy, raise living standards and promote peace and economic stability in the Middle East—a region of almost 350 million people and a $70 billion trading relationship with the United States. The overall Advisory Committee for Trade Policy Negotiations (ACTPN) also notes that the agreement will strengthen the likelihood of additional agreements in the region and improve and strengthen overall U.S. relations with the countries of the Middle East. In addition, those in favor of the agreement assert that Oman is one of the most "open" countries in the Middle East. Economic Freedom of the World, 2005 , published by Canada's Fraser Institute, reports (p. 4) that when measures of economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict. Economic Freedom ranked Oman 17 th out of 127 countries in terms of degree of economic freedom afforded in five basic areas. The only MEFTA country it ranked higher was the UAE, which tied for 9 th place (with Australia, Luxemburg, and Estonia.) Other MEFTA country rankings were Bahrain (24 th ), Jordan (25 th ), Israel ( 50 th ), and Egypt, (tied for 78 th with Iran and Morocco.) In 2003, Oman passed a new labor law extending its labor protections for domestic workers to foreign workers (who predominate in the private sector). In response to some calls to strengthen the Omani labor law further, Chuck Ditrich, National Foreign Trade Council vice president, urges patience, acknowledging that Oman still has some areas that may need further legislation, but argues that Omani laws must be viewed in the context of a "very traditional society" that is committed to modernization. For example, the government of Oman reportedly recognizes the need for more explicit provisions for collective bargaining in its laws. Moreover, Oman has reportedly undertaken consultation with the ILO for technical assistance in complying with ILO core labor standards. Three of the 27 reports by trade advisory committees mandated under the trade promotion authority language of the Trade Act of 2002 have some criticisms of the U.S.-Oman FTA: those committees on the environment, intergovernmental affairs, and labor. Most members of the Trade Policy and Environment Committee agreed that the environment and public participation provisions were acceptable; however, they noted that the U.S.-Oman FTA lacks some environmental provisions which have appeared in other agreements and which would have been appropriate. Examples of such provisions are the extensive public participation framework from the Central America Free Trade Agreement (CAFTA) and some basic environmental provisions which appeared in the FTAs with Chile and Singapore. The Intergovernmental Advisory Policy Committee, in principle, supported the trade liberalization objectives of the agreement. However, the committee stressed the need for trade agreements to continue to respect the authority of state and local governments to regulate in areas under their jurisdiction. They also stressed the need for ongoing consultations with sub-federal governments. The labor groups are the most vocal critics. They argue that potential losers from the agreement would be workers in Oman who would miss out on the opportunity to be more fully protected by labor standards. Other implied losers would be U.S. workers for whom the agreement does little to "level the playing field." Main arguments against the FTA offered by labor interests are concentrated primarily on two basic issues: weaknesses in the agreement, and weaknesses in Omani laws and enforcement, for which the agreement does not adequately compensate. Labor critics point out that the Trade Act of 2002 requires U.S. negotiators to "seek provisions that treat U.S. principal negotiating objectives equally with respect to both: (1) the ability to resort to dispute settlement; and (2) the availability of equivalent dispute settlement procedures and remedies. However, critics argue, the agreement does not do this. Further, they argue, the FTA is a step backward from protections offered Oman under the Generalized System of Preferences: Not All Labor Provisions Are Treated Equally . The U.S.-Oman FTA identifies three basic labor commitments for partner countries: (1) commitments to comply with ILO standards; (2) commitments to enforce their own labor standards; (3) and commitments to not derogate from those standards in order to attract trade and investment. However, critics argue, only the second of these three commitments is enforceable through the dispute resolution procedures of the U.S.-Oman FTA. This treatment, they argue, contrasts with provisions of the U.S.-Jordan FTA which makes all three commitments enforceable through the dispute resolution process. Unequal Treatment of Labor Compared to Most Non-Labor Provisions . Second, there are different dispute resolution procedures for labor and non-labor (e.g., intellectual property) violations, For labor (and environmental) violations, the potential penalty for the one labor (and environmental) violation (failure to enforce one's own laws) that is open to the dispute resolution procedures is capped at $15 million per violation per year. For non-labor (and non-environmental) violations, there is no cap on any monetary assessment. A Step Back from GSP . In addition, the AFL-CIO sees the U.S.-Oman FTA as being a step back from the Generalized System of Preferences (GSP) program. Under GSP, trade preferences for developing countries including Oman are dependent on such countries' taking steps to afford their workers internationally recognized worker rights. A challenge to GSP eligibility for any country begins with a petition to the Office of the USTR documenting that a country is not taking steps to afford its workers such rights. In June of 2005, the AFL-CIO petitioned the USTR to remove Oman from GSP status, arguing that it was not affording its workers internationally recognized worker rights. The USTR subsequently rejected the petition and Oman continues to hold GSP status. When there are weaknesses in the agreement, critics argue, if a country's basic laws and enforcement of those laws are strong enough, workers can still be protected. Oman, critics argue, lacks protections in certain areas. First, as of the date of this report, according to the ILO website, Oman has ratified conventions relating to only two of the four basic ILO core labor standards (enumerated in a footnote on p. 7): those protecting against child labor, and those prohibiting forced labor. Oman has not ratified conventions related to the right to organize and bargain collectively and the elimination of employment discrimination. Furthermore, various sources suggest that Omani labor laws and/or enforcement do not fully cover certain aspects of the following areas relating to core labor standards/internationally recognized worker rights: Right to Organize and Bargain Collectively . The State Department's Country Reports on Human Rights Practices, 2004, finds in the area of "right to organize and bargain collectively," that Omani law does not provide workers with the right to form or join "unions" but does permit them to form representation committees with the goal of taking care of their interests. The LAC reports that where representation committees exist, however, they are by law, not authorized to discuss wages, hours, or conditions of employment. Country Reports for 2005 adds an unofficial estimate that 25 representation committees, representing 9.1% of employees in the private sector, have been registered since 2004 and reports that provisions of the law apply to [Omani] women and foreign workers [as well as Omani men]. Right to Strike . Furthermore, according to Country Reports for 2004, the Omani law does not address strikes or explicitly provide for the right to collective bargaining. However, it reports that the 2003 Omani labor law removed a 1973 prohibition on strikes and details procedures for dispute resolution. Country Reports for 2005 also indicates that, while labor unrest was rare, there were four reported strikes during the year. The most significant one closed the largest seaport for two days. Prohibition of Forced or Compulsory Labor . Country Reports for 2004 also finds that the Omani law prohibits forced or compulsory labor, including that of children. Country Reports for 2004 further notes that even though the protections of the 2003 Omani labor law apply equally to foreign and domestic workers, at times foreign workers (who account for 80% of private sector workforce and 50% of all workers in Oman) were placed in situations amounting to forced labor. Country Reports for 2005 echoes the finding that some situations amounted to forced labor and adds that employers sometimes withheld documents that would release workers from employment contracts and allow them to change employers. Without such documents, a foreign worker must continue to work for his current employer or become technically unemployed and consequently a candidate for deportation. Country Reports for 2005 further reports that many foreign workers were not aware of their right to take such disputes to the Labor Welfare Board, which "in most cases" released the worker from the service contract without deportation, awarded compensation for time worked under compulsion, reimbursed the worker for back wages, and subjected the guilty employer to fines. However, Country Reports 2005 states, there were no available statistics on the number of disputes filed or resolutions by the end of 2005. Before the U.S.-Oman FTA and implementing legislation were formally submitted to Congress, both House and Senate committees held preliminary hearings. The House Ways and Means Committee held full committee hearings on April 5, 2005. The International Trade Subcommittee of the Senate Finance Committee held hearings on March 6, 2006. Then, on May 10, the House Ways and Means Committee held "mock" markup hearings on the Administration's draft implementing legislation and approved the bill without amendment on a party-line vote of 23-11. On May 18, 2006, the Senate Finance Committee held its "mock" markup, adopting an amendment before passing the bill unanimously. The amendment reflected recent concerns about sweatshop conditions in Jordan (see section below), and implications for production under the U.S.-Oman FTA. On June 28, the Senate Finance committee approved the draft implementing legislation ( S. 3569 ) for the U.S.-Oman FTA by a vote of 10 to 3. On June 29, the Senate passed the bill by a vote of 60 to 34. On June 29 the House Ways and Means Committee also approved the draft implementing legislation ( H.R. 5684 ) by a vote of 23 to 15. On July 20 the House passed the bill by a vote of 221 to 205. On September 19 the Senate reconsidered the implementing legislation and passed the House version of the same bill by a vote of 63 to 31. This action was necessary because the Constitution requires that all revenue-raising legislation, which encompasses trade bills, since they affect tariffs, originate in the House. The bill was signed by the President and became P.L. 109-283 on September 26, 2006. A report of alleged sweatshop conditions in plants in Jordan producing for export to the United States has been issued by the National Labor Committee (NLC), a nonprofit organization that promotes worker rights around the world. The 161-page report has raised concerns within Congress that similar conditions might exist or occur in other MEFTA countries, including Oman if the U.S.-Oman FTA were to go into effect. The NLC report entitled U.S.-Jordan Free Trade Agreement Descends into Human Trafficking and Involuntary Servitude, released in May of 2006, documents conditions in 28 separate factories in Jordan in foreign trade zones, where clothing is produced by Jordanian and foreign guest workers, mostly for export to the United States. The report estimates that tens of thousands of foreign guest workers who entered employment willingly were subsequently stripped of their passports and trapped in involuntary servitude, sewing clothing in factories for companies including Wal-Mart, K-Mart, Gloria Vanderbilt, Target, Kohl's, J.C. Penney, Victoria's Secret, and L. L. Bean. The Senate Finance Committee responded to the concerns on May 18, 2006, by unanimously adopting an amendment in its mock markup of the Administration's U.S.-Oman FTA draft implementing legislation. The amendment, offered by Senator Kent Conrad, would prohibit any products made in Oman "with slave labor (including under sweatshop conditions so egregious as to be tantamount to slave labor) or with the benefit of human trafficking," from benefitting from the agreement. Committee Republicans, including Chairman Chuck Grassley, joined Democrats in voting for the conceptual amendment. The committee then unanimously approved the U.S.-Oman draft implementing bill as amended. Any amendments passed by a committee during the mock markup process are advisory in nature, rather than obligatory. The Administration responded that while they would consider the amendment, they had some concerns. First, they argued, the amendment might fall outside the scope of the provision in the Trade Act of 2002 , P.L. 107-210 , Sec. 2103(b)(3)(ii), requiring that any new statutory language be "necessary or appropriate" to implement the trade agreement. Second, the Administration argued, Sec. 307 of the Tariff Act of 1930 already prohibits the importation of merchandise produced in whole or in part through prison, forced, or indentured labor, including by those who voluntarily entered into employment but were later subject to de facto slave working conditions. In response to the Administration's argument, Senator Conrad pointed out that Sec. 307 of the Tariff Act of 1930 may not be applicable to apparel produced under slave labor conditions in Oman. This, he argued, is because apparel is no longer made in great quantities in the United States; and Sec. 307 does not apply to goods produced under forced or indentured labor if those goods are not domestically produced in quantities that meet the consumption demands of the United States. Third, the Administration argued that the amendment may be unnecessary because FTA language requiring Oman to enforce its own labor laws, which prohibit forced labor, is strong enough or enforceable enough to discourage or affect its practice. In addition, the Administration pointed out, Oman has approved core labor standards prohibiting forced or compulsory labor and has made commitments to strengthening its labor standards still further. These Omani commitments came from the Omani Minister of Labor as part of an exchange of letters between House Democrats, the Omani Minister, and the USTR. The Omani Minister made eight commitments in March and ten further commitments regarding forced labor and child labor in May. In those commitments Oman promised to issue Royal Decrees and Ministerial Decisions to strengthen the country's labor laws in response to congressional concerns by no later than October 31, 2006. While some Republicans argued that Oman needs time to craft new laws with technical support from the ILO, some Democrats argued for changes in Omani laws before the U.S.-Oman FTA implementing legislation is considered by Congress. On July 8, 2006, the Sultan of Oman issued a Royal Decree (74/2006) amending provisions of Omani labor law to provide some labor rights consistent with ILO core labor standards. As amended by the decree, Omani law would permit the right to form unions, the right to bargain collectively, and to engage in other union activities. The law would also prohibit employers and others from imposing any compulsory or forced labor with specific penalties for noncompliance. Penalties are provided for those who would interfere with union activity, or decline to provide the necessary facilitation or information. The Royal Decree delegates promulgation of regulations to the Ministry of Manpower; therefore, specific details regarding its implementation and enforcement are yet to be determined. Meanwhile, a few days after the Senate Finance Committee markup hearing, Jordan's trade minister Sharif Zu'bi indicated that the NLC report had incorrectly identified three sweatshops that are not even in Jordan, and that three others had been closed before the report was released in May. In addition, he noted that the Jordanian government had formed nine inspections teams to investigate the entire garment trade in the country, and is working with the International Labor Organization, U.S. labor committees, the USTR, the State Department, and U.S. and Jordanian apparel companies to address the challenges and improve their monitoring system. In the Spring of 2006, the U.S. interagency "Committee on Foreign Investment in the United States" raised no objections to the acquisition and continued operation of contracts by the Dubai-owned "Dubai Ports World" company from a British firm that managed port facilities in several cities including New York, New Jersey, Baltimore, New Orleans, Miami, and Philadelphia. After several members of Congress expressed opposition to the $9 billion merger on the grounds that the company might not be as vigilant on port security as required, the company agreed to a 45-day review of its operations at those ports. On March 9, the House Appropriations Committee voted 62-2 on a provision in the FY2006 supplemental funding bill for Iraq and Afghanistan war operations and other costs that would have effectively prevented DP World from operating in the United States. The following day DP World officials announced that they would divest the newly-acquired U.S. port operations to an American owner. A provision in the Oman FTA became the focus of increased attention. Some argue that this provision could obligate the United States to open up landside aspects of its port activities to operation by companies such as DP World. Others argue that the provision is not new to bilateral trade agreements, and does not change current U.S. policy. The provision, contained in Annex II of the U.S.-Oman FTA, addresses cross-border services and investment in the area of transportation. More specifically, the provision sets out two categories of transportation activities: those for which the United States reserves the right to adopt or maintain any measures, and those activities for which the United States does not reserve the right to adopt or maintain any measures—those activities which are exclusions from the above list. The list for which the United States reserves the right to maintain any measure includes requirements for investment in, ownership and control of, and operation of drill rigs, U.S. flagged vessels, fishing vessels; plus requirements related to documenting a vessel under the U.S. flag, promotional programs, certification licensing, and citizenship requirements, programs, certification licensing and citizenship requirements, manning requirements, and all matters under the jurisdiction of the Federal Maritime Commission. The excluded list, for which the United States does not reserve the right to adopt or maintain any measure, includes two categories of activities—one unconditional, and one conditional. The first category (a) is vessel construction and repair. On this category the United States reserves no right to adopt or maintain any measure. The second category (b), for which the United States waives its right to adopt or maintain any of the listed measures on the condition that comparable market access in these sectors is obtained from Oman, includes the following activities: landside aspects of port activities including operation and maintenance of docks; loading and unloading vessels directly to or from land; marine cargo handling; operation and maintenance of piers; ship cleaning; stevedoring; transfer of cargo between vessels and trucks, trains, pipelines, and wharves; waterfront terminal operations; boat cleaning; canal operation; dismantling of vessels; operation of marine railways for drydocking; maritime surveyors, except cargo; marine wrecking of vessels for scrap; and shift classification societies. Some in Congress argue that the provision excluding the above activities from the U.S. government's "right to adopt or maintain any measure" should be removed from the agreement because it poses a potential security risk to the United States. Others are arguing that the provision merely restates what is already the situation in the United States, and is not a problem. The arguments on both sides follow. Those arguing that the provision excluding certain activities from the U.S. "right to adopt or maintain any measure" should remain in the agreement argue that: A basic obligation of free trade agreements such as the U.S.-Oman FTA is the obligation (subject to specified exceptions) to treat service suppliers and investors of other parties no less favorably than the United States treats its own service suppliers and investors. This provision meets those requirements. This provision is already included in other agreements, including the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America Free Trade Agreement, and FTAs with Australia, Bahrain, Chile, and Morocco. Proponents argued that Omani companies are presumably already able to acquire contracts for and perform these services. Currently there are no U.S. laws that prevent either an Omani-owned company or any other foreign-owned company from contracting with port owners to perform "landside aspects of port activities" in the United States. The U.S. Coast Guard and Customs and Border Protection play an integral role in ensuring security at U.S. ports; and nothing in the agreement amends or diminishes the authority of these agencies. While Oman already provides market access to U.S. service suppliers and investors, the USTR is not aware of any Omani companies that are currently involved in any U.S. port operations or that might be interested in such operations in the future. According to proponents, if an Omani company were to express such interest in the future, the "essential security" (or "national security") exception (explained below) could arguably be invoked to "fully" protect U.S. national security needs. If non-Omani persons set up an enterprise in Oman that was merely a "shell"—i.e., that was engaged in no substantial business activities in Oman—and that enterprise sought to make an investment in the United States, the FTA contains specific language that would arguably permit the United States to deny the FTA's investment-and services-related benefits to that enterprise. Moreover, even if the enterprise set up in Oman had "substantial business activity" in Oman, the United States could deny FTA benefits to it if its owners were nationals of countries subject to U.S. sanctions. Finally, the U.S. government retains the authority to block any potential investment pursuant to the "essential security" exception described below. Chapter 21 of the U.S.-Oman FTA contains several exceptions to the agreement. Article 21.2 addresses "essential security" and provides that: Nothing in the agreement shall be construed: (a) to require a Party to furnish or allow access to any information ... which it determines to be contrary to its essential security interests; or (b) to preclude a Party from applying measures it considers necessary for the fulfillment of its obligations [for] the maintenance or restoration of international peace or security or the protection of its own essential security interests. An "essential security" exception has been included in all U.S. trade agreements dating back to the 1947 General Agreement on Tariffs and Trade (GATT). The United States, among other countries, has consistently interpreted this language (worded similarly to Article 21 of the U.S.-Oman FTA) to be self-judging, and therefore that national security matters are not appropriate for adjudication in a third-party dispute settlement mechanism. In other words, under these provisions it can be argued that nothing in an agreement can prevent the United States from applying measures that it considers necessary for the protection of essential security interests. Moreover, proponents will argue that review of national security claims by international tribunals are without precedent and are highly unlikely because, arguably, no tribunal would accept jurisdiction over the question of what constitutes a country's "national security." In addition, U.S. law—in particular the Exon-Florio Amendment to the Defense Production Act of 1950 —authorizes the President to block proposed foreign investment in the United States that threatens national security. The President has delegated to the interagency Committee on Foreign Investment in the United States (CFIUS) the responsibility to continuously monitor foreign investment in the United States to ensure against threats to national security; and a CFIUS review could still be performed at the discretion of CFIUS. While it is theoretically possible for Oman to bring a legal challenge to the actions of the United States before a third-party tribunal, proponents argued, the United States would appear to be on solid legal grounds for asserting not only that the panel does not have the legal authority to determine the validity of such a matter, but also that the inconsistent measure is permitted and justifiable given the broad "self-judging" language of the national security exception. Those arguing that the exception provision of Annex II should not have been included in the U.S.-Oman FTA argue that such a provision could pose a serious threat to Congress' ability to ensure the security of U.S. port infrastructure. Specific arguments against the provision are as follows: This is because language in Annex II regarding landside port operations introduces new rights of establishment for foreign companies to own sensitive U.S. infrastructure. These FTA provisions arguably subject U.S. laws or policies (whether enacted by Congress, the Executive, or the States) that restrict foreign ownership to a challenge in dispute resolution and/or to suit under the investor-state enforcement provisions. Under the FTA, this right is conditional upon obtaining comparable market access in this sector from Oman. However, this right covers the very port activities about which Congress expressed national security concerns during the Dubai Ports World debate. Generally, the service sectors to which the "right to establish" for foreign companies applies in these FTAs is the same as the service sectors that the United States agreed to in the 1994 WTO's General Agreement on Trade in Services (GATS). However, opponents argue, the Oman FTA adds to the U.S. commitments by specifically including (or by not specifically excluding) "landside operations of ports." The reason for this, they argue, is that neither the GATT agreement nor the FTA expressly exempts these provisions from review by an international tribunal. Nor can either country limit the number or size of such services, or require specific forms of ownership (i.e., require U.S. partners or require that it be a non-profit organization). Under the FTA, such disputes can be brought in two fora, both of which raise concerns: Government-to-government dispute resolution cases are not heard in U.S. courts, but in three-person trade tribunals under procedures agreed to in Article 20 of the FTA. In these cases, each country in the dispute may select one "judge" from its country and these two tribunalists would choose a third "judge"—from a list of trade experts provided by each country. In such a scenario, "judges" with a narrow trade expertise and perspective including non-U.S. individuals would be empowered to balance competing U.S. interests—national security needs against U.S. trade commitments—to decide which comes first. Investor-state enforcement is enumerated in Chapter 10 of the U.S.-Oman FTA. Under these provisions, even if the Omani government were not to initiate a case, an actual investor/company has the right to privately initiate its own case against the United States. Such a case, if brought, would seek a judgement requiring that the United States pay monetary damages equal to part of the expected future profits it would be denied by an adverse U.S. action. The case would be adjudicated by United Nations or World Bank tribunalists, who would be empowered to "second guess" a national security claim, and possibly order the U.S. government to pay the foreign company for its lost future profits. If the U.S. were to raise the "essential security" exception included in Chapter 21, Article 21.2 as a defense before a trade tribunal and a CFIUS review had been completed without a finding of a security threat (as in the case of Dubai World Ports), opponents argue, there is no doubt that an FTA panel would not permit use of the FTA's "essential security" exception to excuse consequent government action that interfered with the FTA investor right to establish port operations. However, the converse is not necessarily true: If a CFIUS review did determine that an acquisition were not in the national security interest of the United States, opponents argued, this would not terminate an FTA claim. This is because the FTA sets out procedures for responding to validly raised claims. Thus, even with a CFIUS review, it is argued that the United States would still be required to respond in a United Nations or World Bank tribunal, essentially requiring litigation on the "essential security" defense. Oman joins four other MEFTA countries with FTAs, and the proposed MEFTA is now one-quarter of the way complete. An agreement with Oman could be a pathway to create private sector jobs for Oman's burgeoning population and a gateway to more openness in the Middle East. If Congress had not approved the U.S.-Oman FTA, any one of a number of things could have happened. On one hand, Oman could have just continued trading with the United States as usual. On the other hand, Oman could have looked elsewhere to countries such as China, Russia, or India for support in diversifying beyond the production of oil which could run out in roughly 15-20 years. In addition, had the U.S.-Oman FTA not been approved, there might have been broader implications. For example, Oman has been letting the United States use several military facilities. While many argued that it would have been be in Oman's interest to continue to cooperate with the United States military, Oman might have been tempted to put further restrictions on the U.S. use of these facilities. Oman might also have shrunk back from its cooperation on counterterrorism which is said to have included sharing/providing tips on intelligence about possible Al Qaeda suspects operating in the Persian Gulf or Oman itself.

In aiming to fight terrorism with trade, the United States negotiated and the President signed on January 19, 2006, the U.S.'s fifth bilateral free trade agreement (FTA) in the proposed 20-entity Middle-East-Free Trade Area (MEFTA). This FTA is with Oman. Other U.S.-FTAs are with Israel, Jordan, Morocco, and Bahrain. A sixth is being negotiated with the United Arab Emirates. Oman is a small oil-exporting U.S. trade partner that has been supportive of U.S. policies in the Middle East and is strategically located at the mouth of the Persian Gulf. Because its oil reserves could be exhausted within 15-20 years, Oman is trying to liberalize and diversify its trade regime beyond oil and gas to provide economic opportunities for its fast growing workforce. Supporters of the agreement typically cite political and economic reasons. Opponents typically point to labor and human rights issues. The FTA with Oman is similar to other MEFTA FTAs and has three basic parts: new tariff schedules, broad commitments to open markets and provisions to support those commitments, and protections for labor and the environment. It provides immediate duty-free access for almost all consumer and industrial goods, with special provisions for agriculture and textiles and apparel. Among all U.S. trade partners, Oman ranks 88th for the United States, while the United States ranks third for Oman (after the United Arab Emirates and Japan). U.S.-Oman trade at about $1 billion for 2005 represents 0.04% (four-one hundredths of one percent) of total U.S. trade. In 2005, the most important U.S. imports from Oman were oil and natural gas (75%), and apparel (10%). The most important U.S. exports to Oman were transport equipment (56%), and machinery (24%). The U.S. International Trade Commission (USITC) predicts that the economic effect of the U.S.-Oman FTA is likely to be minimal since trade levels are low; and any increase in U.S. imports of apparel would come at the expense of workers elsewhere in the world, not in the United States. Total U.S. foreign direct investment in Oman was $358 million in 2003, up from $193 million in 2002. Supporters argue that the U.S.-Oman FTA will contribute to bilateral economic growth and trade, generate export opportunities for U.S. companies, farmers, and ranchers, and help create jobs in both countries. Critics argue that labor protections are inadequate for Omani workers, and that the FTA will not help level the playing field for Omani and U.S. workers. Critics also argue that a provision in Annex II of the FTA could obligate the United States to open up landside aspects of its port activities to operation by companies doing business in Oman—activities about which Congress expressed national security concerns during the Dubai Ports World debate. After the President submitted the agreement and the implementing legislation to Congress, relevant committees had 45 days to consider (or not consider) it, and either chamber had 15 more days to vote the legislation up or down without amendment to the agreement itself or the legislation. The Senate passed implementing legislation on June 29, 2006 (S. 3569); the House passed it (H.R. 5684) on July 20; the Senate re-passed it under the House number on September 19, and it became P.L. 109-283 on September 26, 2006. This report will be updated as events warrant.

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Concerns about hate crimes have become increasingly prominent among policymakers at all levels of government in recent years. A hate crime is defined as "[a] criminal offense against a person or property motivated in whole or in part by the offender's bias against a race, religion, disability, ethnic/national origin, or sexual orientation." Congress has recognized the special concerns and effects of hate crimes by enacting several laws such as the Civil Rights Act of 1968, the Hate Crimes Statistics Act of 1990, and the Hate Crimes Sentencing Enhancement Act of 1994. Current federal law permits prosecution of hate crimes committed on the basis of a person's race, color, religion, or national origin when engaging in a federally protected activity. On October 28, 2009, the President signed the Matthew Shepard and James Byrd, Jr. Hate Crimes Prevention Act into law. The law expands the scope of hate crime victims to include gender, sexual orientation, gender identity and disability. In addition, the law broadens the circumstances under which the federal government would assert jurisdiction to prosecute such crimes. In light of the United States Supreme Court decision in United States v. Morrison , there are questions as to what underlying authority Congress may utilize to expand the scope of hate crimes to cover violence based on gender, sexual orientation, gender-identity and/or disability. The commerce clause, section 5 of the 14 th Amendment, and section 2 of the 13 th and 15 th Amendments are the grants of power most often mentioned when discussing Congress's authority to proscribe hate crimes and to enact other forms of civil rights legislation. Article I, Section 8, Clause 4 of the United States Constitution authorizes Congress to "regulate Commerce with foreign Nations, and among the several States." There are three categories of activities subject to congressional regulation under the commerce clause. Congress may regulate the use of the channels of interstate commerce, or persons or things in interstate commerce, although the threat may come only from intrastate activities. Finally, Congress may regulate those activities having a substantial relation to interstate commerce (i.e., those activities that substantially affect interstate commerce). The Court narrowed the "affects interstate commerce" category with its decision in Morrison by rejecting the argument that Congress may regulate "non-economic, violent criminal conduct based solely on that conduct's aggregate effect on interstate commerce." In this case, the Court considered a suit brought by a former student of The Virginia Polytechnic Institute who alleged that two university football players raped her. The defendants and the university argued that the Violence Against Women Act, which allowed victims of gender-motivated violence to bring federal civil suits for damages, exceeded Congress's authority under the commerce clause. The Court agreed with the defendants despite the congressional findings that gender-motivated violence deterred interstate travel, diminished national productivity, and increased medical costs. The Court concluded that upholding the Violence Against Women Act would open the door to federalization of virtually all serious crime as well as family law and other areas of traditional state regulation. The Court said that Congress must distinguish between "what is truly national and what is truly local," and that its power under the commerce clause reaches only the former. As such, it would appear that any attempts to broaden the scope of hate crime legislation tied to findings and the general nature and consequences of hate crimes under the commerce clause are constitutionally suspect. However, it would appear that hate crimes that involve interstate travel continue to be within the commerce clause's reach. While the expansion of hate crime legislation may be suspect under the commerce clause, it may be within the scope of other legislative powers such as the legislative clauses of the 13 th , 14 th , and 15 th Amendments. The legislative clauses of the aforementioned amendments give Congress the power to enforce the Amendments by appropriate legislation. Morrison addresses the breadth of Congress's legislative power under section 5 of the 14 th Amendment. Under section 5 the Congress is vested with "power to enforce, by appropriate legislation, the [Amendment's] provisions." However, in Morrison, the Court pointed out that state action, not private, is covered. As such, Section 5 does not authorize legislation "directed exclusively against the action of private persons, without reference to the laws of the state, or their administration by her officers." Therefore, hate-driven denials by state officers or those acting under the color of law of equal protection or due process, or the right to vote fall within the scope of the legislative sections of the 14 th and 15 th Amendments. Conversely, it would appear that hate crimes committed by private individuals not acting under the color of law are beyond the scope of amendments. However, Section 2 of the 13 th Amendment may be a more viable option of broadening hate crime legislation. Unlike the 14 th Amendment, the 13 th Amendment proscribes slavery and involuntary servitude without reference to federal, state or private action. The Court has observed that "the varieties of private conduct that" Congress "may make criminally punishable ... extend far beyond the actual imposition of slavery or involuntary servitude ... Congress has the power under the 13 th Amendment rationally to determine what are the badges and incidents of slavery, and the authority to translate that determination into effective legislation." Section 2 of the 13 th Amendment envisions legislation for the benefit of those who bore the burdens of slavery and their descendants (race and/or color). But, it is unclear as to whether it is an appropriate authority for Congress to expand the range of victims of hate crimes (e.g., religion, national origin, etc.). Two questions come to mind: First, does violence based on bigotry constitute a "badge and/or incident of slavery?" Second, if so, must the remedial legislation be limited to the descendants of those for whose principal benefit the amendments were adopted? In a series of cases, the Court has observed that section 2 "clothes Congress with power to pass all laws necessary and proper for abolishing all badges and incidents of slavery in the United States." One could argue that due to the Court's decision in Morrison demonstrating a reluctance to expand Congress's use of the commerce clause to address gender-motivated violence, it is unclear as to whether the Court would consider the same violence as a "badge or incident of slavery" under the 13 th Amendment. However, the Court has not yet addressed the issue of how broad this congressional authority is. In construing the civil rights statutes enacted contemporaneously with the 13 th , 14 th , and 15 th Amendments, the Court held that Arabs and Jews would have been considered distinct "races" at the time the statutes were passed and the Amendments, drafted, debated and ratified. As this case addressed the issue of race, the question of whether religion can be used as a race indicator remains unanswered. In other words, would a Roman-Catholic, Methodist, or Episcopalian be considered a distinct "race" in the 19 th century? As such, it is unclear as to whether this would be considered sufficient to embrace all religious discrimination. There are other constitutional limits upon the manner in which Congress and/or states may enact hate crime legislation. The Court has considered constitutional challenges regarding state hate crime statutes under both the 1 st and 6 th Amendments. The 1 st Amendment declares that "Congress shall make no law ... abridging the freedom of speech." The 14 th Amendment's due process clause imposes the same restriction upon the states, many of whose constitutions have a comparable limitation on state legislative action. Under the 1 st Amendment, the Court has decided several cases which provide the framework in which states must act to protect the constitutionality of hate crime legislation. Generally, the constitutional distinction boils down to the difference between conduct and speech. If the statute's aim is to punish conduct, then it will generally be upheld; however, if the intent behind the statute is to punish speech, thought, or expression, then courts are more apt to strike down the statute. For example in R.A.V. v. City of St. Paul , the Court struck down a local ordinance as being overbroad and because the regulation was "content-based," proscribing only activities which conveyed messages concerning particular topics. However, in Wisconsin v. Mitchell , the Court found that a Wisconsin statute providing sentence enhancement for bias-motivated crimes did not violate a defendant's 1 st Amendment right as the statute was directed towards the defendant's conduct and not expression. Most recently, in Virginia v. Black , the Court found that the 1 st Amendment permits a state to outlaw cross burnings done with the intent to intimidate because "burning a cross is a particularly virulent form of intimidation." However, in a separate ruling, the Court found that the Virginia statute banning all cross burnings is facially invalid as it impermissibly shifts the burden of proof to the defendant to demonstrate that he or she did not intend the cross burning as intimidation. The 6 th Amendment also provides constitutional limits on hate crime statutes. The 6 th Amendment provides defendants a right to a jury trial. In Apprendi v. New Jersey , the Court struck down New Jersey's hate crime law, which allowed a judge to increase a sentence to double the statutory maximum if he or she found, by a preponderance of the evidence, that the defendant acted with a purpose to intimidate an individual or group of individuals because of race. In reversing the lower court's decision, the Court declared that the jury trial and notification clauses of the 6 th Amendment and the due process clauses of the 5 th and 14 th Amendments embody a principle that insists that, except in the case of recidivists, a judge could not on his own findings sentence a criminal defendant to a term of imprisonment greater than the statutory maximum assigned for which he had been convicted by the jury. In other words, "other than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt."

Federal and state legislators recognize the special concerns and effects of hate crimes. Although there is some federal legislation in place, many states have enacted some form of ethnic intimidation law or bias-motivated sentence-enhancement factors in attempts to curtail hate crimes. Several United States Supreme Court cases provide the framework in which states must legislate to ensure the constitutionality of hate crime legislation. After these landmark cases, the real questions for states involve identifying permissible ways to curtail hate crimes without infringing on any constitutionally protected rights. On the federal level, in light of U.S. Supreme Court cases, the question remains as to what extent Congress can broaden the classes of individuals subject to hate crime legislation. This report discusses constitutional considerations facing both individual states and Congress in enacting hate crime legislation. It will be updated as events warrant.

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T he exchange rate policies of some East Asian nations—in particular, China, Japan, and South Korea—have been sources of tension with the United States in the past and remain so in the present. Some analysts and Members of Congress maintain that some countries have intentionally kept their currencies undervalued for a period of time in order to keep their exports price competitive in global markets. Some argue that these exchange rate policies constitute "currency manipulation" and violate Article IV, Section 1(iii) of the Articles of Agreement of the International Monetary Fund , which stipulates that "each member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members." The Trade Facilitation and Trade Enforcement Act of 2015 ( P.L. 114-125 ) requires the Department of the Treasury to "undertake an enhanced analysis of exchange rates and externally‐oriented policies for each major trading partner that has (1) a significant bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in persistent one‐sided intervention in the foreign exchange market." In its semiannual report to Congress released in April 2017, "Treasury has found in this Report that no major trading partner met all three criteria." Treasury did, however, identify six major trading partners to include on its "Monitoring List": China, Germany, Japan, South Korea, Switzerland, and Taiwan. Four of the six trading partners are East Asian economies. This report examines the de facto foreign exchange rate policies adopted by the monetary authorities of East Asian governments. At one extreme, Hong Kong has maintained a "linked" exchange rate with the U.S. dollar since 1983, under which the Hong Kong Monetary Authority (HKMA) is required to intervene to keep the exchange rate between 7.75 and 7.85 Hong Kong dollars (HKD) to the U.S. dollar (USD). Such an arrangement is often referred to as a "fixed" or "pegged" exchange rate. At the other extreme, Japan, the Philippines, and South Korea have reportedly allowed their currencies to float freely in foreign exchange (forex) markets over the last few years—an exchange rate arrangement often referred to as a "free float." However, all three nations—like the United States—have intervened in international currency markets to influence fluctuations in the exchange rate. Most of East Asia's governments, however, have chosen exchange rate policies between these two extremes in the form of a "managed float." There are a number of different types of exchange rate policies that a nation may adopt, depending on what it perceives to be in its best interest economically and/or politically. At one extreme, a country may decide to allow the value of its currency to fluctuate relative to other major currencies in international foreign exchange (forex) markets—a policy commonly referred to as a "free float." One advantage of a "free float" policy over other exchange rate policies is that it permits the nation more autonomy with its domestic monetary policy. However, disadvantages of a "free float" policy include greater exchange-rate risk for international transactions, potentially destabilizing balance sheet effects, and possible rapid shifts in capital flows. At the other extreme, a nation may decide to fix the value of its currency relative to another currency or a bundle of currencies—usually referred to as a "pegged" exchange rate policy. Pegged exchange rate policies can take several forms. The pegged exchange rate may be set by law, without special provisions to defend the value of the currency. Alternatively, a nation may create a "currency board"—a monetary authority that holds sufficient reserves to convert the domestic currency into the designated reserve currency at a predetermined exchange rate. The currency board utilizes those reserves to intervene in international forex markets to maintain the fixed exchange rate. For example, Hong Kong's three designated currency-issuing banks—The Bank of China, HSBC, and Standard Chartered Bank—must deposit with the Hong Kong Monetary Authority sufficient U.S.-dollar-denominated reserves to cover their issuance of Hong Kong dollars at the designated exchange rate of HKD 7.80 = USD 1.00. Some economies that are heavily dependent on trade—such as Hong Kong and Singapore—perceive extensive currency volatility as a burden to trading enterprises, and manage their currencies to avoid it. An advantage of a pegged exchange rate is that it virtually eliminates exchange-rate risk. Disadvantages are the loss of autonomy in domestic monetary policy, potentially rapid changes in domestic prices (including fixed asset values), and exposure to speculative attacks on the pegged exchange rate. A third common exchange rate policy is a "managed float." A nation that adopts a "managed float" allows the value of its domestic currency to fluctuate in international forex markets until certain designated economic indicators reach critical levels. In some cases, the country may designate a band around a determined exchange rate, and intervene in international forex markets if its currency hits the upper or lower value limits. One special form of a managed float is a "crawling peg," in which the nation allows its currency gradually to appreciate or depreciate in value against one or more other currencies over time. China initiated a "crawling peg" policy on July 21, 2005, which it maintained until the summer of 2008, a period in which the renminbi appreciated 21% against the U.S. dollar. Other forms of managed float policies do not rely on the exchange rate but on other economic factors such as the trade balance, current account balance, inflation, and overall economic growth. Contemporary economic theory asserts that a nation cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. If a nation wishes to peg its currency and allow free capital movement (for example, Hong Kong) it must tie its monetary policy to that of the reserve currency nation (for Hong Kong, the United States). Many nations with pegged exchange rates choose to restrict the movement of capital to allow them greater autonomy in their monetary policies (such as anti-inflation measures, interest rate adjustments, or regulating the money supply). Table 1 lists the current de facto exchange rate policies of East Asia according to the International Monetary Fund (IMF) as of April 30, 2016. According to the IMF, only Japan allows its currency, the yen, to float freely on international foreign exchange (forex) markets. Five nations allow their currencies to float, but they reserve the right to intervene in forex markets to maintain stability. Seven countries manage their exchange rates according to certain economic objectives, such as domestic price stability or moderate swings in the forex rate relative to one or more currencies. Brunei and Hong Kong operate a currency board system that effectively pegs their exchange rates. The Hong Kong dollar is pegged to the U.S. dollar; the Brunei dollar is pegged to the Singaporean dollar. Categorizing a government's exchange rate policy can be complicated, particularly during periods of financial turbulence, as was seen, for example, during the global financial crisis of 2008. For example, according to South Korea's central bank, the Bank of Korea, the nation's official exchange rate policy has been a free floating system since December 1997. However, it was reported that the South Korean government sold about $1 billion for won on March 18, 2008, to stop a "disorderly decline" in the value of Korea's currency (see Figure 1 ). There were also reports that Korea sold more dollars for won in early April 2008. At the time, some forex analysts claimed that the new South Korean government had adopted a de facto pegged exchange rate policy of holding the exchange rate between the won and the U.S. dollar at 975-1,000 to 1. The value of the won declined further to nearly 1,500 won to the U.S. dollar in the spring of 2009, before gradually recovering over the next four years to about 1,100 won to the U.S dollar. Allegations of South Korea's intervention into forex markets reappeared in 2015 and 2016, when the won experienced another period of sustained depreciation against the U.S. dollar. The U.S. Treasury's Report to Congress on International Economic and Exchange Rate Policies , released on October 19, 2015, indicated that South Korea appeared to have attempted to resist the appreciation of the won in early 2015, only to switch to efforts to prevent the won's depreciation in July and August. In February 2016, the Bank of Korea stated that the recent declines in the value of the won were "excessive" and that it was concerned about possible "herd behavior" in forex markets, contributing to speculation that Bank of Korea would intervene in forex markets to support the won. Claims that South Korea was intervening in forex markets resurfaced in early 2017; the South Korean government sent a letter to the Financial Times , denying claims that it was managing exchange rates to prevent the won's appreciation. One South Korean think tank conjectured (incorrectly) that the Department of the Treasury might identify South Korea as a currency manipulator in its April 2017 report, given President Trump's statements about currency manipulation and its alleged negative effects on the U.S. economy. Another source of complication arises when there is a seeming discrepancy between the official exchange rate policy and observed forex market trends. For example, China officially maintained a "crawling peg" policy prior to the global financial crisis that allowed its currency—the renminbi—to adjust in value with respect to an undisclosed bundle of currencies within a specified range each day. In theory, this allowed the renminbi to appreciate or depreciate in value gradually over time, depending on market forces. After the global financial crisis began in late 2007, however, the renminbi was comparatively stable in value relative to the U.S. dollar from July 2008 to May 2010 (see Figure 1 ). Initially, this led some analysts to assert that China had abandoned the crawling peg in favor of a pegged exchange rate. Other analysts maintained that the stability of the renminbi with respect to the U.S. dollar was an artifact of the basket of currencies being used by China. Because some major currencies strengthened against the U.S. dollar while others weakened, the weighted average used by China in determining the band for the crawling peg has resulted in a relatively unchanged value when compared to the U.S. dollar. On June 19, 2010, China's central bank, the People's Bank of China, announced it would "proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility," implying that it had been intentionally maintaining a stable exchange rate during the global economic downturn. Starting from the summer of 2010, the RMB once again gradually strengthened against the U.S. dollar to around 6.13 yuan to the U.S. dollar as of February 2015. Since then, the renminbi has weakened against the dollar. As of March 31, 2017, the exchange rate was 6.89 yuan = 1.0 U.S. dollar. Japan's yen has undergone major shifts in value relative to the U.S. dollar over the past 10 years, ranging from a low of 125.35 yen to the U.S. dollar in June 2015 to a high of 76.14 yen to the U.S. dollar in February 2012 (see Figure 1 ). The fluctuations in the value of the yen have also shown some major shifts, such as its strong appreciations in late 2008 and early 2016, or its major depreciations in the winter of 2012-2013, the autumn of 2014, and the end of 2016. Analysts differ on the causes for the shifting value of the Japanese yen. Financial news reports during that time generally maintained that the fluctuations in the value of the yen reflected market confidence (or lack thereof) in Japan's economy and the Bank of Japan's monetary policy. According to these accounts, the weakening of the yen is the result of expansionary fiscal and monetary policies, part of the government's program to stimulate economic growth in Japan ("Abenomics"). However, some U.S. business leaders assert that the decline in the value of the yen in 2015 was the result of Japanese government intervention in foreign exchange markets. The Abe government and the Bank of Japan repeatedly denied claims that they were actively attempting to lower the value of the yen relative to the U.S. dollar, asserting their economic policies are designed to stimulate growth and end price deflation. The last confirmed time Japan intervened in foreign exchange markets was in 2011. There are indications that some East Asian monetary authorities monitor the region's exchange rates and attempt to keep the relative value of their currencies in line with the value of selected currencies in the region. These "competitive" adjustments in exchange rates are allegedly made to maintain the competitiveness of a nation's exports on global markets. Some observers have speculated that competitive adjustments are particularly an issue in Southeast Asia, especially countries with closer economic ties to China. For example, one scholar noted in 2007 that, "Countries that trade with China and compete with China in exports to the third market are keen not to allow too much appreciation of their own currencies vis-à-vis the Chinese RMB [renminbi]." The scholar, Taketoshi Ito, also speculated, "China most likely is more willing to accept RMB appreciation if neighboring countries, in addition [South] Korea and Thailand, allow faster appreciation." Trends in selected Southeast Asian exchange rates over the last 10 years have led some analysts to surmise that a "renminbi bloc" emerged in 2007 and early 2008, and reemerged between 2011 and 2013 (see Figure 2 ). In 2007 and until March 2008, the currencies of Malaysia, Singapore, and Thailand generally followed the appreciation of China's RMB against the U.S. dollar. As the 2008 global financial crisis spread in 2008, first the Thai bhat, then the Malaysian ringgit, and finally the Singaporean dollar began to weaken relative to the U.S. dollar, while China's RMB remained relatively fixed in value. Starting in late 2010 and continuing until the spring of 2013, the currencies of Indonesia, Malaysia, the Philippines, Singapore, and Thailand seemingly once again followed the gradual strengthening of China's RMB against the U.S. dollar. Since then, the Southeast Asian currencies have all weakened relative to the U.S. dollar, while the renminbi continued to strengthen until August 2015. The more recent divergence in exchange rates could be interpreted as a weakening of what some analysts previously had suggested were signs of an emerging "renminbi bloc." In addition to the apparent similar movements in the value of their currencies relative to China's renminbi, there is other anecdotal evidence consistent with the existence of a "renminbi bloc" in Southeast Asia, at least for a period of time. According to International Monetary Fund trade data, China has emerged as the largest trading partner for many Asian nations, including Indonesia, Malaysia, the Philippines, Singapore, and Thailand. China has also been actively promoting the use of the renminbi to settle trade payments, as well as to arrange currency swap agreements. While the apparent weakening in 2008 of what some analysts had suggested was an emerging "renminbi bloc" may have been attributable to the global financial crisis, the more pronounced divergence of exchange rates in 2013 and thereafter is not as readily explained. More recently, some observers speculate that slower economic growth in China and tightening monetary policy in the United States led to slower growth for the Southeast Asian economies and applied downward pressure on their currencies. Meanwhile, China's RMB continued its gradual appreciation relative to the U.S. dollar until August 2015. For nearly 30 years, the Department of the Treasury has been required to provide biannual reports to Congress on the exchange rate policies of foreign countries. The Omnibus Trade and Competitiveness Act of 1988 ( P.L. 100-418 ) required the Secretary of the Treasury to analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. The act also stipulated that the Secretary of the Treasury shall submit to the Committee on Banking, Finance and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, on or before October 15 of each year, a written report on international economic policy, including exchange rate policy. The Secretary shall provide a written update of developments six months after the initial report. The first report was provided to Congress in October 1988. Since the act was enacted, the Department of the Treasury has identified South Korea and Taiwan in 1988 and China in 1992 for manipulating their currencies under the Trade Act's terms. In February 2016, Congress passed the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA; P.L. 114-125 ), which, in addition to other provisions, requires the Secretary of the Treasury to "submit to the appropriate committees of Congress a report on the macroeconomic and currency exchange rate policies of each country that is a major trading partner of the United States." These reports are due every 180 days; the "appropriate committees" are the Committee on Banking, Housing, and Urban Affairs and the Committee on Finance of the Senate; and the Committee on Financial Services and the Committee on Ways and Means of the House of Representatives. The TFTEA also requires the report contain an enhanced analysis of macroeconomic and exchange rate policies for each country that is a major trading partner of the United States that has— (I) a significant bilateral trade surplus with the United States; (II) a material current account surplus; and (III) engaged in persistent one-sided intervention in the foreign exchange market. The latest report was released on April 14, 2017. According to its analysis, "Treasury has found in this Report that no major trading partner met all three criteria for the current reporting period [August-December 2016]." The report did, however, place six major trading partners—China, Germany, Japan, South Korea, Switzerland, and Taiwan—on a "Monitoring List" of "major trading partners that merit close attention to their currency practices." Four of the six major trading partners are in East Asia. Among the report's observations on these four major trading partners were the following: China —"China has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist renminbi (RMB) appreciation even as its trade and current surpluses soared." The report, however, also noted that China has allowed the renminbi to appreciate in recent years, and "China's recent intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation [emphasis in original text] that would have negative consequences for the United States, China, and the global economy." Japan —"Japan has a significant bilateral trade surplus with the United States, with a goods surplus of $69 billion [in 2016]. Japan has not intervened in the foreign exchange market, however, in five years." South Korea —"Korea has a track record of asymmetric foreign exchange interventions, highlighting the urgency of authorities durably limiting foreign exchange intervention only to circumstances of disorderly exchange market conditions and making foreign exchange operations more transparent. In its last analysis of the won, the IMF maintained its assessment that the won is undervalued." Taiwan —"Taiwan has a track record of asymmetric foreign exchange interventions.… Treasury urges Taiwan's authorities to demonstrate a durable shift to a policy of limiting foreign exchange interventions to only exceptional circumstances of disorderly market conditions, and to increase the transparency of foreign exchange market intervention and reserve holdings." While U.S. policy has generally supported the adoption of "free float" exchange rate policies, many East Asian governments consider a "managed float" exchange rate policy more conducive to their overall economic goals and objectives. In part, East Asian governments may be resistant to a "free float" policy because of the commonly held view in Asia that the economies with more liberal exchange rate policies suffered more during the 1997-1998 Asian financial crisis than the economies that moved more forcefully to maintain pegged or managed exchange rates. As a result, there may be skepticism about U.S. recommendations for adoption of "free float" exchange rate policies. In addition, it is uncertain if the adoption of "free float" exchange rate policies by more monetary authorities in East Asia would significantly reduce the U.S. trade deficits with countries in the region. The United States generally runs trade deficits with East Asia. Among economists, there is no consensus that the resulting appreciation of East Asian currencies against the U.S. dollar would either significantly increase overall U.S. exports or reduce U.S. imports. However, for some price-sensitive industries where U.S. companies are competitive, the appreciation of a competing nation's currency may stimulate U.S. export growth and/or a decline in U.S. imports. The debate over foreign exchange rate policies of other nations and its impact on the U.S. economy continues in the 115 th Congress. The Currency Reform for Fair Trade Act ( H.R. 2039 ) would amend the Tariff Act of 1930 (19 U.S.C. chapter 4) to permit the imposition of countervailing duties on the imports of countries whose currency is determined to be "fundamentally undervalued." The act also stipulates that a currency is to be determined undervalued if 1. The government of the country "engages in protracted, large-scale intervention in one or more foreign exchange markets"; 2. The real effective exchange rate of the currency is undervalued by at least 5%; 3. The country has experienced "significant and persistent global current account surpluses"; and 4. The foreign asset reserves held by the government of the country exceed the amount necessary to repay the government's debt obligations for the next 12 months; 20% of the country's money supply; and t he value of the country's imports for the previous four months.

According to the International Monetary Fund (IMF), monetary authorities in East Asia (including Southeast Asia) have adopted a variety of foreign exchange rate policies, varying from Hong Kong's currency board system which links the Hong Kong dollar to the U.S. dollar, to the "independently floating" exchange rates of Japan, the Philippines, and South Korea. Most Asian monetary authorities have adopted "managed floats" that allow their currency to fluctuate within a limited range over time as part of a larger economic policy. Regardless of their exchange rate policies, monetary authorities on occasion may intervene in foreign exchange (forex) markets in an effort to dampen destabilizing fluctuations in the value of their currencies. Legislation has been introduced during past Congresses designed to pressure nations seen as "currency manipulators" to allow their currencies to appreciate against the U.S. dollar. The Trade Facilitation and Trade Enforcement Act of 2015 (P.L. 114-125) requires the Secretary of the Treasury to provide Congress every 180 days with "enhanced analysis of macroeconomic and exchange rate policies" for each major trading partner that has a significant trade surplus with the United States, a current account surplus, and "engaged in persistent one-sided intervention in the foreign exchange market." In its latest report, Treasury determined that "no major trading partner met all three criteria for the current reporting period." Treasury did place six major trading partners—China, Germany, Japan, South Korea, Switzerland, and Taiwan—on its "Monitoring List." Four of those six major trading partners are in East Asia. In the 115th Congress, the Currency Reform for Fair Trade Act (H.R. 2039) would allow the imposition of countervailing duties on goods imported from a foreign country whose currency is determined to be "fundamentally undervalued" in accordance with the provisions of the act. Most East Asian monetary authorities consider a "managed float" exchange rate policy conducive to their economic goals and objectives. A "managed float" can reduce exchange rate risks, which can stimulate international trade, foster domestic economic growth, and lower inflationary pressures. It can also lead to serious macroeconomic imbalances if the currency is, or becomes, severely overvalued or undervalued. A managed float usually means that the nation has to impose restrictions on the flow of financial capital or lose some autonomy in its monetary policy. Over the last 10 years, the governments of East Asia have differed in their response to the fluctuations in the value of the U.S. dollar. China, for example, allowed its currency, the renminbi, gradually to appreciate against the U.S. dollar between 2007 and 2015, and has been actively intervening in foreign exchange (forex) markets since then to prevent the depreciation of its currency. Indonesia, however, has allowed its currency, the rupiah, to depreciate in value relative to the U.S. dollar over the last decade. Between 2011 and 2013, some Southeast Asia nations—such as Malaysia, the Philippines, Singapore, and Thailand—appeared to have adopted exchange rates regimes to keep their currencies relatively stable with respect to China's renminbi. This supposed "renminbi bloc" may have emerged because those nations' economic and trade ties were increasingly with China. In addition, China was actively promoting the use of its currency for trade settlements, particularly in Asia. Exchange rate patterns for the last four years, however, have led some analysts to suggest the "renminbi bloc" may have weakened. This report will be updated as events warrant.

govreport

In recent years, congressional attention has been drawn to the roles and responsibilities of U.S. ambassadors who serve as Chiefs of Mission in U.S. embassies abroad. The death of Ambassador Christopher Stevens in Benghazi, Libya, in September 2012 highlighted the dangers that ambassadors may encounter as the front-line face of U.S. diplomacy, and the availability of resources, leadership, and communication relative to those dangers. The ongoing debate on interagency reform for missions abroad stresses the need to improve coordination among all U.S. agencies, a key responsibility of U.S. ambassadors. The State Department and United States Agency for International Development (USAID) 2010 Quadrennial Diplomacy and Development Review (QDDR) emphasized the need to equip ambassadors to better perform that role. In addition to these specific concerns, congressional interest stems from Congress's part in selecting U.S. ambassadors (as the U.S. Senate advises and consents on their appointment), providing the resources they need to accomplish their missions, and overseeing their conduct of those missions. This report addresses the role and effectiveness of U.S. ambassadors and others who serve as a Chief of Mission (COM) abroad, particularly their responsibility for coordinating interagency activities and their control over U.S. forces operating in their countries of assignment. After a background section on the history of COM roles and a section on the sources of COM legal authority, this report addresses four commonly asked questions regarding the scope and exercise of COM authority. It concludes with a discussion of two prominent congressional concerns: (1) how effective is COM authority in practice? and (2) how might the exercise of COM authority be improved? It will be updated as warranted. "Chief of Mission," or COM, is the title conferred on the principal officer in charge of each U.S. diplomatic mission to a foreign country, foreign territory, or international organization. Usually the term refers to the U.S. ambassadors who lead U.S. embassies abroad, but the term also is used for ambassadors who head other official U.S. missions and to other diplomatic personnel who may step in when no ambassador is present. The U.S. Constitution authorizes the President to appoint ambassadors with the advice and consent of the Senate, that is to say, subject to Senate confirmation. In circumstances where no presidentially appointed ambassador is currently serving at a U.S. mission abroad, legislation further authorizes the President to appoint a career U.S. foreign service officer as a chargé d'affaires or "otherwise as the head of a mission ... for such period as the public interest may require." An ambassador or other foreign service official may hold the COM position within a given U.S. mission abroad. Appointed by the President, each COM serves as the President's personal representative, leading diplomatic efforts for a particular mission or in the country of assignment under the general supervision of the Secretary of State and with the support of the regional assistant secretary of state. The role of the COM has expanded considerably since World War II. With the postwar expansion of U.S. foreign assistance around the world, COMs assigned to head U.S. embassies or other country-based diplomatic missions abroad have been charged with responsibility for overseeing nearly all U.S. government activities in their country of assignment, with the primary exception of military operations. Most often, they exercise this authority through their leadership of the embassy's "country team," the membership of which includes the chief representative of each U.S. government agency undertaking activities in a host country or other mission. The State Department/USAID 2010 Quadrennial Diplomacy and Development Review (QDDR) casts ambassadors as chief executive officers or "CEOs" of multi-agency missions, not only conducting traditional diplomacy, but also leading and overseeing civilians from multiple federal agencies in other work. The QDDR highlights the key role of country teams and ambassadors in the conduct of foreign policy and assistance, and sets forth ways in which the Obama Administration would try to improve the knowledge and skills of COMs and their ability to lead country teams. Civilian agencies "possess some of the world's leading expertise on issues increasingly central to our diplomacy and development work," the QDDR states. "The United States benefits when government agencies can combine their expertise overseas as part of an integrated country strategy," when "implemented under Chief of Mission authority, and when those agencies build lasting working relationships with their foreign counterparts." At the time of the QDDR's release, then-Secretary of State Clinton also announced that Chiefs of Mission were to play a role in integrating country-level strategic plans and budgets. The authorities and responsibilities of COMs are explained primarily in the Foreign Service Act of 1980, as amended (FSA 1980; P.L. 96-465 ). (This legislation also explains the responsibility of all U.S. government officials operating under a U.S. mission abroad to report to the COM and abide by COM directives.) Section 207 of FSA 1980 serves as a codification in legislation of many of the provisions in previous executive orders setting out and developing COM authority as U.S. government activities abroad increased throughout the latter half of the 20 th century. COM authority is also shaped by executive branch directives, which include executive orders and other presidential directives and State Department regulations, some of which provide more extensive authority than FSA 1980. According to State Department regulations, COM authority derives originally from the President's general constitutional powers in foreign affairs. Because of this constitutional basis for COM authority, according to the State Department, the President's letter of instruction (see " Letter of Instruction ," below) providing greater detail to COMs is of greater significance in determining a COM's authority than the pertinent legislative provisions relating to such authority. Section 207 of the FSA 1980 (22 U.S.C. §3927) sets out the three main components of COM authority: (1) the COM's responsibilities, (2) the COM's authority over the personnel stationed at the embassy and in the country of assignment, and (3) the obligations of U.S. government personnel and agencies to that COM. Each component is outlined below. COM Responsibilities . Section 207(a)(1) of FSA 1980 states that, under the direction of the President, a COM "shall have full responsibility for the direction, coordination, and supervision of all Government executive branch employees in that country," except for Voice of America (VOA) correspondents on official assignment and employees under the command of a U.S. Geographic Combatant Commander (GCC). (Recent Presidential Letters of Instruction exclude personnel on the staff of an international organization, but do not reference VOA correspondents, see below.) Pursuant to Section 207(a)(2), the COM is also responsible for keeping " fully and currently informed with respect to all activities and operations of the Government within that country, and shall insure that all Government executive branch employees in that country (except for Voice of America correspondents on official assignment and employees under the command of a United States area military commander) comply fully with all applicable directives of the chief of mission." A principal duty of each U.S. Chief of Mission in a foreign country, under Section 207(c) is "the promotion of United States goods and services for export to such country." COM Authority o ver Personnel . Section 207(b) of FSA 1980 states that any executive branch agency with employees in a foreign country "shall insure that all of its employees in that country" (except for VOA correspondents on official assignment and those under the command of a GCC) "comply fully with all applicable directives" of the COM. Obligation to Keep COM Fully Informed. Subsection (b) also provides that any executive branch agency with employees in a foreign country "shall keep the chief of mission to that country fully and currently informed with respect to all activities and operations of its employees in that country…." Section 207 of FSA 1980 limits COM authority to coordinate and supervise U.S. government activities in a host country to executive branch agencies. In general, representatives of the judicial and legislative branches, including Members of Congress and their staffs, are not subject to the same coordinating and supervisory authorities of the COM. In addition to and in accordance with the relevant legislative mandates, COM authority derives from an array of executive branch orders and directives, explained below. Presidents provide their primary directives in a Letter of Instruction to each COM, setting out each COM's role and responsibilities as the President's personal representative at each U.S. mission abroad. Although the State Department stresses the distinction between the constitutional and legislative sources of COM authority, the Letter of Instruction and Section 207 of FSA 1980 contain similar language on the central points of COM authority. They do not contradict each other in their explanation of responsibilities of the COM and the obligations of other U.S. agency representatives to adhere to the COM's directives in each host country. One difference with the FSA 1980 is the personnel excluded from COM authority. The FSA 1980 excludes VOA correspondents on assignment and personnel under the command of a GCC, as mentioned above. The template of an Obama Administration Letter of Instruction excludes personnel on the staff of an international organization. Another difference is that Letters of Instruction (as indicated by templates of presidential Letters of Instruction of two administrations) state that ambassadors have the right to see "all communications to and from Mission elements," except those exempted by law or executive decision. Executive orders have gradually expanded the authority and responsibilities of COMs. The requirement that COMs coordinate all U.S. government activities in a host country and be kept informed of all activities by U.S. government personnel dates back at least to the early years after World War II, when concerns surfaced about the management of U.S. humanitarian and security assistance to various Western European countries. In 1952, President Harry S. Truman issued Executive Order 10338, which directed the Chief of Mission to coordinate the activities carried out by representatives of U.S. government agencies under the Mutual Security Act of 1951. This included the activities of chiefs of economic missions, military assistance, advisory groups, and other representatives of U.S. government agencies. The COM was also tasked with responsibility "for assuring the unified development and execution of the said program in each country." To that end, the representatives of U.S. agencies covered by the order were directed to "keep the respective Chief of United States Diplomatic Missions and each other fully and currently informed on all matters, including prospective plans, recommendations, and actions relating to the programs under the Act…." Subsequent executive orders conferred on each COM to a country broader authority over U.S. government agencies' activities in that country, not specifically including or excluding any agency or type of activity. Section 201 of Executive Order 10893 of 1960, which remains in force, states, Sec. 201. Functions of Chiefs of United States Diplomatic Missions . The several Chiefs of the United States Diplomatic Missions in foreign countries, as the representatives of the President and acting on his behalf, shall have and exercise, to the extent permitted by law and in accordance with such instructions as the President may from time to time promulgate, affirmative responsibility for the coordination and supervision over the carrying out by agencies of their functions in the respective countries. National Security Decision Directive 38 of June 1982 (NSDD-38) provides that a COM's approval is required before executive agencies may change the size, composition, or mandate of the staff at a diplomatic post. NSDD-38 states that the COM shall make such decisions through a process determined by the President. Current legislation requires the Secretary of State to direct each COM to review at least every five years "every staff element under chief of mission authority, including staff from other departments or agencies" and recommend approval or disapproval of each element pursuant to the "NSDD-38 process." NSDD-38 disputes concerning staffing between the COM and executive agency representatives are resolved by the decision of the COM or of the President. Agreement concerning mission structure and individual agency presence and activities in a host country are often set out in a memorandum of understanding (MOU) executed by a COM and a U.S. government agency operating in the mission. In General. The Foreign Affairs Manual (FAM) and the Foreign Affairs Handbook (FAH) provide further detail on COM authority based on legislative and executive directives. Many pertinent provisions relate to the COM's overall authority over a given U.S. diplomatic mission abroad, stating that the COM "determines the precise structure of a mission, in light of local circumstances and the specific nature and scope of function assigned to the post." As per the President's Letters of Instruction, FSA 1980, and E.O. 10893, each COM is charged with integrating all mission activities at all posts within a host country, and attachés from other executive branch agencies, including Department of Defense attachés and other military personnel attached to a U.S. Embassy, perform their duties under the direction of the COM. The FAM also specifies that while the COM is the President's personal representative in a foreign country or international organization, the Secretary of State supervises the COM generally, and the pertinent regional Assistant Secretary of State is tasked with providing support to the COM. Security. As explained above, COM authority over coordination and supervision of U.S. government activities in a host country extends only to the executive branch, and not generally to the legislative and judicial branches. The Secretary of State, however, is tasked with ensuring the security of all U.S. government personnel, including all branches of the federal government, pursuant to the Omnibus Diplomatic Security and Antiterrorism Act of 1986, as amended ( P.L. 99-399 ; 22 U.S.C. §4801 et seq.). According to the FAH, the COM is also responsible for the security of personnel "by extension," except for VOA personnel and employees under the command of a GCC. The State Department and DOD in 1997 executed a comprehensive memorandum of understanding on the security of DOD personnel in foreign countries. Supplementary memoranda of agreement (MOAs) must be executed between the State Department and DOD in each country to carefully delineate between personnel under the security protection of the COM and the GCC. VOA personnel are required to inform the COM of their presence in a host country and receive a security briefing, but are otherwise treated like other U.S. journalists, due to journalistic independence requirements in U.S. law. Personnel. The NSDD-38 process ensures that the COM is informed of, reviews, and approves all changes in the size, composition, and mandate of each executive agency operating in a host country. The FAM and the FAH provide additional information concerning staffing decisions for each mission abroad. The COM must approve entry into a host country by all personnel, including personnel assigned to temporary duty in a country. The COM maintains supervisory authority over all personnel, including full-time, non-full-time, non-permanent, and non-direct-hire personnel operating in a foreign country or at a U.S. mission abroad. Decisions as to additions or subtractions of such personnel are also subject to COM approval under the NSDD-38 process. In general, contractors working for commercial firms engaged by executive agencies in a host country are not under COM coordinating and supervisory authority, but any such engagement that would change the composition of an agency's presence in a host country is subject to COM approval. A number of questions are often raised regarding the scope and exercise of COM authority. This section responds to four of the most common questions: 1. Does COM authority extend to Department of Defense (DOD) personnel? 2. Who exercises COM authority in a country without a U.S. embassy or U.S. diplomatic presence? 3. Is COM authority in effect in countries where the United States is engaging in hostilities? 4. What is the COM's authority over Members of Congress, legislative branch employees, and congressional foreign travel? COM authority extends to all DOD personnel in a country except those under the command of a GCC. An ambassador is also charged with responsibility for the activities of in-country military personnel by a variety of statutes, presidential directives, and executive branch arrangements, as well as the President's Letter of Instruction. The following is an overview of key aspects of the COM relationship with GCCs and military personnel, but it is not exhaustive. In practice, this relationship may vary because of personalities, special circumstances, or different perceptions of COM responsibilities. As mentioned earlier in this report, Section 207 of the FSA 1980 place under COM authority, that is to say, subject to a COM's "direction, coordination, and supervision," all executive branch personnel, with specified exclusions, including those under the command of an "area military commander" (now referred to as a geographic combatant commander). This FSA 1980 exclusion is reiterated in the Presidential Letter of Instruction that each ambassador receives when assigned to a post. Thus, COM authority extends to military personnel such as Marine security guards, the Defense Attaché, personnel serving in Security Cooperation Organizations (SCOs) in-country who plan and implement U.S. military assistance programs under specified provisions of the FAA and under the Arms Export Control Act (AECA), and a number of other military personnel. The FSA 1980 COM authority is augmented by other provisions of law that create overlapping or additional COM responsibilities regarding certain military personnel stationed abroad. The Foreign Assistance Act of 1961, as amended (FAA 1961), places under COM "direction and supervision" military personnel serving in a SCO. These personnel, as well as other military personnel stationed in-country, including Marine security guards, are subject to NSDD 38 of June 1982, mentioned earlier, which requires the COM's approval before executive agencies may change the size, composition, or mandate of their staff at a diplomatic post. In addition, the FAA 1961 charges the COM with responsibility for seeing that the recommendations of DOD representatives "pertaining to military assistance (including civic action) and military education and training programs are coordinated with political and economic considerations, and his comments shall accompany such recommendations if he so desires." Special COM authorities are conveyed by presidential order or directive. For instance, National Security Policy Directive 36 (NSPD-36) of May 11, 2004, charged the Secretary of State with responsibility for "the continuous supervision and general direction" of all assistance for Iraq. At the same time, it charged the commander of the U.S. Central Command (USCENTCOM) with responsibility for directing "all U.S. government efforts" and coordination of "international efforts in support of organizing, equipping, and training all Iraqi security forces." NSPD-36 mandated that the Commander was to exercise his responsibility "with the policy guidance of the Chief of Mission." It also instructed the Commander and the COM to "ensure the closest cooperation and mutual support" in all activities. COMs have no authority over GCCs, who are responsible by law to the President and Secretary of Defense, but the COM and the GCC are expected to maintain a cooperative relationship. The FSA 1980 requirement that executive branch agencies with employees in a foreign country keep the COM "fully and currently informed with respect to all activities and operations of its employees in that country," applies to the GCC. In addition, templates of presidential Letters of Instruction of two administrations indicate that presidents expect such communication to flow both ways and differences of opinion to be reported to Washington. "You [the Ambassador] and the area military commander must keep each other currently and fully informed and cooperate on all matters of mutual interest," according to the more recent template. "Any difference that cannot be resolved in the field will be reported to the Secretary of State and the Secretary of Defense." As directed by legislation and presidential directive, the Secretary of State, and by extension COMs, are responsible for the security of all U.S. government personnel on official duty abroad and their accompanying dependents, except for personnel under the command of a U.S. area military commander and Voice of America correspondents on official assignment. By definition, this includes DOD personnel serving under COM authority. However, the law allows the Secretary of State to delegate operational responsibilities to the heads of agencies. Thus, responsibility for DOD personnel under COM authority may be delegated to the GCC if so negotiated in a memorandum of agreement (MOA) between the GCC and the COM. A COM's relationship to Special Operations Forces (SOF) in-country depends on the activity being performed and under whose command they are operating. When operating abroad, SOF will generally be under the command of the GCC. These personnel are performing activities that the GCC is explicitly given authority to oversee. Like other GCC personnel, SOF forces deployed under the GCC are not subject to COM authority. However, SOF forces may operate under COM authority when performing certain functions or conducting certain activities. In addition, in some cases, the Special Operations Command (SOCOM) commander, who is not a GCC, may exercise command of a special operations mission at the direction of the President or Secretary of Defense. These are limited circumstances authorized by the President where SOF personnel are deployed outside of COM or GCC authority. In such cases the relationship with the COM would generally be clarified in the President's authorizing directive. The COM's position as the eyes, ears, and hands on the ground of the President and the Secretary of State, with responsibility for the overall bilateral relationship with a country, may have implications for the role that the COM plays in relation to military activities. Presidential Letters of Instruction make clear that the Secretary of State is responsible, under the direction of the President and to the fullest extent provided by law, for the overall coordination of U.S. government activities abroad. The FAA 1961 charges the Secretary of State with responsibility for the "continuous supervision and general direction of ... military assistance" (an undefined term). Some perceive the COM as the best-placed person to exercise these responsibilities on behalf of the Secretary. In effect, a COM sometimes carries out this role, but there appears to be no consistency in practice or consensus on when and how this should occur. In a number of cases, Congress has mandated in law a COM role regarding specific military activities or DOD has written such a role into its guidance for an activity that falls under the command of the GCC. For instance, Congress requires COM concurrence (i.e., approval) for Special Operations Forces to provide support to "foreign forces, irregular forces, groups, or individuals" that assist or facilitate U.S. military operations to combat terrorism. In a case of DOD policy guidance, SOCOM Directive 350-3 "specifies that planners coordinate with ambassadors and country teams during the planning process" for Title 10 Section 2011 Joint Combined Exchange Training (JCET) events "and with State during the approval process.... " Congress amended Section 207 of the FSA 1980 in 2002, exempting Voice of America (VOA) correspondents from COM authority. In explaining this decision, the conference report accompanying the Foreign Relations Authorization Act, Fiscal Year 2003 ( P.L. 107-228 ) stated, Although VOA correspondents are on the federal payroll, they are unique in that they are working journalists. Accordingly, their independent decisions on when and where to cover the news should not be governed by other considerations. This exemption is in accord with legislation authorizing VOA broadcasts and U.S. international broadcasting in general, which requires such broadcasting to comport with journalistic standards of objectivity and independence. The United States does not maintain an embassy or even a diplomatic presence in all countries and political entities due to severed or strained diplomatic relations, contested sovereignty claims in a given geographic area, autonomous, semi-autonomous, or other special status of entities or regions, or geographic remoteness, among other reasons. Nevertheless, in most cases there are fully authorized COMs assigned to such countries and entities. COMs assigned to such countries exercise COM authority regarding diplomatic relations and U.S. government activities in such countries and political entities, despite the limited nature of such activities when access is restricted. For instance, in the case of Cuba, with which the United States has no diplomatic relations, the principal officer of the U.S. Interests Section in Havana has been designated a COM. Also, with the February 2012 closure of the U.S. embassy in Damascus, the current U.S. ambassador exercises his COM authority via the U.S. Interests Section of the Czech Republic's Damascus embassy. Consuls general leading the U.S. consulates in Jerusalem and Hong Kong also possess COM authority. Some ambassadors are appointed to cover a number of states at one time and therefore exercise COM authority over a number of countries at once; for example, the U.S. ambassador to Fiji is also U.S. ambassador to Kiribati, Nauru, Tonga, and Tuvalu. In some cases, online websites function as virtual diplomatic posts to extend a U.S. diplomatic presence to those countries lacking a physical U.S. diplomatic presence, such as the Virtual Embassy of the United States for Tehran. In the case of a country experiencing an irregular change of government or the collapse of government, COM's authority does not appear to change under U.S. law and practice. The State Department's Foreign Affairs Manual states that "diplomatic relations are maintained between states, not governments. The absence of a government that has clear control or that has obtained power through legitimate means does not automatically result in a rupture of diplomatic relations." In the case of a change in government or other political or social upheaval in a foreign country resulting in a U.S. government policy of non-recognition, the COM is tasked with establishing guidelines for U.S. government communications with the country's officials in accordance with that policy, and all U.S. government representatives are required to abide by those guidelines. COM authority in a specific country is not necessarily terminated or curtailed if the United States engages in hostilities with that country or within that country's borders. Only if hostilities lead to the permanent withdrawal of an ambassador, permanent closure of U.S. diplomatic facilities, and evacuation of diplomatic mission personnel and dependents, does COM authority effectively cease. A COM may decide to suspend operations of a U.S. diplomatic mission in a foreign country in emergency circumstances, including circumstances of armed hostilities, whether the United States is participating in such hostilities or not. A U.S. diplomatic mission officially closes upon termination of diplomatic relations between the United States and the pertinent foreign country. In all circumstances, the President makes the final decision to close any U.S. diplomatic mission. In both Iraq and Afghanistan during the recent conflicts in those two countries, U.S. ambassadors and chargés d'affaires acted with COM authority contemporaneously with ongoing U.S. military operations, although it can be noted that these COMs were installed only after the success of the initial invasions in toppling each of the governments of these two countries. As discussed above, a COM in a foreign country where U.S. armed forces are conducting military operations must coordinate with the pertinent GCC on many matters. A non-permissive security environment in a foreign country where armed conflict is taking place may limit a COM's options otherwise available in carrying out COM roles and responsibilities. When Congress declares war under its constitutional powers, or some state of armed conflict otherwise prevails between the United States and a foreign country, the ambassador or other COM to that country can be expected to be recalled, and the diplomatic mission closed or substantially curtailed. For instance, Ambassador Joseph Grew left Japan in 1942, soon after Japan attacked Pearl Harbor and Congress declared war on Japan. Although the United States occupied Japan after the war, no ambassador in the role of the COM was appointed until 1952, after the Allied handover of control to the Japanese government. As explained above, COM authority to approve or supervise U.S. government personnel in a foreign country does not extend to the legislative branch. State Department guidelines nonetheless assert the primacy of the COM as the President's representative to a foreign government. Given the presidential prerogative concerning the conduct of foreign relations, the guidelines suggest that any relations with a foreign government must be coordinated through the COM, including those undertaken by the legislative branch. Members of Congress and their staffs may travel to foreign countries without specific COM approval, but accepted practice includes notification to (rather than clearance by) the COM concerning congressional travel to a foreign country. The State Department's Bureau of Legislative Affairs is tasked with informing U.S. missions abroad of planned visits by Members of Congress and their staffs. The COM will advise on current local conditions within a host country in relation with such travel, and the COM remains responsible for the security of Members and other legislative branch personnel in the host country. With regard to employees of the Government Accountability Office (GAO), the State Department and the GAO have executed an MOU that places GAO personnel under the authority of the COM except with regard to their overseas audit, investigation, and evaluation-related activities. Library of Congress personnel stationed abroad are subject to COM authority, pursuant to an MOU executed between the Library and the State Department. Congress plays an important role in setting standards for the exercise of COM authority and providing COMs with the resources—training, personnel, monetary—to promote its effective exercise. The following two sections address current concerns regarding the effectiveness of COM authority in practice and possible options to improve COM performance. The State Department's 2010 QDDR stressed the need for capable COMs to act as CEOs of U.S. embassies. Although there have not been systematic studies of the exercise of COM powers, recently some analysts have raised questions concerning the effectiveness of individual ambassadors and other COMs in managing their embassies and exerting their authority. In a report released in September 2012, weaknesses in COM leadership and management were discerned by the State Department's Office of Inspector General (OIG), which reportedly have caused "reduced productivity, low morale, and stress-related curtailments" of tours of duty at approximately 25% of posts abroad. These findings, based on surveys of personnel at a select grouping of diplomatic posts abroad, do not clearly spell out the exact weaknesses of COMs, but state that they are related to "basic leadership or management principles and the failure to observe [these] basic principles.... " Assessing the ability of COMs to carry out a key function, the coordination of the activities of all U.S. government agencies in a country, one former U.S. ambassador has asserted that COMs cannot count on State Department officials to support their efforts to assert and protect their authority over other executive branch representatives, and thus are discouraged from exercising the authority granted to them as the President's representative. He found that the authority provided by statutes and hierarchical position can easily be undermined by actual practices: Solid backing from [the Department of] State in a difference of opinion with another agency's representatives, for example, cannot be depended upon. Messages from the department on the subject, often distributed to other agencies, sometimes dismiss legitimate concerns in an offhand manner. Similarly cables addressed to chiefs of mission, often prepared by individuals not in the proximate chain of command, do not always convey the impression that the COM's authorities or views are of particular importance. If State does not treat chiefs of mission as personal representatives of the president, especially in open communications, it cannot expect others to do so—or respect their authority in the interagency process. Over the past several years, a number of institutions, including think tanks and government agencies, have advanced proposals to improve the exercise of COM authority. These have included selecting potential ambassadors and others in line for COM posts for interagency experience, expertise, and inclination, and standardizing the education and training of potential ambassadors. With regard to COM education and training, the Foreign Service Institute (FSI) has taken steps to enhance its two-week training course for new COMs. In response to suggestions in the QDDR, FSI has created a new handbook on COM interagency leadership, and has stressed COM authority with regard to coordination and supervision of all U.S. government activities related to a mission, NSDD-38 procedures, and diplomatic security responsibilities. The "ambassador as CEO" concept found in the QDDR has been integrated into COM training, and interagency panels conducted during the training educate new COMs on the many interagency aspects of COM authority. The State Department OIG, in the report mentioned above, cited a lack of management and leadership guidance in the FAM and FAH, and called for creating a new handbook for COMs focusing on post management. OIG also recommended instituting a performance assessment system across U.S. missions abroad to consistently monitor COM performance, identify trouble spots, and inform COM training and best practices, through regular confidential surveys of post personnel. Nevertheless, some analysts doubt that such steps will suffice if an ambassador or other COM does not have the support of officials in Washington at the appropriate time to overcome the pull of agency interests and pressures on a country team. A COM's ability to manage and coordinate effectively depends on respect for an ambassador's authority and expertise within the State Department itself, and the Department's direct support for a COM's position when necessary, as well as recognition of the COM's role with respect to other agencies. In line with these concerns, it has been recommended that documents on COM authority be provided to all regional assistant and deputy assistant secretaries in order to improve relations between Department bureaus in Washington and COMs in the field. It has also been suggested that State representatives to DOD training facilities make presentations explaining the extent and importance of COM authority. U.S. ambassadors and others exercising COM authority are by law the cornerstone of U.S. foreign policy coordination in their respective countries. Their jobs are highly complex, demanding a broad knowledge of the U.S. foreign policy toolkit and the ability to oversee the activities and manage the representatives of from many U.S. government entities, which in some embassies number about 40 U.S. departments and agencies. Understanding the position and core authorities of U.S. Chiefs of Mission is a key element to appreciating the conduct of U.S. foreign policy abroad. Moreover, Members of Congress may wish to examine whether current efforts to improve COM effectiveness in ensuring interagency coordination are sufficient. Specific questions might include whether (1) the two-week FSI training course required for new ambassadors is adequate; (2) interagency experience should be a standard expectation for prospective COMs; (3) FSI career-long leadership training courses are sufficient to build effective leaders and managers at the COM and Deputy COM level; (4) agency representatives on country teams, and their supervisors in Washington, fully understand and comply with their obligations to the COM; and (5) State Department leaders provide the needed backing, support, and resources.

"Chief of Mission," or COM, is the title conferred on the principal officer in charge of each U.S. diplomatic mission to a foreign country, foreign territory, or international organization. Usually the term refers to the U.S. ambassadors who lead U.S. embassies abroad, but the term also is used for ambassadors who head other official U.S. missions and to other diplomatic personnel who may step in when no ambassador is present. Appointed by the President, each COM serves as the President's personal representative, leading diplomatic efforts for a particular mission or in the country of assignment. U.S. ambassadors and others exercising COM authority are by law the cornerstone of U.S. foreign policy coordination in their respective countries. Their jobs are highly complex, demanding a broad knowledge of the U.S. foreign policy toolkit and the ability to oversee the activities and manage the representatives of many U.S. government entities, with some exceptions for those under military command. Congress plays an important role in setting standards for the exercise of COM authority and providing COMs with the resources—training, personnel, monetary—to promote its effective exercise. A number of recent developments have increased congressional attention to issues associated with the roles and responsibilities of COMs. The statutory basis for COM authority and responsibilities is the Foreign Service Act of 1980, as amended (FSA 1980; P.L. 96-465), which states that the COM has "full responsibility for the direction, coordination, and supervision of all Government executive branch employees in that countries," with some exceptions; and for keeping "fully and currently informed" about all government activities and operations within that country. COM authority is also conferred by other sources of legal authority, which include executive orders and other presidential directives and State Department regulations, some of which provide more extensive authority than the FSA 1980. The Chief of Mission role in conducting and coordinating diplomacy abroad was also invoked in the first Quadrennial Diplomacy and Development Review (QDDR), released by the State Department in 2010. The scope and exercise of COM authority, both generally and in specific instances, have been of ongoing interest and concern to Congress. This report summarizes the current legal authority of Chiefs of Mission to include relevant legislation and executive branch directives and regulations. It includes brief discussion of common questions related to COM authority such as: Does COM authority extend to Department of Defense (DOD) personnel? Who exercises COM authority in countries without a U.S. embassy or diplomatic presence? Is COM authority in effect in countries where the United States is engaging in hostilities? What is the COM's authority over the legislative branch? Finally, specific concerns, possible options, and reform proposals for improving COM authority and effectiveness are explored. This report may be updated as events warrant.

govreport

China's economy is heavily dependent on global trade and investment flows. In 2007, China overtook the United States to become the world's second-largest merchandise exporter after the European Union (EU). China's net exports (exports minus imports) contributed to one-third of its GDP growth in 2007. China's exports of goods and services as a share of GDP rose from 9.1% in 1985 to 37.8% in 2008 (see Figure 1 ). The Chinese government estimates that the foreign trade sector employs more than 80 million people, of which 28 million work in foreign-invested enterprises. Foreign direct investment (FDI) flows to China have been a major factor behind its productivity gains and rapid economic growth. FDI flows to China in 2007 totaled $75 billion, making it the largest FDI recipient among developing countries and the third largest overall, after the EU and the United States; FDI flows to China in 2008 were $92 billion. The current global economic slowdown (especially among its major export markets—the United States, the EU, and Japan) is having a significant negative impact on China's export sector and industries that depend on FDI flows. The Chinese economy slowed sharply in 2008 and early 2009. China's fourth-quarter 2008 real GDP growth (year-on-year basis) was 6.8%, and its 1 st quarter 2009 growth (year-on-year basis) was 6.1% (reportedly, the slowest quarterly growth in 10 years). Some analysts contend annual economic growth of less than 8% could lead to social unrest in China, given that an estimated 20 million people seek jobs every year (including migrant workers who move to urban centers and high school and college graduates). According to the International Monetary Fund (IMF), China was the single most important contributor to world economic growth in 2007. Thus, a Chinese economic slowdown (or recovery) could also have significant global implications. The extent of China's exposure to the current global financial crisis, in particular from the fallout of the U.S. sub-prime mortgage problem, is unclear. On the one hand, China places numerous restrictions on capital flows, particularly outflows, in part so that it can maintain its managed float currency policy. These restrictions limit the ability of Chinese citizens and many firms to invest their savings overseas, compelling them to invest those savings domestically, (such as in banks, the stock markets, real estate, and business ventures), although some Chinese attempt to shift funds overseas illegally. Thus, the exposure of Chinese private sector firms and individual Chinese investors to sub-prime U.S. mortgages is likely to be small. Moreover, Chinese government entities, such as the State Administration of Foreign Exchange, the China Investment Corporation (a $200 billion sovereign wealth fund created in 2007), state banks, and state-owned enterprises, may have been more exposed to troubled U.S. mortgage securities. Chinese government entities account for the lion's share of China's (legal) capital outflows, much of which derives from China's large and growing foreign exchange reserves. These reserves rose from $403 billion in 2003 (year end) to $2.1 trillion as of June 2009. In order to earn interest on these holdings, the Chinese government invests in overseas assets. A large portion of China's reserves are believed to be invested in U.S. securities, such as long-term (LT) Treasury debt (used to finance the federal deficit), LT U.S. agency debt (such as Freddie Mac and Fannie Mae mortgage-backed securities), LT U.S. corporate debt, LT U.S. equities, and short-term (ST) debt. The Treasury Department estimates that, as of June 2008, China's holdings of U.S. securities totaled $1,205 billion (up from $922 billion in June 2007), making it the second-largest foreign holder of such securities (after Japan). Of this total, $527 billion were in LT U.S. agency securities, $522 billion were in LT Treasury securities, $100 billion in LT equities, $26 billion in LT corporate securities, and $30 billion in ST debt. If China held troubled sub-prime mortgage backed securities, they would likely be included in the corporate securities category and certain U.S. equities (which include investment company share funds, such as open-end funds, closed-end funds, money market mutual funds, and hedge funds) which may have been invested in real estate. However, these were a relatively small share of China's total U.S. securities holdings. China's holdings of Fannie Mae and Freddie Mac securities (though not their stock) were likely to have been more substantial, but less risky (compared to other mortgage-backed securities), especially after these two institutions were placed in conservatorship by the Federal Government in September 2008 and thus have government backing. The Chinese government generally does not release detailed information on the holdings of its financial entities, although some of its banks have reported on their level of exposure to sub-prime U.S. mortgages. Such entities have generally reported that their exposure to troubled sub-prime U.S. mortgages has been minor relative to their total investments, that they have liquidated such assets and/or have written off losses, and that they (the banks) continue to earn high profit margins. For example, the Bank of China (one of China's largest state-owned commercial banks) reported in March 2008 that its investment in asset-backed securities supported by U.S. sub-prime mortgages totaled $10.6 billion in 2006 (accounting for 3.5% of its investment securities portfolio). In October 2008, it reported that it had reduced holdings of such securities to $3.3 billion (1.4% of its total securities investments) by the end of September 2008, while its holdings of debt securities issued or backed by Freddie Mac and Fannie Mae were at $10 billion. Fitch Ratings service reported that the Bank of China's exposure to U.S. sub-prime-related investments was the largest among Asian financial institutions, and that further losses from these investments were likely, but went on to state that the Bank of China would be able to absorb any related losses "without undue strain." However, China's economy has not been immune to effects of the global financial crisis, given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth. Numerous sectors were hard hit. To illustrate: The real estate market in several Chinese cities experienced a sharp slowdown in construction, falling prices and growing levels of unoccupied buildings. This increased pressure on the banks to lower interest rates further to stabilize the market. The value of China's main stock market index, the Shanghai Stock Exchange Composite Index, lost nearly two-thirds of its value from December 31, 2007, to December 31, 2008. China's trade and FDI plummeted sharply, as indicated in Figure 2 . Exports and imports from January-July 2009 were down 22.0% and 23.6%, respectively on a year-on-year basis; they declined 10 straight months beginning in November 2008. FDI flows to China from January-July 2009 were down 20.4%; they declined for 10 consecutive months beginning in October 2008 (year-on-year basis). The Chinese government in January 2009 estimated that 20 million migrant workers alone had lost their jobs in 2008 because of the global economic slowdown. During the first four months of 2009, industrial output rose by 5.5% year-on-year, well below the 12.9% growth rate in 2008. China has taken a number of steps to respond to the global financial crisis. On September 27, 2008, Chinese Premier Wen Jiabao reportedly stated that "what we can do now is to maintain the steady and fast growth of the national economy, and ensure that no major fluctuations will happen. That will be our greatest contribution to the world economy under the current circumstances." In addition to cutting interest rates and boosting bank lending, China has implemented a number of policies to stimulate and rebalance the economy, increase consumer spending, restructure and subsidize certain industries, and boost incomes for farmers and rural poor. On November 9, 2008, the Chinese government announced it would implement a two-year, 4 trillion yuan ($586 billion) stimulus package (equivalent to 13.3% of China's 2008 GDP), largely dedicated to infrastructure projects. The package would finance public transport infrastructure (including railways, highways, airports, and ports) affordable housing, rural infrastructure (including irrigation, drinking water, electricity, and transport), environmental projects, technological innovation, health and education, and rebuilding areas hit by disasters (such as areas that were hit by the May 12, 2008 earthquake, primarily in Sichuan province). China's stimulus, if fully implemented, would likely constitute one of the largest economic stimulus packages (both in spending levels and as a percent of GDP) that have been announced by the world's major economies to date, although it is unclear to what extent the stimulus package represents new spending versus projects that were already in the works before the economic downturn hit China. Table 1 provides a breakdown of the stimulus program spending priorities. The Chinese stimulus program includes steps the government intends to take to assist 10 pillar industries (i.e., industries deemed by the government to be vital to China's economic growth) to promote their long-term competitiveness. These industries include autos, steel, shipbuilding, textiles, machinery, electronics and information, light industry (such as consumer products), petrochemicals, non-ferrous metals, and logistics. Government support policies for the 10 industries are expected to include tax cuts and incentives (including export tax rebates), industry subsidies and subsidies to consumers to purchase certain products (such as consumer goods and autos), fiscal support, directives to banks to provide financing, direct funds to support technology upgrades and the development of domestic brands, government procurement policies, the extension of export credits, and funding to help firms invest overseas. On April 7, 2009, the Chinese government announced plans to spend $124 billion over the next three years to create a universal health care system. The plan would attempt to extend basic coverage to most of the population by 2011, and would invest in public hospitals and training for village and community doctors. A number of efforts have been made to boost rural incomes and spending levels and to narrow the gap in living standards between rural and urban citizens (as well as between coastal and western regions of the country). For example, since February 2009, an estimated 900 million Chinese rural residents have been eligible to receive a 13% rebate for purchase of home appliances. Public housing projects, education, and infrastructure projects are largely targeted to rural areas. The government has also announced plans to boost agricultural subsidies to farmers. On June 24, 2009, China's State Council launched a new pilot rural pension program that will initially cover 10 percent of China's counties beginning in October 2009 (Currently most rural farmers are not covered by pension system). Chinese officials contend that their economic policy efforts are beginning to produce results. They note a number of positive developments: GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. Several economic forecasting firms have recently predicted a strong Chinese economic recovery. For example, Global Insight in August 2009, predicted China's real GDP would grow 8.0% in 2009 and 10.1% in 2010, while the Economist Intelligence Unit projected real growth at 8.0% for both years. China's Shanghai Stock Exchange Composite Index has risen by 67.3% since the beginning of the year (through August 14, 2009. A number of sectors have enjoyed healthy growth during the first seven months of 2009. Although they have not achieved levels that occurred before the global economic crisis, they could signify that a recovery is taking place. For example, retail sales were up 15% (6.7 percentage points lower than in the previous, urban fixed-asset investment rose 32.9% (0.7% percentage points lower), and industrial output rose by 7.5% (8.6 percentage points lower). Real estate prices in major cities have also begun to rise over the past few months. Although there are many indicators of a Chinese economic recovery (with the exception of trade and FDI flows), there are numerous concerns over long-term growth prospects. Many analysts note that much of the recent economic growth that has occurred has resulted from large-scale bank lending and infrastructure spending projects, rather than consumer spending. In addition, many analysts have raised concerns that the large level of borrowing by local governments and state-owned enterprises could lead to a sharp rise in non-performing loans on the balance sheets of China's major banks, and could cause local governments to be become heavily indebted. Many analysts are also concerned that the stimulus policies that China has implemented to date could slow efforts to further reform the economy, especially in regards to state-owned enterprises and the banking system. Some have charged that China has rolled backed some it its economic reforms by boosting industrial subsidies and increasing trade and investment barriers, in order to assist firms deemed by the government to be vital to future development. China has also imposed "buy China" regulations to prevent participation by foreign firms and ensure that stimulus money benefit only Chinese firms. Many economists contend that China's long-term economic growth prospects will likely depend on the ability of the government to rebalance the economy by promoting greater domestic consumption and to deepen market-oriented economic reforms. Thus, China's current economic recovery could be short-lived. Analysts debate what role China might play in responding to the global financial crisis, given its huge foreign exchange reserves (at over $2 trillion) but its relative reluctance to become a major player in global economic affairs and its tendency to be cautious with its reserves. Some have speculated that China may, in order to help stabilize its most important trading partner (the United States), boost purchases of U.S. securities (especially Treasury securities) in order to help fund the hundreds of billions of dollars that are expected to be spent by the U.S. government to purchase troubled assets and stimulate the economy. Additionally, China might try to shore up the U.S. economy by buying U.S. stocks (or might do so to take advantage of relatively low prices). During her visit to China on February 21, 2009, Secretary of State Hillary Rodham Clinton stated that she appreciated "greatly the Chinese government's continuing confidence in the United States Treasuries," and she urged the government to continue to buy U.S. debt. Some contend that taking an active role to help the United States (and other troubled economies) would boost China's image as a positive contributor to world economic stability, similar to what occurred during the 1997-1998 Asian financial crisis when it offered financial aid to Thailand and pledged not to devalue its currency. On the other hand, there are a number of reasons why China might be reluctant to significantly increase its investments of U.S. assets. One concern could be whether increased Chinese investments in the U.S. economy would produce long-term economic benefits for China. Some Chinese investments in U.S. financial companies have fared poorly, and Chinese officials could be reluctant to put additional money into investments that were deemed to be too risky. Secondly, a sharp economic downturn of the Chinese economy would likely increase pressure to invest money at home, rather than overseas. Many analysts (including some in China) have questioned the wisdom of China's policy of investing a large volume of foreign exchange reserves in U.S. government securities (which offer a relatively low rate of return) when China has such huge development needs at home. China's holdings of U.S. securities at the end of 2008 are estimated to have been roughly equivalent to over $1,000 per person in China, a significant figure for a country with a per capita GDP of about $3,190 (2008). On March 13, 2009, Wen Jiabao at a news conference stated that he was "a little bit worried" about the safety of Chinese assets in the United States On March 24, 2009, the governor of the People's Bank of China, Zhou Xiaochuan, published a paper calling for the replacing the U.S. dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. Many analysts (including some in China) have questioned the wisdom of China's policy of investing a large level of foreign exchange reserves in U.S. government securities, which offer a relatively low rate of return when China has such huge development needs at home. While additional large-scale Chinese purchases of U.S. securities might provide short-term benefits to the U.S. economy and may be welcomed by some policymakers, they could also raise a number of issues and concerns. Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities as leverage against U.S. policies it opposes. For example, various Chinese government officials reportedly suggested on a number of occasions in the past that China could dump (or threaten to dump) a large share of its holdings in order to counter U.S. pressure (such as threats of trade sanctions) on various trade issues (such as China's currency policy). In exchange for new purchases of U.S. debt, China would likely want U.S. policymakers to lower expectations that China will move more rapidly to reform its financial sector and/or allow its currency to appreciate more substantially against the dollar. Some analysts have suggested that China could choose to utilize its reserves to buy stakes in various distressed U.S. industries. However, this could also raise concerns in the United States that China was being allowed to buy equity or ownership in U.S. firms at rock bottom prices, that technology and intellectual property from acquired firms could be transferred to Chinese business entities (boosting their competitiveness vis-a-vis U.S. firms), and that becoming a large stakeholder in major U.S. companies could give the Chinese government increased political influence in the United States. U.S. policymakers in the past have sometimes opposed attempts by Chinese firms to acquire shares or ownership of U.S. firms. While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and President Hu met and pledged "to work together to resolutely support global trade and investment flows, "resist protectionism," and to resume high-level cooperation on long-term economic issues under the Strategic and Economic Dialogue (S&ED). The first round of the S&ED was held in Washington, D.C. on July 27-28, 2009. The two sides agreed to continue cooperation on a number of economic fronts, including promoting balanced economic growth and financial reforms. It is unclear to what extent the global financial crisis will affect U.S.-Chinese economic ties. Prior to the crisis, U.S. officials urged China to adopt economic reforms, especially in terms of the financial system, in ways that would emulate the U.S. economic model. Once the economic crisis hit, China was quick to blame U.S. economic policies for the crisis, and thus, U.S. influence with China on economic issues may have waned somewhat. China's increased use of subsides, "buy China" procurement regulations, and trade and investment barriers could increase pressure in the United States to utilize U.S. trade laws against unfair trade practices and/or to provide temporary relief to U.S. firms and workers injured by import surges from China. Chinese officials have countered with their own complaints over rising U.S. "protectionism." Although China has attempted to diversify its large foreign exchange holdings and to make its currency more convertible in international exchange markets (such as through currency swap arrangements with various countries), it is unlikely ( at least in the near term) to make major changes to its heavy reliance on the dollar as its main source of foreign exchange reserves (and investments in dollar-denominated assets), nor is China in a position to make its currency fully convertible in international exchange rate markets (due to the relative weakness of its banking system). However, Chinese officials are deeply concerned over the security of their dollar holdings if the dollar undergoes a sharp depreciation against major currencies in the future (possibly arising from rising U.S. public debt). Such concerns may also spur the Chinese government to take more steps to promote domestic consumption, and lessen dependence on trade and FDI flows, as a source of economic growth.

Over the past several years, China has enjoyed one of the world's fastest-growing economies and has been a major contributor to world economic growth. However, the current global financial crisis has significantly slowed China's economy; real gross domestic product (GDP) fell from 13.0% in 2007 to 8.0% in 2008. Several Chinese industries, particularly the export sector, have been hit hard by crisis, and millions of workers have reportedly been laid off. This situation is of great concern to the Chinese government, which views rapid economic growth as critical to maintaining social stability. China is a major economic power and holds huge amounts of foreign exchange reserves, and thus its policies could have a major impact on the global economy. The Chinese government has stated that it plans to rebalance the economy by lessening its dependence on exports for economic growth while boosting domestic demand. In November 2008, the Chinese government announced a $586 billion spending package to help stimulate the domestic economy, largely geared towards new infrastructure projects. In addition, the government ordered banks to sharply expand loans to local governments and businesses to expand investment. The government has also offered a number of programs to stimulate domestic consumption of consumer products (such as cars and appliances), especially in the rural areas. As a result, China's economy has shown some improvement. For example, its GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. However, from January to July 2009, China's trade was down 23% over the same period in 2008, while foreign direct investment fell 18%. Some analysts have criticized various aspects of China's economic stimulus policies. Some contend that China, in an effort to assist firms impacted by the global economic slowdown, has imposed numerous new trade-distorting policies, such as extensive industrial subsidies and trade and investment restrictions on foreign firms. In addition, many analysts warn that the easy lending policies of Chinese state-owned banks may later lead to a sharp increase in the level of non-performing loans by these banks if loans go to investments that fail to produce long-term returns. China's efforts to stabilize its economy are of major concern to U.S. policy makers. If successful, such policies could boost Chinese demand for U.S. products. In addition, China is a major purchaser of U.S. Treasury securities, which help fund the Federal Government's borrowing needs, and thus its decision whether or not to continue to purchase U.S. debt could impact the U.S. economy. U.S. policy makers also want to ensure that, despite the sharp downturn in the Chinese economy from the effects of current global economic downturn, China will continue to reform its economy and liberalizes its trade regime and refrain from imposing policies that restrict or distort trade.

govreport

A variety of interrelated statutes and agency regulations govern leasing and permitting foroil and gas development on federal lands. The national mining and minerals policy fosters andencourages the following activities: private enterprise in ... the development of economicallysound and stable domestic mining, minerals, metal and mineral reclamation industries [and] theorderly and economic development of domestic mineral resources, reserves, and reclamation ofmetals and minerals to help assure satisfaction of industrial, security and environmental needs. (1) The Bureau of Land Management (BLM) -- part of the U.S. Department of the Interior -- managesmost federal mineral development and is largely responsible for implementing this policy. (2) BLM also manages a largeamount of federal lands. Federal land in the National Forest System (NFS) is under the jurisdictionof the Forest Service, which is part of the U.S. Department of Agriculture. The Forest Service playsa role in authorizing mineral development on NFS lands. This report addresses the leasing and permitting of onshore, federal public domain lands. "Public domain lands" encompass lands obtained "by treaty, conquest, cession by States, and[certain] purchase[s]." (3) The historical distinction between public domain lands and other federal lands is reflected in thedifferent statutes that apply to the different types of lands. This report first analyzes the legal framework for oil and gas leasing and permitting onfederal public domain lands managed by BLM and the Forest Service. Second, this report assesseshow the recently enacted Energy Policy of 2005 affects these laws. Finally, this report analyzesselected judicial and administrative decisions regarding what steps federal environmental lawsrequire agencies to take before issuing coalbed methane leases. Coalbed methane is a type of naturalgas that is trapped in coal seams by water pressure; it is leased separately from the coal. At the dawn of the twentieth century, private entities could explore, develop, and purchasefederal public domain lands containing oil with relative ease. The federal government permittedmineral exploration of such lands without any charge. Oil could be developed as a placermineral. (4) Full ownershipof oil lands "could be obtained for a nominal amount." (5) However, Congress's enactment of the Mineral Lands Leasing Actof 1920 (MLLA) ended the private acquisition of title to federal oil lands by authorizing theSecretary of the Interior (Secretary) to issue permits for exploration and to lease lands containing oiland gas and other defense-related minerals. (6) The first section of this report details the legal framework for suchoil and gas leasing. "Public domain lands" encompass lands obtained "by treaty, conquest, cession by States, and[certain] purchase[s]." (7) The historical distinction between public domain lands and other federal lands is reflected in thedifferent statutes that apply to the various types of lands. The scope of this report does not encompass "acquired lands," which are lands "granted or sold to the United States by a State orcitizen." (8) The MLLA authorizes the Secretary to lease oil and gas deposits and onshore public domainlands containing oil and gas deposits, with the federal government retaining title to the lands. (9) This leasing authority appliesto National Forest System (NFS) lands that are reserved from the public domain, and to mostreserved subsurface mineral estates. (10) However, it excludes numerous categories of lands such asnational parks and monuments, as well as lands in incorporated cities, towns, and villages. (11) Areas within the NationalWilderness Preservation System cannot be leased, but valid rights existing as of 1984 arepreserved. (12) In sum,all public lands subject to the Secretary's authority under MLLA "which are known or believed tocontain oil or gas deposits may be leased by the Secretary." (13) However, the Secretary of the Interior cannot issue any lease for National Forest Systemlands reserved from the public domain if the Secretary of Agriculture objects. (14) In addition, the U.S. ForestService has issued separate regulations governing certain aspects of leasing and permitting for oiland gas development on lands within its jurisdiction. The Secretary is also authorized to withdraw public lands managed by BLM so that some orall potential land uses are proscribed on those lands. (15) A withdrawal involves "withholding an area of Federal landfrom settlement, sale, location, or entry, under some or all of the general land laws, for the purposeof limiting activities under those laws in order to maintain other public values in the area or reservingthe area for a particular public purpose or program." (16) However, limitations on the Secretary's withdrawal authorityexist. (17) For example,Congress can make withdrawals, and the Secretary may not modify or revoke a congressionalwithdrawal. (18) U.S. Department of the Interior The BLM manages approximately 262 million acres of public lands under the Federal LandPolicy and Management Act of 1976 (FLPMA). (19) The Secretary of the Interior must develop and revise "land useplans" for the public lands -- officially known as Resource Management Plans (RMPs) -- thatconsider the present and potential future uses for public lands managed by BLM. (20) These RMPs serve as theinitial determinant of which lands may be subject to leasing. All activities performed on these landsmust be consistent with the RMPs. (21) Thus, an RMP must allow oil and gas development in an areain order for it to take place there. (22) The Secretary generally must apply "multiple use" and "sustained yield" principles whendeveloping RMPs. (23) "Multiple use" principles involve judiciously managing lands in a manner that takes into account theenvironmental, historical, and natural resource values of the lands and prevents their permanentimpairment. (24) "Sustained yield" means maintaining "high-level annual or regular periodic output of the variousrenewable resources of the public lands." (25) In addition, the Secretary is required to provide opportunitiesfor the public and various levels of government to participate in the development of RMPs. (26) This can includeprocedures such as holding public hearings, when appropriate. (27) Regulations require thepreparation of an Environmental Impact Statement (EIS) or an Environmental Assessment (EA)when producing an RMP. (28) The Secretary's mandate to formulate and revise RMPs extends to all BLM-managed publiclands, no matter how they had been classified before the enactment of FLPMA in 1976. (29) The land use provisionsalso apply to lands that had previously been withdrawn. (30) In addition, FLPMA requires that public lands within BLM'sjurisdiction be inventoried and identified on a continuing basis. (31) U.S. Forest Service The Forest Service also manages its lands under multiple use and sustained yieldpolicies. (32) It developsland management plans for NFS lands by considering the desired conditions, objectives, suitabilityof areas for various uses, and other criteria. (33) As with the Department of the Interior's planning process, thelaws governing Forest Service land management and implementation require public notification andopportunities for public participation. (34) When analyzing Forest Service lands for potential leasing, theForest Service classifies lands into three categories: (1) lands that will be "[o]pen to development subject to the terms andconditions of the standard oil and gas lease form" (2) lands that will be "[o]pen to development but subject to constraints that willrequire the use of lease stipulations" (3) lands that will be "[c]losed to leasing, distinguishing between those areasthat are being closed through exercise of management direction, and those closed by law, regulation,etc." (35) The Forest Service must also comply with the National Environmental Policy Act of 1969(NEPA) when analyzing NFS lands for potential leasing. (36) Once the Forest Service has completed its analysis of which NFSlands will be available for leasing, it notifies BLM of its decisions. (37) Forest Serviceauthorization for BLM to lease specific lands may follow. (38) The MLLA authorizes both competitive and noncompetitive leasing procedures. Usuallylands go through the competitive leasing process first. When BLM posts a list of lands available forcompetitive leasing, private entities may respond by submitting nominations for parcels to beauctioned. (39) No unitbeing auctioned can exceed 2,560 acres, except in Alaska, where the maximum unit acreage is 5,760acres. (40) In addition,each unit must be "as nearly compact as possible." (41) The Secretary must provide forty-five days notice before offering public lands for leasing,including a thirty-day period for receiving public comments after notice is published in the FederalRegister. (42) Competitive bidding must be held on a quarterly basis in each state where public lands are availablefor leasing. (43) TheSecretary may also authorize additional opportunities for bidding if he considers them to benecessary. (44) Once the public notice requirements have been satisfied, the public lands are offered forcompetitive leasing through an oral auction. (45) A national minimum acceptable bid of $2 per acre applies to theauction. (46) Any bidsfor less than the national minimum bid must be rejected. (47) A competitive bid constitutes a legally binding commitment andcannot be withdrawn. (48) The MLLA requires the Secretary to accept the highest bid from a responsible qualified bidderwhose bid meets or exceeds the national minimum acceptable bid. (49) The winning bidder at a competitive auction must submit the following payments on the dayof sale, unless otherwise specified: (1) the minimum bonus bid of $2 per acre; (2) the first year'srental payment; and (3) a $75 per parcel administrative fee. (50) Then, the balance of thebonus bid, if applicable, is due within ten working days. (51) The lease is issued within sixty days of payment of the remainderof the bonus bid. (52) Thelease is also conditioned upon a royalty payment of at least 12.5% in amount or value of theproduction that is removed or sold from the lease, (53) unless the Secretary suspends, waives, or reduces theroyalty. (54) If no bids are received at a competitive bidding auction -- or if all bids submitted are for lessthan the national minimum acceptable bid -- the land will be offered for noncompetitive leasingwithin thirty days. (55) This noncompetitive leasing remains available for two years after the competitive biddingauction. (56) The first qualified person who applies for a noncompetitive lease and pays the $75application fee is entitled to receive the lease without having to competitively bid. (57) All noncompetitive offersreceived during the first business day after the last day of the competitive auction are considered tohave been submitted simultaneously; in such cases, a lottery determines the lease winner. (58) Unlike competitive bids,noncompetitive offers may be withdrawn by the offeror within sixty days of filing the offer if nolease has yet been signed on the government's behalf. (59) As with competitive leases, a noncompetitive lease isconditioned upon payment of a 12.5% royalty in amount or value of the oil or gas removed or soldfrom the lease. (60) Additionally, there are minimum and maximum acreage limitations for noncompetitive leases. (61) If these criteria are met,BLM will issue the lease within sixty days of the Secretary identifying a qualified applicant. (62) If no application for a noncompetitive lease is submitted during the two years that the landis available for noncompetitive leasing, the process for leasing the land will again be a competitiveoral auction. (63) NEPA applies to the competitive and noncompetitive leasing processes, possibly requiringpreparation of a supplemental EIS (SEIS) or a new EA or EIS, unless reliance on old documents issufficient or the agency issues a FONSI. (64) General Statutory Restrictions In addition to the processes affecting where leasing can take place (discussed above), generalrestrictions on leasing address who can lease and how much land they can lease. First, public landscontaining oil and gas deposits may only be leased to U.S. citizens, associations of U.S. citizens,corporations organized under U.S. laws or the laws of any State, and municipalities. (65) In addition, citizens of acountry that denies similar privileges to U.S. citizens and corporations may not control any interestin federal leases. (66) Second, no entity is permitted to own or control oil or gas leases (including options for such leases)under MLLA in excess of 246,080 acres in any one State other than Alaska. (67) Other aggregate acreagelimitations include limitations pertaining to options (68) and to combined direct and associational/corporate stockholderinterests. (69) Payment Terms: Royalties and Rentals Leases are conditioned upon payment to the Government of a royalty of at least 12.5% inamount or value of oil or gas production that is removed or sold from the leased land. (70) Leases subject to rates ineffect after December 22, 1987 must generally pay a 12.5% royalty, but this percentage can increaseif a lease is cancelled because of late payments and then reinstated. (71) The Secretary also has thepower to reduce the royalty on a noncompetitive lease if he deems it equitable to do so or ifcircumstances could "cause undue hardship or premature termination of production" absent such areduction. (72) For oiland gas leases, the royalty must be paid in value unless the Department of the Interior specifies thata royalty payment-in-kind is required. (73) Once the royalty has been paid, the Secretary is required to sellany royalty oil or gas "except whenever in his judgment it is desirable to retain the same for the useof the United States." (74) In addition to royalties, leases are conditioned upon payment of annual rentals. (75) Generally, the rental ratefor the first five years of a lease is $1.50 per acre per year, with the rate increasing to $2 per acre foreach additional year of the lease. (76) However, there is some variation in rental amounts for certainspecific categories of lands. (77) For leases issued after December 22, 1987, a minimum royaltyin lieu of the rental is due once oil or gas has been discovered on the leased land. (78) The amount of thisminimum royalty is equal to the annual rental that would otherwise have been due. (79) Perhaps most important,rental payments are not due on acreage for which royalties or minimum royalties are being paid,"except on nonproducing leases when compensatory royalty has been assessed in which case annualrental as established in the lease shall be due in addition to compensatory royalty." (80) The Secretary is authorized to waive, suspend, or reduce rentals and royalties under certainconditions. (81) Moneyreceived from royalties and rentals is initially paid into the U.S. Treasury. (82) Fifty percent of the fundsthen go to the State where the land or mineral deposit is located. (83) Forty percent of the fundsare allocated into the Reclamation Fund under the Reclamation Act of 1902 for projects that providewater to arid Western states. (84) Because Alaska is not served by the Reclamation Fund, 90percent of the funds collected from federal leases in Alaska are allocated to the State of Alaska. (85) Length of Leases, Extensions, and Cancellations The primary term for competitive and noncompetitive leases is ten years. (86) Leases can be extendedbecause of, inter alia , drilling operations or oil or gas production. The existence of an approvedcooperative plan can also affect extensions. First, a lease will be extended for two years because of drilling if three criteria aresatisfied: (87) (1) actual drilling operations began before the end of the primary leaseterm; (2) actual drilling operations are being "diligently prosecuted" (88) at the end of the primarylease term; and (3) rental was timely paid. Second, a lease that meets these criteria will be extended "so long as oil or gas is being produced in paying quantities." (89) A lease that has been extended because of production does notterminate simply because production stops, as long as the lessee starts reworking or drillingoperations within sixty days after production ceases and conducts them with reasonable diligenceduring the non-productive period. (90) Furthermore, if a lease initially extended because of drillingbegins yielding oil or gas in paying quantities during the two-year drilling extension, the lease canbe extended again. (91) Finally, lessees may collectively adopt and operate under a cooperative or unit plan for aparticular area if the Secretary considers such a plan to be in the public interest. (92) All leases subject to sucha plan will be extended if any of the leases covered by the plan qualify for a drilling or productionextension. (93) Any MLLA lease can be cancelled or forfeited if the lessee fails to comply with MLLAprovisions, the lease's provisions, or regulations promulgated pursuant to MLLA. (94) In some situations theSecretary has the authority to cancel the lease, but some circumstances require a judicial proceedingto cancel the lease. (95) In addition, MLLA provides for automatic termination "upon failure of a lessee to pay rental on orbefore the anniversary date of the lease, for any lease on which there is no well capable of producingoil or gas in paying quantities." (96) However, the Secretary may reinstate automatically terminatedleases in some cases. (97) Operators (98) must submit an Application for a Permit to Drill (APD) for each oil or gas well. (99) Without an approvedAPD, operators cannot begin drilling operations or cause surface disturbances that are preliminaryto drilling. (100) Infact, the APD process must begin at least thirty days prior to the commencement of operations. (101) A complete APD must include the following: (102) a drilling plan; a surface use plan of operations, including drillpad locations and plans forreclaiming the surface; evidence of bond coverage; Form 3160-3; and any other information that may be required. Once BLM receives an APD, it must post information for public inspection for at least thirtydays before it may act on the APD. (103) Another pre-approval requirement is that BLM must preparean environmental record of review or an environmental assessment. (104) Based on thesedocuments, BLM decides whether an EIS is required. (105) Additionally, an adequate bond or other financial arrangementis required before the operator begins any surface-disturbing activities. (106) Within five working days of the end of the public notice period, BLM must choose one offour options: (107) (1) approve the application as submitted; (2) approve the application with modifications and/orconditions; (3) disapprove the application; or (4) delay final action. BLM must approve a surface use plan of operations addressing proposed surface-disturbingactivities before a permit to drill on lands BLM manages may be granted. (108) BLM and the ForestService have proposed joint regulations regarding surface use plans of operations. (109) An approved surface use plan of operations addressing proposed surface-disturbing activitiesis also required before a permit to drill on NFS lands may be granted and before anysurface-disturbing operations may begin. (110) The operator must submit its proposed surface use plan ofoperations to BLM as part of its APD. (111) When the proposal pertains to NFS lands, BLM forwards theproposed surface use plan of operations to the Forest Service. (112) The level of detail required in a proposed plan varies depending upon the "type, size, andintensity of the proposed operations and the sensitivity of the surface resources that will be affectedby the proposed operations." (113) When evaluating a proposed surface use plan of operations,the Forest Service must ensure that the proposal is consistent with the "approved forest land andresource management plan" for that area of land. (114) During the evaluation process, the Forest Service must alsocomply with NEPA, as well as appropriate Forest Service regulations and policies. (115) In addition, the ForestService can require that the operator increase the amount of its bond if it "determines [that] thefinancial instrument held by [BLM] is not adequate to ensure complete and timely reclamation andrestoration" of the NFS lands. (116) Ultimately, the Forest Service must decide among four options: (117) (1) approve the plan (2) approve the plan "subject to specified conditions" (3) disapprove the plan (4) delay the plan because additional time is needed to reach adecision Once it has made its decision regarding the proposed surface use plan of operations, theForest Service forwards the decision to BLM. (118) In August 2005, the Congress passed and the President signed the Energy Policy Act of 2005(2005 EPACT). (119) This comprehensive law touches upon many aspects of U.S. energy regulation, and among itsprovisions were several changes to the law governing federal oil and gas leases on public domainlands. This section of the report highlights selected provisions from the 2005 EPACT relating tothese topics. It also addresses selected provisions that were included in either the House or Senatebill, but were not included in the final legislation. The topics addressed by this section can beclassified into four categories: (1) streamlining and expediting oil and gas development processes;(2) a NEPA-related provision; (3) the Arctic National Wildlife Refuge; and (4) miscellaneousprovisions. The 2005 EPACT requires the Secretary of the Interior and the Secretary of Agriculture toenter into a memorandum of understanding regarding issues such as the establishment of proceduresto "ensure timely processing" of oil and gas lease applications, surface use plans of operation, andAPDs. (120) Thismemorandum must also ensure that lease stipulations are consistently applied and are "only asrestrictive as necessary to protect the resource for which the stipulations are applied." (121) The Secretary of the Interior -- in consultation with the Secretary of Agriculture when NFSlands are involved -- must also conduct an internal review of Federal onshore oil and gas leasing andpermitting practices and subsequently submit a report to Congress detailing steps to improve theprocess. (122) TheSecretary of the Interior is also required to establish a Federal Permit Streamlining Pilot Project. (123) Under the 2005 EPACT, the Secretary of the Interior is required to ensure expeditiouscompliance with 42 U.S.C. § 4332(2)(C), which is the NEPA provision that requires the preparationof an EIS for major Federal actions that significantly affect the quality of the humanenvironment. (124) More specifically, the Secretary of the Interior must propose regulations containing deadlines formaking decisions on RMPs, lease applications, surface use plans of operations, and APDs. (125) The 2005 EPACT alsorequires the Secretary of Agriculture to "ensure expeditious compliance with all applicableenvironmental and cultural resources laws." (126) The 2005 EPACT establishes that certain actions taken by either the Secretary of the Interioror by the Secretary of Agriculture (when NFS lands are involved) "shall be subject to a rebuttablepresumption that the use of a categorical exclusion under [NEPA] would apply if the activity isconducted pursuant to [MLLA] for the purpose of exploration or development of oil or gas." (127) The House bill had included a provision that differed from the NEPA provision adopted bythe Conference Committee. The House bill had declared that certain actions that the Secretary ofthe Interior takes "for the purpose of exploration or development of a domestic Federal energysource" are not subject to the NEPA provision requiring the preparation of an EIS. (128) Exempted actionswould have included drilling an oil or gas well where drilling had previously occurred and drillingan oil or gas well "within a developed field for which an approved land use plan or anyenvironmental document prepared pursuant to [NEPA] analyzed such drilling as a reasonablyforseeable activity." (129) One much-debated difference between the House and Senate energy bills had been the Housebill's provisions requiring the Secretary of the Interior to establish a competitive oil and gas leasingprogram in the Arctic National Wildlife Refuge (ANWR). (130) The 2005 EPACT does not include these provisions. However, several of the key ANWR provisions under the House billare detailed in the following paragraph, and may be relevant to future legislative proposals. Under the House bill, ANWR lands would have been available for leasing to any personqualified to obtain a lease under MLLA. (131) Bids would have been submitted as sealed competitivebids. (132) Two uniqueANWR provisions in the House bill included (1) a provision requiring the first lease sale to be forat least 200,000 acres, with additional sales to be conducted as long as there is sufficient interest indevelopment (133) and(2) a provision directing that the State of Alaska would receive 50 percent of ANWR leasingrevenues, with the remainder being divided between a Coastal Plain Local Government Impact AidAssistance Fund and miscellaneous receipts within the U.S. Treasury. (134) Miscellaneous relevant provisions contained in the 2005 EPACT include the following: The Secretary of the Interior must reduce the royalty rate for oil and gasproduction on "marginal properties" (i.e., leases or units producing less than a specified amount),under certain conditions. (135) The Secretary of the Interior may reinstate leases that were terminated becauseof the lessee's failure to timely pay the rental amount due, under certain modified conditions. (136) The Secretary of the Interior must determine that receiving royalties in-kindwould provide greater or equal benefits than receiving royalties in-value before accepting anyroyalties in-kind. (137) The Secretary of the Interior must conduct a study regarding split estates. (138) The Secretary of Energy must conduct a study of petroleum and natural gasstorage capacity and operational inventory levels. (139) Coalbed methane (CBM) is a natural gas that is trapped in coal seams by water pressure. Developers extract CBM by pumping water into coal seams to decrease the water pressure, therebyreleasing the CBM. (140) In the second half of the 1990s, CBM production "increaseddramatically to represent a significant new source of natural gas for many Western states." (141) In 1999, the SupremeCourt held that CBM could be leased separately from coal. (142) Recently,environmental groups, developers, and BLM have litigated issues surrounding what actionsconstitute compliance with FLPMA and NEPA in the context of CBM development. These issueshave developed through several cases adjudicated by federal courts and the Interior Board of LandAppeals (IBLA), which is part of the U.S. Department of the Interior. In one prominent case, environmental groups challenged a BLM decision to issue CBMleases to Pennaco, an energy developer. (143) When it auctioned the leases, BLM relied on two documentsto purportedly satisfy NEPA requirements: (144) (1) an RMP and EIS that were prepared before theleases were issued, but did not specifically address CBM extraction ("the BuffaloRMP/EIS") (2) a draft EIS (DEIS) that was prepared after the leaseswere issued, but did address the potential environmental impacts of CBM development ("theWyodak DEIS") The BLM also determined that the Pennaco leases conformed with the Buffalo RMP, thus satisfyingFLPMA. (145) However, environmental groups alleged that the environmental impacts from CBM developmentwere different than the impacts from conventional oil and gas development. (146) Thus, they argued thatBLM did not take the requisite "hard look" at the potential environmental impacts of issuing thePennaco leases. (147) The Interior Board of Land Appeals sided with the environmental groups by finding thatNEPA had not been satisfied and remanding to BLM for "additional appropriate action." (148) The IBLA found theBuffalo RMP/EIS to be inadequate because it did not specifically address CBM development, whichthe IBLA considered to be significantly different than the conventional development analyzed by theBuffalo RMP/EIS. (149) For example, the IBLA concluded that water production resulting from CBM extraction issignificantly greater than water production from conventional oil and gas development and that CBMdevelopment posed unique air quality concerns. (150) Further, the IBLA explained that the Wyodak DEIS did notsatisfy NEPA because it was a post-leasing analysis. (151) In particular, because it was a post-leasing analysis, theWyodak DEIS "did not consider reasonable alternatives available in a leasing decision, includingwhether specific parcels should be leased [and] appropriate lease stipulations." (152) Although the IBLA'sdecision was reversed by a federal district court, (153) the Tenth Circuit Court of Appeals agreed with the IBLA. (154) In Pennaco Energy,Inc. v. United States Department of the Interior , the Tenth Circuit held that "the IBLA gave dueconsideration to the relevant factors and that the IBLA's conclusion was supported by substantialevidence in the administrative record." (155) Pennaco appears to be the key Circuit Court decision on the merits of a case applyingFLPMA and NEPA to CBM development in this context. However, a variety of other judicial andadministrative decisions have addressed similar issues. These cases often turn on fact-intensive,case-by-case determinations. Several such decisions are briefly summarized below. In Northern Plains Resource Council, Inc. v. United States Bureau of Land Management ,BLM had amended an RMP and prepared an EIS to address the impacts of oil and gas leasing inseveral areas. (156) These documents analyzed and allowed small-scale exploratory CBM drilling. (157) However, they statedthat "further environmental studies would have to be completed before commercial production wouldbe allowed." (158) Years later, after receiving APDs for the covered land, BLM completed EAs and made FONSIs fornumerous CBM wells. (159) Based on the FONSIs, BLM approved the APDs withoutpreparing an EIS. (160) BLM later recognized the energy industry's intention to engage in full-field CBM development onsome land, prompting it to prepare a new statewide EIS and proposed RMP amendments addressingthe environmental impacts of large-scale CBM development. (161) The United StatesDistrict Court for the District of Montana rejected the plaintiff's argument that the original RMP andEIS were inadequate, thus violating FLPMA and NEPA. (162) It held that the disputed APDs were all for test wells and thusfell within the scope of the exploratory drilling contemplated by the original documents. (163) Further, the courtexplained that once BLM had begun preparing a new EIS to address full-field development, "it wasnot required to halt lease sales, as long as [the leases] were in conformance with the existingplan." (164) The NinthCircuit Court of Appeals affirmed this decision on procedural grounds because the plaintiff'schallenge was barred by the statute of limitations. (165) In subsequent litigation, the same plaintiff challenged the new statewide EIS and proposedRMP amendments, which authorized full-field CBM development in some areas. (166) The United StatesDistrict Court for the District of Montana agreed with one of the plaintiff's two primaryarguments. (167) Itheld that BLM should have considered a "phased development alternative" as an alternative tofull-field CBM development. (168) However, it also held that BLM was justified in conductingtwo separate studies of the area, rather than conducting one larger study. (169) In San Juan Citizens ' Alliance v. Babbitt , plaintiffs argued that BLM had acted arbitrarily andcapriciously -- thus violating NEPA -- by approving CBM wells at twice the density that wascontemplated by existing environmental documents. (170) Prior to approving the challenged CBM wells, BLM hadissued a statewide EIS as well as preparing an EA and making a FONSI for a smaller area within thestate. (171) However,the plaintiffs claimed that BLM should have either created a new EIS or a supplemental EIS (SEIS)to sufficiently address the cumulative environmental impacts of the existing wells combined withthe impacts of the newly approved wells. (172) Plaintiffs asserted that new information shedding light on theenvironmental impacts of CBM development had become available since the issuance of the originaldocuments. (173) Plaintiffs also argued that BLM had violated FLPMA by approving CBM development that allegedlydid not conform to the RMP. (174) The defendants moved to dismiss, and the United StatesDistrict Court for the District of Colorado denied the motion. (175) Several IBLA decisions also address similar issues. In the 2003 matter of Wyoming OutdoorCouncil , the IBLA ruled that BLM had not taken the NEPA-mandated "hard look" at water qualityissues associated with CBM development in one area. (176) The IBLA found the BLM's water quality analysis to beinadequate because it was based on only one CBM well sample and neither of BLM's EAs addressed"any deleterious impact of CBM discharge water due to its chemical composition." (177) The IBLA also foundthat BLM should have considered the cumulative environmental impacts of the new wells combinedwith some nearby wells that met "the geographical proximity test for inclusion in a cumulativeimpacts analysis." (178) In the 2004 matter of Western Slope Environmental Resource Council , the IBLA stated: [T]he appropriate time for considering the potentialimpacts of oil and gas exploration and development is when BLM proposes to lease public lands foroil and gas purposes because leasing, at least without [no surface occupancy stipulations], constitutesan irreversible and irretrievable commitment to permit surface-disturbing activity. (179) The IBLA went on to hold that the appellants had not proven that the environmental impacts of CBMdevelopment in the disputed area would be different from the impacts of conventional oil and gasdevelopment. (180) Even though the unique environmental impacts of CBM had been recognized in some cases, theIBLA emphasized that the appellants had not met their burden of proof in this particular case. (181) Evidence indicatedthat the disputed coalbeds were located far beneath the surface and that there was a "lack oftransmissivity of the coal." (182) According to the IBLA, this evidence suggested that CBMextraction in this area would not produce a large amount of water, thus limiting the environmentalimpacts that would occur. (183)

A variety of statutes and agency regulations govern leasing and permitting for oil and gasdevelopment on federal lands. This report first explains the legal framework for oil and gas leasingand development on federal "public domain" lands, which involves an overview of the following: laws and regulations affecting which public domain lands are potentiallysubject to oil and gas leasing; development of Resource Management Plans; competitive and noncompetitive oil and gas leasingprocesses; terms and conditions of oil and gas leases; and the process surrounding applications for permits to drill. Second, this report assesses how the recently enacted Energy Policy Act of 2005 ( P.L.109-58 ) will affect preexisting oil and gas development laws. The third section of the reportanalyzes selected judicial and administrative decisions regarding what steps federal environmentallaws require agencies to take before issuing leases for coalbed methane leases. Coalbed methane isa type of natural gas that is trapped in coal seams by water pressure. This report will be updated as developments warrant.

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Reforming or limiting itemized tax deductions for individuals has gained the interest of policymakers as one way to increase federal tax revenue, increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions, in the views of some, would have adverse economic effects or changes in the distributional burden of the federal income tax code. Discussions about itemized tax deduction reform are informed by analysis of tax filer data. This report analyzes the most recently available public data from the Internal Revenue Service's (IRS's) Statistics of Income (SOI) to provide an overview of who claims itemized deductions, what they claim them for, and the amount in deductions claimed. In addition, the revenue loss associated with several of the larger deductions is presented using data from the Joint Committee on Taxation's (JCT's) tax expenditure estimates. This report concludes with a brief discussion of the implications of various policy options to reform or limit itemized deductions. More in-depth discussion on options for reforming itemized tax deductions, as a whole or individually, can be found in other CRS reports. Individual income tax filers have the option to claim either a standard deduction or the sum of their itemized deductions on the federal income tax. The standard deduction is a fixed amount, based on filing status, available to all taxpayers. Alternatively, tax filers may claim itemized deductions . Tax filers who itemize must report each item separately on their tax returns and be able to provide documentation in the event of an IRS audit. Whichever deduction a tax filer claims—standard or itemized—the deduction amount is subtracted from adjusted gross income (AGI) to determine taxable income. AGI is the broad measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Generally, only individuals with aggregate itemized deductions greater than the standard deduction would find it worthwhile to itemize. The tax benefit of choosing to itemize is the amount that their itemized deductions exceed the standard deduction multiplied by their top marginal income tax rate. Some itemized deductions can only be claimed if they meet or exceed minimum threshold amounts (also known as a floor) to simplify tax administration and compliance. Floors usually come in the form of a limit based on a percentage of AGI. For example, eligible extraordinary medical and dental expenses must amount to at least 10% of AGI for most tax filers to claim an itemized deduction; total expenses less than this floor are not eligible for an itemized deduction. In addition, some itemized deductions are subject to a cap (also known as a ceiling) in benefits or eligibility. Caps are meant to reduce the extent that tax provisions can distort economic behavior, limit revenue losses, or reduce the availability of the deduction to higher-income tax filers. For example, the itemized deduction for home mortgage interest can only be claimed for the value of interest payments made on the first $1 million of mortgage debt. This section of the report uses publicly available tax data from the IRS to provide a profile of itemizers and some insight into trends among various itemized deduction provisions. Itemized deductions are often grouped together in broader discussions of tax policy, in part because they are grouped together on the tax Form 1040. But, itemized deductions exist for a variety of reasons and are designed in ways such that they target (or exclude) certain types of tax filers. Analysis of data on these deductions can inform these discussions over reforming one or more itemized deduction provisions. Specifically, the data analysis in this report intends to identify who claims itemized deductions, for how much, and for which provisions. This analysis might be relevant to the 115 th Congress, as there has been growing congressional interest in reforming or limiting itemized tax deductions for individuals. Some see reforming itemized tax deductions as one way to increase federal tax revenue (and possibly contribute to deficit reduction), increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. In 2014, 30% of all tax filers chose to itemize their deductions rather than claim the standard deduction. Of this 30% of tax filers, a greater share of higher-income individuals chose to itemize their deductions compared with lower-income individuals. Table 1 shows the share of tax filers who chose to itemize their deductions and the average sum of those deductions in 2014 by AGI. Higher-income tax filers chose to itemize their deductions more often than lower-income tax filers in 2014. As shown in Table 1 , the share of tax filers who chose to itemize in income ranges above $200,000 remained virtually the same (over 90%), although the average sum of itemized deductions claimed increases substantially as income rises. For taxpayers with an AGI greater than $200,000, the share that itemized ranged from 91% to 93% and the average sum of itemized deductions claimed per itemizer ranged from $43,131 to $424,864. In contrast, 77% of tax filers with an AGI between $100,000 and $200,000 chose to itemize their deductions in 2014, with an average of $25,598 in deductions claimed. Five percent of tax filers with an AGI less than $20,000 chose to itemize their deductions in 2014, with an average of $15,857 in deductions claimed. Figure 1 shows the distribution, by AGI, of total itemizers and total itemized deduction claimed in 2014. Although higher-income tax filers both tended to itemize at higher rates and claim a larger average total of itemized deductions, the majority of itemizers (56.2%) had incomes less than $100,000, and 86.8% of itemizers had an AGI less than $200,000. Compared with the distribution of itemizers, the distribution of total itemized deduction claim amounts was more even across income ranges. As shown in Figure 1 , a majority (63.6%) of total itemized deduction claims (amounts, in dollars) were made by itemizers with an AGI greater than $100,000. Although tax filers with an AGI more than $1 million comprised 0.8% of itemizers, they claimed 13.1% of all itemized tax deductions in 2014. Similarly, tax filers with an AGI between $500,000 and $1 million accounted for 1.8% of itemizers, but they claimed 5.3% of all itemized deductions. Tax filers with an AGI between $50,000 and $100,000 accounted for 33.6% of all itemizers, but they claimed 23.5% of all itemized deductions. Another way to analyze tax data on itemized deductions is to look at specific deductions. Specific deductions tend to benefit different types of itemizers based on their income. In addition to differences in the income of the itemizer, the variation in itemized deduction claims can also be explained, in part, by the structure of certain provisions (e.g., floors or ceilings that are designed to limit claims). Tax filers in different income ranges tended to claim specific itemized deductions in different frequencies. Table 2 shows the average amount claimed in 2014 for selected deductions and the share of total tax filers who itemized in each income class that claimed a particular deduction. Tax filers in higher-income ranges claimed deductions for charitable gifts, state and local income taxes, and real estate property taxes at higher rates than tax filers in lower-income ranges. For example, the deduction for charitable gifts was claimed by 37% of tax filers with an AGI between $50,000 and $100,000; 68% of tax filers with an AGI between $100,000 and $200,000; and more than 86% of tax filers in each of the income ranges over $200,000. Fewer tax filers in the highest income group (with an AGI greater than $1 million) than in the $100,000-$1 million income groups claimed the home mortgage interest deduction, possibly due to a greater ability for some individuals to pay for home purchases with cash (i.e., they did not have a mortgage). On the other hand, higher-income individuals might have preferred taking a mortgage out on their house, rather than paying in cash, if they believed that their investments would yield a higher rate of return than the cost of the interest on the mortgage. Few tax filers, in general, claimed the deduction for extraordinary medical and dental expenses —particularly at the highest income ranges . The 10% of AGI floor required for most tax filers to claim the deduction in 2014 limited the amount of taxpayers that could be eligible for this provision. Average tax deduction values indicate which provisions had the largest effects in reducing different tax filers' taxable incomes. The mortgage interest deduction was, on average, the largest single deduction, by amount, claimed by tax filers with an AGI less than $500,000 (aside from the medical expenses deduction). In contrast, the deduction for state and local income taxes was the largest average deduction amount claimed for any deduction by tax filers with an AGI greater than $500,000 (aside from the infrequent instance where a tax filer claimed the itemized deduction for extraordinary medical expenses). The average deduction for charitable gifts also increases sharply for tax filers with an AGI of $1 million or above. The average amount of the charitable gift deduction claimed by tax filers with an AGI between $500,000 and $1 million was $18,615. In contrast, the average amount of the charitable gift deduction for tax filers with an AGI greater than $1 million was $172,529 in 2014. Figure 2 shows the how the distribution of various specific deductions as a share of all itemized deductions varies across income classes. These data illustrate several trends. The home mortgage interest deduction comprised the largest share of total itemized deductions for itemizers with an AGI between $20,000 and $200,000. The deduction for state and local income taxes comprised the largest share of total itemized deductions for itemizers with an AGI greater than $200,000. The deductions for state and local income taxes and charitable contributions composed a larger share of total deductions claimed as income rise. Table 3 shows the amounts claimed for certain itemized deductions as a share of the total income of itemizers. Itemized deduction claims are high when measured as a share of income for lower-income itemizers (although, as noted in Table 1 , tax filers with lower income choose to itemize at relatively lower rates). Total itemized deduction claims as a share of income decline as income increases. Across all itemizers, deductions claims amounted to 18.9% of AGI. In terms of specific deductions, total claims for the deduction for home mortgage interest comprised the largest share of income among itemizers with less than $200,000 in AGI. For itemizers with an AGI greater than $200,000, the claims for state and local income taxes comprised the largest single deduction as measured as a share of income. Some itemized deductions are classified as tax expenditures, or losses in federal tax revenue. Table 4 shows the Joint Committee on Taxation (JCT) estimates for the top four itemized deductions that are expected, under current law, to contribute most to annual tax expenditures in FY2018. Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 ( P.L. 93-344 ) as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." The four itemized deductions that are projected to contribute most to tax expenditures in FY2018 are estimated to account for 17.8% ($241.2 billion) of the approximately $1.36 trillion in net individual tax expenditures. As shown in Table 4 , the deduction for state and local income or sales taxes is estimated to be the itemized deduction with the largest tax expenditure estimate in FY2018, accounting for 5.5% ($74.1 billion) of all individual tax expenditures in FY2018. The deduction for state and local income or sales taxes is also the fifth-largest individual tax expenditure overall in FY2018. The deduction for home mortgage interest is estimated to account for 5.3% ($72.1 billion) of FY2018 tax expenditures, followed by charitable gifts (4.3%) and real estate taxes (2.7%). Congress might consider policies further limiting itemized deductions. Some view these limits as one way to increase federal revenue, increase the progressive structure of the federal income tax code, simplify the tax code, or reduce economic distortions in the tax code. When a tax filer loses the ability to take deductions, then their taxable income increases (absent other behavioral changes). Others seek to limit itemized deductions to increase progressivity in the tax code, where tax filers with higher incomes pay a larger share of their income in taxes than those with less income. Arguments against broad limits to itemized deductions vary. The economic effects of limiting itemized tax deductions might be undesirable for some. Those who are willing to accept the economic consequences of limits on itemized tax deductions might argue for reform of individual provisions, rather than broader limits, because the rationale for itemized deductions varies. For example, some might find the deduction for charitable contributions desirable but not the deduction for state and local income taxes. Others argue that higher-income tax filers already provide most of the revenue collected through the individual federal income tax, and might oppose further efforts to increase the progressivity of the federal income tax code. Some proposals to reform or limit itemized deductions include a flat, dollar-value cap or percentage-of-income cap on total deductions; a limit on the tax rate at which deductions can be valued; converting deductions into credits; and various others. Although this report does not assess these policies in depth, it provides insights from the data analysis on itemized tax deductions that might be useful for informing the debate concerning reform options. First, efforts to target limits on itemized tax deductions toward higher-income tax filers are restricted in the amount of revenue that can be raised. Some have suggested a fixed dollar amount cap as one possible way to target revenue raised from primarily higher-income households. However, to avoid increasing the taxable income of most households, the cap on total deductions would need to be set high enough such that it would not be lower than the average deduction values for those in the middle or lower portion of the income distribution. For example, Table 1 suggests that a cap of $25,000 would affect the average itemizer with an AGI less than $200,000. However, higher caps could have more limited ability to raise revenue. Even though those at the top of the income range have high average itemized deduction claim totals, data from Table 1 indicate that 87% of itemizers have an AGI less than $200,000 (or 97% have less than $500,000 in AGI), and Figure 1 indicates that these tax filers account for 65% of itemized deductions claimed (or 82% for itemizers with less than $500,000 in AGI). Second, the form of a limit on itemized deductions might affect which deductions a tax filer might claim. If a tax filer potentially has deductions that exceed a flat-dollar value cap, then the tax filer must choose which deductions to claim. Table 2 provides some estimates of which deductions may "fill" up a taxpayer's cap, if that cap is based on a fixed amount, whereas Table 3 provides estimates under a limit in the form of a share of AGI. A reduction in the tax benefit derived from activities eligible for tax deduction can affect tax filer behavior. Deductible activities that are more easily adjustable in the short run (e.g., charitable giving) could be reduced after enactment of a limit on deductions in favor of activities that are more difficult to adjust or plan for in the short run (e.g., state and local income or sales taxes, or extraordinary medical expenses). Over time, tax filers might adjust their behavior to accommodate for limits in itemized deductions (e.g., renting a residence might be more preferable for some, if they can no longer deduct mortgage interest). However, a tax filer might still engage in particular activities for other reasons (although possibly to a lesser extent) even without a tax benefit. Figure 2 shows what share of a tax filer's itemized deductions is composed of individual itemized deductions. In contrast, limits that are not tied to fixed amounts could be structured in a way that does not cause a trade-off among tax-deductible activities. For example, these limits could be capped based on a share of the tax filer's income. Although these limits would be less likely to cause a trade-off between tax-deductible activities, they may reduce the tax-beneficial value of these activities. By reducing the value of those activities (in terms of tax liability), a tax filer might choose to claim a smaller deduction related to a certain activity (based on the behavioral response for each activity). Third, the extent to which a limit on itemized deductions increases revenue depends on its structure. Limits on itemized deductions increase the amount of income of itemizers that is subject to taxation (and also potentially tax more of that income under a higher marginal income tax bracket), thereby increasing revenue. Certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.

Reforming or limiting itemized tax deductions for individuals has gained the interest of policymakers as one way to increase federal tax revenue, increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions could cause adverse economic effects or changes in the distributional burden of the federal income tax code. This report is intended to identify who claims itemized deductions, for how much, and for which provisions. This report analyzes data to inform the policy debate about reforming itemized tax deductions for individuals. In 2014, 30% of all tax filers chose to itemize their deductions rather than claim the standard deduction. In addition, the data indicate that both the share of tax filers who itemized their deductions and the amount claimed by each tax filer increased as adjusted gross income (AGI) increases. AGI is the basic measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Although higher-income tax filers were more likely to itemize their deductions and claim a larger amount of itemized deductions than lower-income tax filers, the majority of itemizers (56.2%) had an AGI less than $100,000, and 86.8% of itemizers had an AGI less than $200,000. Tax filers in different income ranges tended to claim different itemized deductions in different frequencies. In 2014, tax filers in higher income ranges claimed deductions for charitable gifts, state and local income taxes, and real estate taxes at higher rates than tax filers in lower income ranges. For example, the deduction for charitable gifts was claimed by 37% of itemizing tax filers with an AGI between $50,000 and $100,000, whereas it was claimed by 68% to 87% of itemizing tax filers with an AGI above $100,000. Deductions for state and local income taxes and the deduction for charitable gifts comprised a larger share of itemized deductions as income rose. The four largest itemized deductions are estimated to account for 17.8% ($241.2 billion) of the approximately $1.4 trillion in tax expenditures in FY2018. These deductions were for state and local income or sales taxes, home mortgage interest, charitable gifts, and real estate taxes. These findings have several implications for reforming or limiting itemized tax deductions. First, efforts to target itemized tax deduction limits on the highest income class analyzed in this report (+$1 million in AGI) are limited in the amount of revenue that can be raised. Although tax filers with an AGI greater than $1 million claimed a larger average amount of deductions ($424,864), 87% of itemizers had an AGI less than $200,000 (or 97% have less than $500,000 in AGI) and they accounted for 65% of itemized deductions claimed (or 82% for itemizers with less than $500,000 in AGI). Second, the structure of a limit on itemized deductions could affect which deductions a tax filer might claim. A limit based on a percentage reduction in the overall tax benefits of itemized deductions would not likely change the relative choice of deduction claims. However, limits using a flat-dollar amount likely would alter deduction claims and possibly tax filer behavior. A tax filer who has deductions that exceed a flat-dollar value cap must choose which deductions to claim. Even if a tax filer chooses not to claim a particular deduction because of the dollar cap, the tax filer might still engage in the activity for other reasons (although possibly to a lesser extent). Third, the structure of a limit on itemized deductions also has an effect on its capacity to raise revenue. Limiting deductions might raise the taxable income of some individuals, and tax a higher share of their income at a higher marginal tax rate. However, certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.

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The Pacific Islands region, also known as the South Pacific or Southwest Pacific, presents Congress with a diverse array of policy issues. It is a strategically important region that encompasses U.S. Pacific territories. U.S. relations with Australia and New Zealand include pursuing common interests in the Southwest Pacific, which also has attracted Chinese diplomatic attention and economic engagement. Congress plays key roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. relations with the Marshall Islands, Micronesia, and Palau (also referred to as the Freely Associated States or FAS). The United States has economic interests in the region, particularly fishing. The United States provides foreign assistance to Pacific Island countries, which are among those most affected by climate change, particularly in the areas of climate change adaptation and mitigation. The Southwest Pacific covers 20 million square miles of ocean and 117,000 square miles of land area (roughly the size of Cuba). The region includes 14 sovereign states with approximately 9 million people, including three countries in "free association" with the United States—the Marshall Islands, Micronesia, and Palau. Papua New Guinea (PNG), the largest country in the Southwest Pacific, constitutes 80% of region's land area and 75% of its population. (See Table 1 .) The region's gross domestic product (GDP) totals around $32 billion (about the size of Albania's GDP). Per capita incomes range from lower middle income (Solomon Islands at $2,000 per capita GDP) to upper middle income (Nauru and Palau at $14,200). According to many analysts, since gaining independence during the post-World War II era, many Pacific Island countries have experienced greater political than economic success. Despite weak political institutions and occasional civil unrest, human rights generally are respected and international observers largely have regarded governmental elections as free and fair. Of 12 Pacific Island states ranked by Freedom House for political rights and civil liberties, eight are given "free" status, while Fiji, Papua New Guinea, and the Solomon Islands—the three largest countries in the region—are ranked as "partly free." Most Pacific Island countries, with some exceptions such as Fiji, Papua New Guinea, and the Solomon Islands, have limited natural and human resources upon which to launch sustained development. Many small atoll countries in the region are hindered by lack of resources, skilled labor, and economies of scale; inadequate infrastructure; poor government services; and remoteness from international markets. In addition, some areas also are threatened by frequent weather-related natural disasters and rising sea levels related to climate change. The Pacific Islands Forum (PIF), which was known as the South Pacific Forum until 1999, seeks to foster cooperation between member states. It is comprised of 18 states and territories. The PIF's 16 states are Australia, Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea, the Republic of the Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Its two territories are French Polynesia and New Caledonia. The PIF Secretariat is located in Suva, Fiji. Key issues addressed by the PIF include climate change, regional security, and fisheries. American Samoa, Guam, and the Northern Marianas have observer status with the PIF. The Melanesian Spearhead Group (MSG), founded in 1986, includes the following Melanesian countries and organizations: Fiji, the Kanak Socialist Liberation Front (FLNKS) of New Caledonia, Papua New Guinea, the Solomon Islands, and Vanuatu. The MSG seeks to have "common positions and solidarity in spearheading regional issues of common interest, including the FLNKS cause for political independence in New Caledonia." In 2015, the MSG granted the United Liberation Movement for West Papua observer status and Indonesia associate member status. On the whole, the United States enjoys friendly relations with Pacific Island countries and has benefitted from their support in the United Nations. This is especially true of the Freely Associated States, particularly Palau, which in 2014 reportedly voted with the United States 90% of the time. (See " Compacts of Free Association " below.) The United States has worked with Australia, the preeminent power in the Southwest Pacific, to help advance shared strategic interests, maintain regional stability, and promote economic development, particularly since the end of the Cold War in the early 1990s. New Zealand also has cooperated with U.S. initiatives in the region, been a major provider of foreign aid, and helped lead peacekeeping efforts. France and Japan also maintain significant interests in the region. China has become a diplomatic force, major source of foreign aid, and leading trade partner in the Southwest Pacific. In addition, more recently, other nations, including Russia, India, and Indonesia, have made efforts to expand their engagement in the region. The Pacific Islands generally can be divided according to four spheres of influence, those of the United States, Australia, New Zealand, and France. The American sphere extends through parts of the Micronesian and Polynesian subregions. (See Figure 1 .) In the Micronesian region lie the U.S. territories Guam and the Northern Mariana Islands as well as the Freely Associated States. In the Polynesian region lie Hawaii and American Samoa. U.S. security interests in the Micronesian subregion, including military bases on Guam and Kwajalein Atoll in the Marshall Islands, constitute what some experts call a defensive line or "second island chain" in the Pacific. The first island chain includes southern Japan, Taiwan, and the Philippines. Some analysts in China have viewed the island chains as serving to contain China and the Chinese navy. The region also was a key strategic battleground during World War II, where the United States and its allies fought against Japan. Australia's interests focus on the islands south of the equator, particularly the relatively large Melanesian nations of Papua New Guinea, which Australia administered until PNG gained its independence in 1975, the Solomon Islands, and Vanuatu. New Zealand has long-standing ties with its territory of Tokelau, former colony of Samoa (also known as Western Samoa), and the Cook Islands and Niue, two self-governing states in "free association" with New Zealand. Australia and New Zealand often cooperate on regional security matters such as peacekeeping. France continues to administer French Polynesia, New Caledonia, and Wallis and Futuna. U.S. policymakers have emphasized the importance of the Pacific Islands region for U.S. strategic and security interests. In testimony before the Subcommittee on Asia and the Pacific of the House Committee on Foreign Affairs, former Deputy Assistant Secretary of State Matthew Matthews emphasized the changing strategic context of the Pacific Islands region: The Pacific Island region has been free of great power conflict since the end of World War II, we have enjoyed friendly relations with all of the Pacific island countries. This state of affairs, however, is not guaranteed.... Our relations with our Pacific partners are unfolding against the backdrop of shifting strategic environment, where emerging powers in Asia and elsewhere seek to exert a greater influence in the Pacific region, through development and economic aid, people-to-people contacts and security cooperation. There is continued uncertainty in the region about the United States' ... willingness and ability to sustain a robust forward presence. During the hearing, then-Chairman of the Subcommittee on Asia and the Pacific former Representative Matt Salmon stated that the countries of the region deserve U.S. attention "for the important roles that they play in regional security, as participants in international organizations, and as the neighbors to our own U.S. territories of American Samoa, Guam and the Commonwealth of the Northern Mariana Islands." Some analysts have expressed concerns about the long-term strategic implications of China's growing engagement in the region. Other experts have argued that China's diplomatic outreach and economic influence have not translated into significantly greater political sway over South Pacific countries, and that Australia, a U.S. ally, remains the dominant power and provider of development assistance in the region. Some observers also have contended that Chinese military assistance and cooperation in the region remain modest compared to that of Australia, and that China has not actively sought to project "hard power." Broad U.S. objectives and policies in the region have included promoting sustainable economic development and good governance, addressing the effects of climate change, administering the Compacts of Free Association, supporting regional organizations, projecting a presence in the region, and cooperating with Australia and regional aid donors. Other areas of concern and cooperation include combating illegal fishing, supporting peacekeeping operations, and responding to natural disasters. Areas of particular concern to Congress include overseeing U.S. policies in the Southwest Pacific and the administration of the Compacts of Free Association; regional foreign aid programs and appropriations; approving the U.S.-Palau agreement to provide U.S. economic assistance through 2024; and supporting the U.S. tuna fleet. The Obama Administration asserted that as part of its "rebalancing" to the Asia-Pacific region, it had increased its level of engagement in the Southwest Pacific, including expanding staffing and programming and increasing the frequency of high-level meetings with Pacific leaders. Other observers contended that the rebalancing policy had not included a corresponding change in the level of attention paid to the Pacific Islands region. U.S. diplomatic outreach to the region includes the following: In 2011, then-President Obama met with Pacific Island leaders on the margins of the Asia Pacific Economic Cooperation (APEC) Leaders Meeting. In 2012, Hillary Clinton attended the Pacific Islands Forum annual summit, the first Secretary of State to do so, in the Cook Islands, where she noted U.S. assistance to the region and highlighted three U.S. objectives: trade, investment in energy, and sustainable growth; peace and security; and women's empowerment. In 2013, then-Secretary of State John Kerry met with Pacific Island leaders at the United Nations and pledged to work with the region to address climate change. In 2014, then-Secretary Kerry visited the Solomon Islands following devastating floods there. In 2015, then-President Obama met with leaders of Kiribati, the Marshall Islands, and Papua New Guinea at the Paris Climate Conference. In September 2016, then-Assistant Secretary of State for East Asian and Pacific Affairs Daniel Russel led a U.S. delegation to the 28 th Pacific Islands Forum in Pohnpei, Micronesia. Main topics of discussion included climate change, management and conservation of fisheries and other marine resources, sustainable development, regional economic integration, and human rights in West Papua. The region depends heavily upon foreign aid. In terms of official development assistance (ODA) as defined by the Organization for Economic Cooperation and Development (OECD), which focuses on grant-based assistance, OECD members Australia, New Zealand, the United States, France, and Japan are the principal aid donors in the Southwest Pacific. Major multilateral sources of ODA include the World Bank's International Development Association and the Asian Development Bank. According to the OECD, in 2014, the most recent year for which full data are available, the leading aid donors committed ODA to the region as follows: Australia, $850 million; New Zealand, $374 million; the United States, $277 million; France, $126 million; and Japan, $107 million. Although the United States remains one of the largest providers of ODA to the region by some measures, U.S. assistance remains concentrated among the Freely Associated States. China has become a major source of foreign assistance, but Chinese aid differs from traditional ODA due to its heavy emphasis on concessional loans and infrastructure projects (see " China's Foreign Assistance and Trade " below). The U.S. government administers foreign assistance to Pacific Island countries through the U.S. Agency for International Development (USAID) Office for the Pacific Islands (based in the Philippines) and Pacific Islands Satellite Office (based in Papua New Guinea). U.S. foreign assistance activities include regional environmental programs; military training; disaster assistance and preparedness; fisheries management; HIV/AIDS prevention, care, and treatment programs in Papua New Guinea; and strengthening democratic institutions in Papua New Guinea, Fiji, and elsewhere. U.S. assistance also aims to help strengthen Pacific Islands regional fora. USAID has partnered with Pacific Islands regional organizations to carry out a five-year program to coordinate responses to the adverse impacts of climate change. Through the Coastal Community Adaptation Program, USAID supports local-level climate change interventions in nine Pacific Island countries. The United States supports natural disaster mitigation and response capabilities and weather and climate change adaptation programs in the Marshall Islands and Micronesia, two low-lying atoll nations, and elsewhere in the Pacific Islands region. USAID's Regional Development Mission-Asia (RDM/A) carries out several environmental programs in the region, particularly in Papua New Guinea. The United States conducts International Military Education and Training (IMET) programs related to peacekeeping operations, strengthening national security, responding to natural and man-made crises, developing democratic civil-military relationships, and building military and police professionalism in Fiji, Papua New Guinea, Samoa, and Tonga. The Obama Administration requested $1 million in Foreign Military Financing (FMF) for FY2016 for a regional program to promote peacekeeping activities, English language capabilities, and professionalism in the military. (See Table 2 .) For FY2017, U.S. assistance aims to expand engagement with the PIF and other regional bodies to improve democratic development and governance in the region. Funding provided pursuant to the South Pacific Tuna Treaty (SPTT) constitutes a major source of U.S. assistance to some Pacific Island countries. Under the SPTT, in force since 1988, Pacific Island parties to the treaty provide access for U.S. tuna fishing vessels to fishing zones in the Southwest Pacific, which supplies one-third of the world's tuna. In exchange, the American Tunaboat Association pays licensing fees to Pacific Island parties to the treaty. In addition, as part of the agreement, the United States provides economic assistance to the Pacific Island parties totaling $21 million per year. In January 2016, the United States temporarily withdrew from the agreement, arguing that the terms were "no longer viable" for the U.S. tuna fleet. The U.S. fleet argued that it could no longer pay quarterly fees due to sharply declining prices for tuna and competition from other countries, some of which was illegal. U.S. boats resumed fishing in the region in March 2016 but with fewer fishing days allotted than in 2015. Talks to renegotiate the SPTT resulted in an agreement in principle in June 2016 that aims to "establish more flexible procedures for commercial cooperation between Pacific Island Parties and US industry." Congress plays roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. diplomatic, economic, and military relations with the Marshall Islands, Micronesia, and Palau. U.S. economic commitments to the Freely Associated States—totaling nearly $200 million in FY2015 —are administered by the Department of the Interior. The Compact of Free Association Review Agreement, signed by the United States and the Republic of Palau in 2010, awaits congressional approval. Since 2000, the Republic of the Marshall Islands has unsuccessfully sought additional compensation for damages related to U.S. nuclear testing on Marshall Islands atolls during the 1940s and 1950s. In 1947, the Marshall Islands, the Federated States of Micronesia, Palau, and the Northern Marianas, which had been under Japanese control during part of World War II, became part of the U.S.-administered United Nations Trust Territory of the Pacific Islands. In the early 1980s, the Marshall Islands and Micronesia rejected the option of U.S. territorial or commonwealth status and instead chose free association with the United States. Compacts of Free Association were negotiated and agreed by the governments of the United States, the Marshall Islands, and Micronesia, and approved by plebiscites in the Trust Territory districts and by the U.S. Congress in 1985 ( P.L. 99-239 ). Congress approved the Compact with Palau in 1986 ( P.L. 99-658 ), which Palau ratified in 1994. The Compacts were intended to establish democratic self-government and to advance economic development and self-sufficiency through U.S. grant and federal program assistance, and to further the national security of the Freely Associated States (FAS) and the United States in light of Cold War geopolitical concerns. Under the Compacts, the FAS are sovereign nations that conduct their own foreign policy, but the United States and the FAS are subject to certain limitations and obligations regarding international security and economic relations. The United States is obligated to defend the Freely Associated States against attack or threat of attack. The United States may block FAS government policies that it deems inconsistent with its duty to defend the FAS (the "defense veto"), and it has the prerogative to reject the strategic use of, or military access to, the FAS by third countries (the "right of strategic denial"). The United States also may establish military bases in the FAS, and the Marshall Islands is home to a premier U.S. military facility (the Ronald Reagan Ballistic Missile Defense Test Site [RTS], also known as the Kwajalein Missile Range). The Freely Associated States and their citizens are eligible for various U.S. federal programs and services. FAS citizens are entitled to reside and work in the United States and its territories as "lawful non-immigrants" and are eligible to volunteer for service in the U.S. armed forces. Several hundred FAS citizens serve in the U.S. military and roughly 12 FAS citizens serving in the U.S. armed forces died in the Iraq and Afghanistan war efforts. The Marshall Islands, Micronesia, and Palau were members of the U.S.-led coalition that launched Operation Iraqi Freedom in 2003. The FAS economies depend heavily on U.S. support. The Department of the Interior provides direct economic or grant assistance to the FAS. Its Office of Insular Affairs is responsible for administering the Compacts. The Compacts with the Marshall Islands and Micronesia provided economic assistance totaling roughly $2.5 billion between 1987 and 2003, including payments for damages and personal injuries caused by U.S. nuclear testing on Marshall Islands atolls during the 1940s and 1950s. In December 2003, the Compacts were amended in order to extend economic assistance for another 20 years and establish trust funds that aim to provide sustainable sources of government revenue after 2023. Projected U.S. grant assistance and trust fund contributions to the Marshall Islands for the 2004-2023 period total $629 million and $235 million, respectively. Projected grant assistance and trust fund contributions to Micronesia for the same period total $1.4 billion and $442 million, respectively. In 1986, the United States and Palau signed a 50-year Compact of Free Association. The Compact was approved by the U.S. Congress but not ratified in Palau until 1993 (entering into force on October 4, 1994). The U.S.-Palau Compact provided for 15 years of direct economic assistance, the construction of a 53-mile road system, a trust fund, services of some U.S. federal agencies such as the U.S. Postal Service and the National Weather Service, and eligibility for some U.S. federal education, health, and other programs. Between 1995 and 2009, U.S. assistance totaled over $850 million, including grant assistance, road construction, and the establishment of a trust fund ($574 million), Compact federal services ($25 million), and discretionary federal program assistance ($267 million). Under the Compact, direct economic assistance was to terminate in 2009 while annual distributions from the trust fund were to increase, to help offset the loss of economic assistance. However, Palauan leaders and some U.S. policymakers argued that continued assistance to Palau beyond 2009 was necessary. Furthermore, the value of the Compact trust fund fell from nearly $170 million to $110 million in 2008-2009 due to the global financial crisis, although it rebounded and was valued at approximately $184 million in 2015. In September 2010, the United States and Palau agreed to renew Compact economic assistance, but it awaits approval by Congress. (See Table 3 .) The 2010 accord provided for $215.75 million in direct economic assistance over an additional 15-year period (2011-2024). According to some estimates, U.S. support, including both direct economic assistance and projected discretionary program assistance, would total approximately $427 million between 2011 and 2024. In addition, the agreement committed Palau to undertake economic, legislative, financial, and management reforms. Although there has been bipartisan support for continued assistance, Congress has yet to approve the renewal agreement, also known as the Compact of Free Association Review Agreement, largely for budgetary reasons. From FY2010 to FY2016, the U.S. government continued annual direct economic assistance to Palau at 2009 levels ($13.1 million), pending congressional approval of the 2010 agreement and resolution of funding issues. Other U.S. assistance pursuant to the agreement, however, remained unfunded. During the 114 th Congress, two bills were introduced in support of the agreement to extend Compact assistance to Palau. S. 2610 , A Bill to Approve an Agreement Between The United States and the Republic of Palau, would not significantly alter total U.S. economic assistance to Palau from the levels specified in the 2010 renewal agreement, although the assistance would be allocated in different increments due in part to the delay in implementing the agreement. H.R. 4531 , To Approve an Agreement Between the United States and the Republic of Palau, and for Other Purposes, would provide an additional $31.8 million as well as reschedule U.S. assistance. In addition, the conference report ( H.Rept. 114-840 ) to accompany S. 2943 , The National Defense Authorization Act for Fiscal Year 2017, included the following statement: "The conferees believe that enacting the Compact Review Agreement is important to United States' national security interests and, as such, believe that the President should include the Compact Review Agreement in the Fiscal Year 2018 budget request." From 1946 to 1958, the United States conducted 67 atmospheric atomic and thermonuclear weapons tests on the Marshall Islands atolls of Bikini and Enewetak. In 1954, "Castle Bravo," the second test of a hydrogen bomb, was detonated over Bikini atoll, resulting in dangerous levels of radioactive fallout upon the populated atolls of Rongelap and Utrik. Between 1957 and 1980, the residents of the four northern atolls returned to their homelands (Rongelap and Utrik in 1957; Bikini in 1968; and Enewetak in 1980). However, the peoples of Bikini and Rongelap were re-evacuated to other islands in 1978 and 1985, respectively, after the levels of radiation detected in the soil were deemed unsafe for human habitation. Although diving and tourist facilities have operated on Bikini on and off since 1996, and the U.S. government had declared some parts of Rongelap safe for human habitation following a $45 million cleanup effort, neither atoll has been resettled. Some experts claim that remediation techniques, primarily replacing surface soil in populated areas and adding potassium chloride fertilizer to agricultural areas, has made resettlement possible, although most of the displaced people have refused to return. The Compact of Free Association established a Nuclear Claims Fund of $150 million and a Nuclear Claims Tribunal (NCT) to adjudicate claims. Investment returns on the Fund were expected to generate revenue for personal injury and property damages awards, health care, resettlement, trust funds for the four atolls, and quarterly distributions to the peoples of the four atolls for hardships suffered. In all, the United States reportedly has provided over $600 million for nuclear claims, health and medical programs, and environmental cleanup and monitoring. The Compact deems the Nuclear Claims Fund as part of a "full and final settlement" of legal claims against the U.S. government. However, the Fund was depleted by 2009 and was not sufficient to cover the NCT's awards of $96 million to approximately 2,000 individuals for compensable injuries. In addition, the Tribunal awarded, but was unable to pay, approximately $2.2 billion to the four atoll governments for remediation and restoration costs, loss of use, and consequential damages. The Marshall Islands government and peoples of the four most-affected atolls long have argued that greater U.S. compensation was justified for loss of land, personal injuries, and property damages. They have claimed that the nuclear tests caused high incidences of miscarriage, birth defects, and weakened immune systems, as well as high rates of thyroid, cervical, and breast cancer. In addition, some experts contend that more than a dozen Marshall Islands atolls, rather than only four, were affected. Some experts have disputed the Marshall Islands claims, pointing to some earlier studies. In September 2000, the government of the Republic of the Marshall Islands (RMI) submitted to the U.S. Congress a Changed Circumstances Petition requesting additional compensation of roughly $1 billion for personal injuries, property damages, public health infrastructure, and a health care program for those exposed to radiation. The Petition based its claims upon the "changed circumstances" provision of Section 177 of the Compact, arguing that "new and additional" information, such as greater radioactive fallout than previously known or disclosed and revised radiation protection standards, constituted "changed circumstances" and that existing compensation was "manifestly inadequate." In November 2004, the George W. Bush Administration released a report evaluating the Petition, Report Evaluating the Request of the Government of the Republic of the Marshall Islands Presented to the Congress of the United States of America , concluding that there was no legal basis for considering additional compensation payments. In April 2006, the peoples of Bikini and Enewetak atolls filed lawsuits against the United States government in the U.S. Court of Federal Claims seeking additional compensation related to the U.S. nuclear testing program. The court dismissed both lawsuits on August 2, 2007. The U.S. Court of Appeals for the Federal Circuit upheld the lower court ruling on January 30, 2009, finding that Section 177 of the Compact removed U.S. jurisdiction. In April 2010, the Supreme Court declined to hear the case. In April 2014, the RMI filed suits in the United States and the International Court of Justice in the Hague against the United States and eight other nuclear powers, claiming their failure to meet their obligations toward nuclear disarmament under Article VI of the Nuclear Non-Proliferation Treaty. The lawsuits did not seek compensation but rather action on disarmament. On February 3, 2015, a federal court in California dismissed the RMI suit against the United States, on the grounds that the RMI lacked standing to bring the case and that the case was resolvable by the political branches of government rather than the courts. Some policymakers, including Members of Congress, have expressed concerns about China's growing influence in the region. China has become a growing political and economic actor in the Southwest Pacific, and some observers contend that it aims to promote its interests in a way that potentially displaces the influence of traditional actors in the region such as the United States, Australia, and New Zealand. In the view of one analyst, "China clearly does seek to become at least a leading power in the Western Pacific and perhaps the leading power in the Western Pacific." One expert reports that China's principal strategic activity in the region is signals intelligence monitoring. Toward this end, China reportedly has regularly sent vessels to the region that both track satellites and ballistic missiles and also gather intelligence. Other analysts argue that Beijing does not consider the South Pacific to be of key strategic importance, and note that Australian assistance remains significantly larger than that provided by Beijing. Some believe that although many Pacific Island leaders say they appreciate China's economic engagement and diplomatic policy of "non-interference" in domestic affairs, the region maintains strong ties to Australia and the West that are rooted in shared history and culture as well as migration. Beijing's engagement in the region has been motivated largely by a desire to garner support in international fora and find sources of raw materials. According to some analysts, China began to fill a vacuum created by waning U.S. attention following the end of the Cold War. While the United States does not maintain an embassy in several Pacific Islands countries, for example, Beijing has opened diplomatic missions in all eight of the Pacific Island countries with which it has diplomatic relations. China-Taiwan "dollar diplomacy," in which the two entities competed for official diplomatic recognition through offers of foreign aid, has been a declining factor since the late 2000s. China is one of the top providers of foreign assistance in the Southwest Pacific, providing $150 million in foreign assistance per year on average during the past decade. China has held two China-Pacific Island Countries Economic Development and Cooperation Forums (2006 and 2013), where Chinese officials announced large aid packages, including pledges of preferential loans ($376 million in 2006 and $1 billion in 2013). In November 2014, Chinese President Xi Jinping travelled to Fiji to establish a strategic partnership between China and eight Pacific Island countries. China also has provided support to the Pacific Islands Forum and has helped finance some of the organization's activities and initiatives. Despite China's rise, Australia remains the dominant foreign aid donor in the region. Between 2006 and 2014, Australia reportedly provided approximately $7.7 billion in foreign aid to the region, compared to the United States ($1.9 billion), China ($1.8 billion), New Zealand ($1.3 billion), Japan ($1.2 billion), and France ($1.0 billion). In terms of grant-based aid, China's foreign assistance is relatively small. Unlike other major donors, which provide mostly grant assistance, nearly 80% of Chinese aid reportedly has been provided in the form of preferential loans, generally to finance infrastructure projects that use Chinese companies and labor. China's foreign assistance to the Southwest Pacific, like its economic assistance to many other regions, largely consists of concessional loans, infrastructure and public works projects, and investments in the extraction of natural resources. Papua New Guinea is the largest Pacific recipient of Chinese aid, having received 35% of Chinese assistance to the region. Other major recipients include Fiji, Vanuatu, and Samoa. China's foreign assistance has resulted in 218 projects since 2006, including Chinese-built roads, sea ports, airports, hydropower facilities, mining operations, hospitals, government buildings, educational facilities, sports stadiums, and other public works. Other Chinese assistance areas include public health, education, fisheries conservation, the environment, and financial support for Fiji's elections in 2014. Recent, smaller forms of aid reportedly include rowing machines for Samoa, water supply systems for small towns in Tonga, and quad bikes for Cook Islands legislators. Beijing also reportedly has provided modest military equipment and training to Fiji, Papua New Guinea, and Tonga. Some observers have criticized Chinese assistance, arguing that some infrastructure projects are poor in quality and that some Chinese loans and aid activities lack transparency and exacerbate corruption, increase debt burdens, or harm the environment. Other concerns are that some Chinese economic projects and investments do not employ local labor or that they are not directly aimed at reducing poverty. Some experts contend that Chinese aid has reduced the regional influence of Australia, the United States, and European countries, while others dispute this contention. Another issue is the relatively recent influx of Chinese traders and shop owners in some urban areas, which reportedly has caused resentment among some native residents. China is a major trading partner in the region, surpassing even Australia, and has economic interests in the following sectors: energy production (hydro power and gas), mining, fisheries, timber, agriculture, and tourism. (See Table 3 .) The largest Chinese investment project is the $1.6 billion Ramu Nickel mine in Papua New Guinea. China also has become a major source of tourists and is the only non-Pacific Island nation to be a member of the South Pacific Tourism Organization. The United States has relied upon Australia, and to a lesser extent New Zealand, to help advance shared strategic interests, maintain regional stability, and promote economic development in the Southwest Pacific. Australia has played a critical role in helping to promote security in places such as Timor-Leste, which gained its independence from Indonesia following a 1999 referendum that turned violent, the Solomon Islands, and Bougainville, which is part of Papua New Guinea. The 2016 Australia Defence White Paper articulates Australia's approach to the South Pacific: The South Pacific region will face challenges from slow economic growth, social and governance challenges, population growth and climate change. Instability in our immediate region could have strategic consequences for Australia should it lead to increasing influence by actors from outside the region with interests inimical to ours. It is crucial that Australia help support the development of national resilience in the region to reduce the likelihood of instability. This assistance includes defence cooperation, aid, policing and building regional organisations.... We will also continue to take a leading role in providing humanitarian and security assistance where required. New Zealand's Pacific identity, derived from its geography and growing population of New Zealanders with Polynesian or other Pacific Island ethnic backgrounds, as well as its historical relationship with the South Pacific, undergirds its relationship with the region. The June 2016 New Zealand Defence White Paper articulates New Zealand's ongoing interest in the South Pacific: Given its strong connections with South Pacific countries, New Zealand has an enduring interest in regional stability. The South Pacific has remained relatively stable since 2010, and is unlikely to face an external military threat in the foreseeable future. However, the region continues to face a range of economic, governance, and environmental challenges. These challenges indicate that it is likely that the Defence Force will have to deploy to the region over the next ten years, for a response beyond humanitarian assistance and disaster relief. New Zealand will continue to protect and advance its interests by maintaining strong international relationships, with Australia in particular, and with its South Pacific partners, with whom it maintains a range of important constitutional and historical links. New Zealand works closely with Pacific Island states on a bilateral and multilateral basis. It has played a key role in promoting peace and stability in the Southwest Pacific in places such as Timor-Leste, the Solomon Islands, and Bougainville, and Papua New Guinea. Approximately 60% of New Zealand's foreign assistance goes to the Southwest Pacific. In September 2015, Wellington pledged to increase foreign assistance to the region by $100 million to reach a total of $1 billion in expenditures over the next three years. New Zealand also has provided development and disaster assistance to the region. In 2015, New Zealand's then-Prime Minister John Key reaffirmed New Zealand's support for the Pacific Islands Forum and sustainable South Pacific economic development, including for sustainable fisheries. An estimated $2 billion worth of fish is taken legally from the waters of the 14 PIF countries, with an additional $400 million worth of fish thought to be taken illegally each year. France's decision to stop nuclear testing in the South Pacific in 1996 opened the way for improved relations with the region. Although much of France's regional military presence was withdrawn following its decision to stop nuclear testing, France continues to have a military presence that reportedly includes 2,800 personnel and 7 ships, including surveillance frigates and patrol vessels. France is also a member of the Quadrilateral Defense Coordination Group, along with the United States, Australia, and New Zealand, which seeks to coordinate maritime security in the South Pacific. France recently signed a $39 billion deal to provide 12 new submarines to the Australian Navy. Other external actors are becoming more active in the Southwest Pacific. Russia reportedly has sent a shipment of weapons with advisors to help train the Fijian military in the use of recently delivered equipment. India reportedly is exploring the possibility of establishing a satellite monitoring station in Fiji. Indonesia, too, has become more interested in the region, often with regards to its relations with the Melanesian countries. Indonesia has been a dialogue partner of the Pacific Islands Forum since 2001. Indonesian objectives related to the PIF include repositioning Indonesia's foreign policy towards a "look east policy" and getting "closer to the countries of the Pacific region," maintaining "the integrity of the unitary Republic of Indonesia," and improving the "image of Indonesia." The PIF and Melanesian countries have criticized human rights abuses in West Papua, Indonesia, which has a large, ethnically Melanesian indigenous population. Alleged human rights violations include the harassment of human rights groups and arbitrary arrests of independence activists. Some Melanesian countries have supported self-determination for West Papua and its inclusion in the Melanesian Spearhead Group. Indonesia has responded that it is a democratic country that is committed to human rights. It has resisted "interference in its domestic affairs" and in 2015 refused to accept a PIF fact-finding mission to investigate human rights violations. Pacific Island countries have sought international support for helping them to cope with the impacts of climate change, reduce greenhouse gas (GHG) emissions, and increase renewable energy use and energy efficiency. U.S. assistance efforts in the region have focused on climate change adaptation and strengthening governmental capacity to attract international financing and successfully implement environmental programs. Many experts view the Pacific Islands as highly vulnerable to the effects of climate change and other environmental problems, such as sea level rise, ocean acidification, invasive species, and extreme weather events. These environmental issues can have adverse effects on agriculture, drinking water supplies, fisheries, and tourism. A report by the U.S. Fish and Wildlife Service states Climate change presents Pacific Islands with unique challenges including rising temperatures, sea-level rise, contamination of freshwater resources with saltwater, coastal erosion, an increase in extreme weather events, coral reef bleaching, and ocean acidification. Projections for the rest of this century suggest continued increases in air and ocean surface temperatures in the Pacific, increased frequency of extreme weather events, and increased rainfall during the summer months and a decrease in rainfall during the winter months. Some areas of the region lie only 15 feet above sea level, and if sea levels continue to rise as projected, Kiribati, Tokelau, and Tuvalu may be uninhabitable by 2050. Some experts predict that many Pacific Islanders face displacement over the coming decades. Kiribati reportedly is buying land in Fiji in case its population needs to relocate. Much of the Republic of the Marshall Islands is less than six feet above the sea, and some experts say that rising sea levels may make many areas of the country unfit for human habitation in the coming decades . Bikini Islanders, with the support of the U.S. Department of the Interior, have asked to be allowed to resettle in the United States. They claim that Kili and Ejit, the islands to which Bikini Islanders were relocated before and after the nuclear tests of the 1940s and 1950s and where about 1,000 of them currently live, can no longer sustain them, due to a lack of resources and a greater frequency of bad weather. Recurrent flooding from storms and high tides has disrupted water supplies and destroyed crops. The Department of the Interior has proposed that the U.S. resettlement fund set up for Bikini Islanders help to support their relocation to the United States. Pacific Island states were very active in seeking to influence the outcome of the U.N. Climate Change Conference of the Parties (COP) in Paris, France, in 2015. The Paris Agreement includes several outcomes sought by Pacific Island countries, such as a commitment to limit temperature rise. The Agreement reaffirms "the goal of limiting global temperature increase well below 2 degrees Celsius, while urging efforts to limit the increase to 1.5 degrees." Twelve Pacific Island countries signed the Paris Agreement on April 22, 2016. The Pacific Islands Forum 2016 annual meeting continued the organization's focus on climate change. The Forum Communique included the following statement: Leaders reiterated the importance of the Pacific Islands Forum in maintaining a strong voice considering the region's vulnerabilities to the impact of climate change. Leaders welcomed the Paris Agreement and reinforced that achieving the Agreement goal of limiting global temperature increases to 1.5°C above pre-industrialised levels is an existential matter for many Forum Members which must be addressed with urgency. Leaders congratulated the eight Forum countries that have ratified the Agreement and encouraged remaining Members and all other countries to sign and ratify the Agreement before the end of 2016 or as soon as possible. Leaders called for ambitious climate change action in and across all sectors and encouraged key stakeholders to prioritise their support for the implementation of key obligations under the Agreement. Climate change and sea level rise are not the only environmental challenges "substantially enhanced" by anthropogenic activity facing the region. Ocean acidification is likely to have a severe impact on Pacific Island states. According to some experts, carbon dioxide, absorbed by seawater, creates acidification which in turn reduces the ability of many marine organisms, such as coral, from regenerating. Coral reefs play a key role in supporting fisheries and tourism which are two key components of the economy of many Pacific Island states. A recent study has found that coral cover in the Great Barrier Reef off the coast of Australia has declined by 50% over the past 30 years. Various studies have predicted that if current trends continue, ocean reefs will "be the first major ecosystem in the modern era to become ecologically extinct" by the end of the century. Others predict an earlier demise . The Southwest Pacific straddles the largest tuna fisheries in the world. According to one advocacy group, over half of the tuna consumed in the world is harvested from the Western and Central Pacific Ocean at an unsustainable rate. Many of the Pacific Islands states lack the capacity to effectively monitor and patrol their fisheries resources. In one example, Palau, a nation with a land area of 177 square miles and a maritime exclusive economic zone (EEZ) of 230,000 square miles, has a maritime police division of 18 personnel and one patrol ship. The global black market for seafood is estimated to be worth $20 billion with one in five fish caught illegally . As a result, poaching of fisheries is a major problem in the Pacific. In order to minimize poaching, the United States and nine Pacific Island states have entered into ship rider agreements. Under the program, enforcement officials from Pacific I sland states may ride U.S. Coast Guard ships while they are patrolling the EEZs of those states. U.S . Coast Guard ships are empowered to enforce the laws of the host nation . New Caledonia, a territory of France, and Bougainville, which is part of Papua New Guinea, are to hold referenda on independence in 2018 and 2019. Issues and areas of possible concern to Congress include U.S. assistance for the administration of free and fair elections, the building of political institutions, and the mitigation of potential conflict. Developments in Bougainville also may affect U.S. relations with Papua New Guinea. The French Overseas Territory of New Caledonia, annexed by France in 1853 and formerly used as a penal colony for French convicts, may become the world's next state. An estimated 39% of New Caledonia's 260,000 people are Kanaks while 27% are European, with the balance composed of "mixed race" persons and others from elsewhere in the Asia-Pacific. In the 1980s, the indigenous Kanaks clashed with pro-France settlers. In a referendum in 1987, which was boycotted by local independence groups, New Caledonians voted to remain with France. Under the Noumea Accord of 1998, signed by France, the Kanak Socialist Liberation Front, and the territory's anti-independence RCPR Party, a referendum on independence must be held by the end of 2018. The Bougainville conflict between the Papua New Guinea Defense Force and the pro-independence Bougainville Revolutionary Army began over disputes related to the Panguna copper mine on Bougainville in the late 1980s. Key grievances related to the mine included the influx of workers from elsewhere in Papua New Guinea and Australia, environmental damage caused by the mine, and Bougainville islanders' dissatisfaction with their share of mine revenue. Tensions over the mine and secessionist sentiment led to a decade-long, low-intensity war in which an estimated 10,000 to 20,000 government troops, militants, and civilians died. Peace between the government and rebels was restored in 1997 under a New Zealand-brokered agreement. Under the terms of the agreement, a referendum on self-determination is to be held by mid-2020. A target date of June 2019 has now been agreed to by the Papua New Guinea government and Bougainville regional government. Some factions reportedly have held onto their weapons out of concern that the PNG government will not go through with the referendum.

The Pacific Islands region, also known as the South Pacific or Southwest Pacific, presents Congress with a diverse array of policy issues. It is a strategically important region with which the United States shares many interests with Australia and New Zealand. The region has attracted growing diplomatic and economic engagement from China, a potential competitor to the influence of the United States, Australia, and New Zealand. Congress plays key roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. relations with the Marshall Islands, Micronesia, and Palau. The United States has economic interests in the region, particularly fishing, and provides about $38 million annually in bilateral and regional foreign assistance, not including Compact grant assistance. This report provides background on the Pacific Islands region and discusses related issues for Congress. It discusses U.S. relations with Pacific Island countries as well as the influence of other powers in the region, including Australia, China, and other external actors. It includes sections on U.S. foreign assistance to the region, the Compacts of Free Association, and issues related to climate change, which has impacted many Pacific Island countries. The report does not focus on U.S. territories in the Pacific, such as Guam, the Northern Mariana Islands, and American Samoa. The Southwest Pacific includes 14 sovereign states with approximately 9 million people, including three countries in "free association" with the United States—the Marshall Islands, Micronesia, and Palau. New Caledonia, a territory of France, and Bougainville, which is part of Papua New Guinea (PNG), are to hold referenda on independence in 2018 and 2019. U.S. officials have emphasized the diplomatic and strategic importance of the Pacific Islands region to the United States, and some analysts have expressed concerns about the long-term strategic implications of China's growing engagement in the region. Other experts have argued that China's mostly diplomatic and economic inroads have not translated into significantly greater political influence over South Pacific countries, and that Australia remains the dominant power and provider of development assistance in the region. Major U.S. objectives and responsibilities in the Southwest Pacific include promoting sustainable economic development and good governance, administering the Compacts of Free Association, supporting regional organizations, helping to address the effects of climate change, and cooperating with Australia, New Zealand, and other major foreign aid donors. U.S. foreign assistance activities include regional environmental programs, military training, disaster assistance and preparedness, fisheries management, HIV/AIDS prevention, care, and treatment programs in Papua New Guinea, and strengthening democratic institutions in PNG, Fiji, and elsewhere. Other areas of U.S. concern and cooperation include illegal fishing and peacekeeping operations. Congressional interests include overseeing U.S. policies in the Southwest Pacific and helping to set the future course of U.S. policy in the region, approving the U.S.-Palau agreement to provide U.S. economic assistance through 2024, and funding and shaping ongoing foreign assistance efforts. The Obama Administration asserted that as part of its "rebalancing" to the Asia-Pacific region, it had increased its level of engagement in the region. Other observers contended that the rebalancing policy had not included a corresponding change in the level of attention paid to the Pacific Islands.

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The Endangered Species Act (ESA) provides for the listing and protection of species that are endangered or threatened with extinction. Listing a species results in limitations on activities that could affect that species and in penalties for the taking (as defined in the ESA) of individuals of a listed species. Federal agencies are also required to use their existing authorities to further the purposes of the act. Under certain circumstances, federal agency actions may be exempted from the act. The exemption process and its history are the subject of this report. Federal agencies are required to consult with either the Fish and Wildlife Service (FWS) or the National Marine Fisheries Service (NMFS) (together, the Services ) to determine whether an agency project might jeopardize the continued existence of listed species or destroy or adversely modify a species' critical habitat. This process is known as consultation . The consultation concludes with the appropriate Service issuing a biological opinion (BiOp) as to the harm the project poses. If a project could jeopardize a species, a jeopardy opinion is released along with any reasonable and prudent alternatives (RPAs) to the agency action that would avoid jeopardy. To excuse any incidental taking of listed species, the Services issue an incidental take statement that includes reasonable and prudent measures (RPMs) to minimize the effects of the project. When a federal action cannot be conducted without jeopardizing species, and the federal agency believes that the RPAs would thwart the project, the federal agency, the governor of the state where the project would occur, or the licensees or permittees involved in the project may seek an exemption. Very rarely, the Service(s) may find that jeopardy would occur and that there is no RPA that would avoid jeopardy. The exemption process is also available for this circumstance. The exemption process offers the opportunity to consider extraordinary economic circumstances in the list of factors used in evaluating federal actions, and provides an opportunity for economic factors to override jeopardy to the species. However, an exemption is for a federal project, license, or action, rather than for a species—a key distinction. In more than four decades since the ESA was enacted, there have been only six instances in which an exemption was sought, and only two in which it was granted. Appendix A , Appendix B , Appendix C , and Appendix D provide discussions and histories of the six attempts to secure exemptions under the ESA. If there are future applications for exemptions, the historical prologue as seen through these past applications may prove useful, because this process is used so rarely. In addition, in the controversy over California water projects, there were proposals in the mid - and late-2000s to seek an exemption from the ESA. Appendix E provides a discussion and history of the California water conflict. The controversy over Tellico Dam in Tennessee in the 1970s set the stage for Congress's creation of the exemption process. As originally enacted in 1973, the ESA prohibited all activities detrimental to listed species with very few exceptions. In the 1970s, when the prospective impoundment of water behind the nearly completed Tellico Dam in Tennessee threatened to eradicate the only known population of the snail darter (a small fish related to perch), the Supreme Court concluded that the "plain language" of the ESA mandated that the gates of the dam not be closed. In Tennessee Valley Authority (TVA) v. Hill , the Court stated: One would be hard pressed to find a statutory provision whose terms were any plainer than those in § 7 of the [ESA]. Its very words affirmatively command all federal agencies "to insure that actions authorized , funded , or carried out by them do not jeopardize the continued existence" of an endangered species or "result in the destruction or modification of habitat of such species.... " This language admits of no exception.... Concededly, this view of the Act will produce results requiring the sacrifice of the anticipated benefits of the project and of many millions of dollars in public funds. But examination of the language, history, and structure of the legislation under review here indicates beyond doubt that Congress intended endangered species to be afforded the highest of priorities. After this Supreme Court decision, Congress amended Section 7 of the ESA to include a process by which economic impacts could be weighed and government projects exempted from the restrictions that otherwise would apply. The process they created is shown in Figure 1 . The Tellico Dam controversy also illustrated a common theme in ESA controversies: the protection of threatened and endangered species is rarely the chief issue. A species' need for a particular dwindling habitat and its resources often parallels human desires for the same dwindling resources. The parties to the debate have often struggled for years over the basic allocation of those resources, from Tellico River, to the Edwards Aquifer in Texas, to prairie grasslands, to water allocation in San Francisco Bay. The debate over ESA and species protection typically signals an intensification of an underlying and usually much larger struggle. In broad outline, Congress created a committee of top government officials who could pass judgment on federal projects by balancing the national interest in protecting listed species against the national interest in proceeding with an important federal project. Congress limited the parties who could apply for exemptions, and required that successful parties would be required to pay the costs of mitigating the project's effects. Because projects are exempted, rather than species, the ESA still requires that species affected by the exempted project must be conserved in their remaining habitat. While there have been a few amendments to this process in later years, the basic structure formed after Tellico Dam remains the same, and is described below. The Endangered Species Committee (ESC) reviews applications for exemptions, and is responsible for the ultimate decision. It may conduct additional fact-finding. The ESC is composed of the following members: the Secretary of the Interior (who serves as the chair), the Secretary of Agriculture, the Secretary of the Army, the Chairman of the Council of Economic Advisors, the Administrator of the Environmental Protection Agency, the Administrator of the National Oceanic and Atmospheric Administration, and one individual from each affected state. (If multiple states are involved, each state has an appropriate fraction of a vote. ) Application for an exemption is limited to three eligible entities: the federal agency proposing the action, the governor of the state in which the action is proposed, or the permit or license applicant (if any) related to that agency action. The term permit or license applicant is defined in the ESA as a person whose application to a federal agency for a permit or license has been denied primarily because of the application of the prohibitions in Section 7(a), which requires that federal agency actions avoid jeopardy or destruction or adverse modification of critical habitat. These restrictions of the exemption process clarify that the exemption process is used after a Section 7 consultation has been completed, and that the exemption process is not open to just any interested party. (See Figure 1 , Steps 3 and 7.) An exemption application must describe the consultation process already carried out between the federal agency and the Secretary (of Commerce or the Interior, as appropriate) and must include a statement explaining why the action cannot be altered or modified to conform to the requirements of the statute. (See Figure 1 , Step 9.) All applications must be submitted to the Secretary not later than 90 days after completing the consultation (i.e., issuance of a BiOp finding jeopardy to the species or destruction or adverse modification of its designated critical habitat) if the exemption applicant is the federal agency or state, or within 90 days of denial of the permit or license if the exemption applicant is a permit or license applicant. An application must set out the reasons the applicant considers an exemption warranted, include relevant documents such as a biological assessment (BA) and BiOp, and describe any alternatives to the project. Additional application requirements are contained in the relevant regulations. The Secretary may deny the application within 10 days if these initial requirements have not been completed. If the application is complete, the Secretary will publish a notice of receipt of the application in the Federal Register and notify the governor of each affected state (as determined by the Secretary), so that state members can be appointed to the ESC. The Secretary also must notify the State Department, so that its review for potential conflicts with international treaties or agreements can begin. The Secretary determines whether the federal agency and/or the exemption applicant have met three criteria: consulted in good faith and reasonably and responsibly considered modifications or any RPAs; conducted any biological assessment required; and refrained from irreversibly or irretrievably committing resources that would foreclose on the implementation of any reasonable and prudent measures to avoid jeopardy to the species or adverse modification of its critical habitat. The Secretary has 20 days from receipt of the completed application to make a finding that the exemption applicant has met the criteria. A denial for failing to meet the criteria in this stage of the application is deemed a final agency action, meaning that it has reached a stage eligible to be challenged in federal court. The last criterion, whether there has been an irreversible or irretrievable commitment of resources, harkens back to the consultation process. The statute prohibits those initiating consultation from making such a commitment of resources if it would have "the effect of foreclosing the formulation or implementation of any reasonable and prudent alternative measures." This serves to prevent waste of federal resources (such as time and money) on a project that may turn out to violate a federal statute. It also allows a project to be halted before any harm to listed species or their habitats occurs. Because the agency presumably is not carrying out the proposed project while the consultation occurs, it appears that the reference to commitments of resources in the exemption process refers to activities after consultation has concluded. Otherwise, after a jeopardy opinion, an agency that continued to work on a project might seek an exemption, but leave the ESC faced with a fait accompli—the loss of the species in violation of the act. Within 140 days of determining that the exemption applicant has met the requirements described above, the Secretary, in consultation with the other members of the ESC, must convene a formal hearing on the application and prepare a report. (See Figure 1 , Step 17.) The hearing is to collect evidence regarding the exemption. The formal hearing is conducted by an independent administrative law judge (ALJ), and can include witness testimony, offers of proof, and interveners. The purpose is to develop a full evidentiary record to provide a basis for the Secretary's report. If deemed necessary, the ALJ may subpoena records and testimony for the hearing. Service employees who participated in the consultation may not participate in the hearing (e.g., as advisors), but may be witnesses. By law, the Secretary's report must discuss the following: the availability of reasonable and prudent alternatives; the nature and extent of the benefits of the agency action; the nature and extent of alternative actions consistent with conserving the species or the critical habitat; a summary of whether the action is in the public interest and is nationally or regionally significant; appropriate reasonable mitigation and enhancement measures that should be considered by the ESC; and whether the applicant has made any irreversible or irretrievable commitment of resources. The ESC is required to determine whether to grant an exemption within 30 days of receiving the Secretary's report. (See Figure 1 , Step 18.) If the ESC decides more information is required, it may conduct additional fact-finding, including hosting oral presentations. The ESC has subpoena powers for obtaining information it deems necessary to reach its decision. The ESC meetings, hearings, and records are open to the public, and a notice of the hearings and meetings is published in the Federal Register . The ESC shall grant an exemption if, based on the evidence, it determines that (i) there are no reasonable and prudent alternatives to the agency action; (ii) the benefits of such action clearly outweigh the benefits of alternative courses of action consistent with conserving the species or its critical habitat, and such action is in the public interest; (iii) the action is of regional or national significance; and (iv) neither the Federal agency concerned nor the exemption applicant made any irreversible or irretrievable commitment of resources prohibited in subsection (d) of this section. [See discussion above on commitments of resources.] The second and third items give the ESC the opportunity to weigh economic impacts of an exemption and of any alternative courses of action on a national or regional scale. An exemption requires five affirmative votes (out of seven) on the committee. If it approves the exemption, the ESC is required to specify mitigation and enhancement measures in its written decision. The mitigation and enhancement measures that are required to be established by the ESC must be reasonable and "necessary and appropriate to minimize the adverse effects" of the approved action on the species or its critical habitat. (See Figure 1 , Step 20.) The measures can include live propagation, transplantation, and habitat acquisition and improvement. The exemption applicant (whether federal agency, governor, or permit or license applicant) is responsible for carrying out and paying for the mitigation, although the applicant may request that the Secretary carry out the mitigation or enhancement measures. If so, the applicant must fund the measures carried out by the Secretary. The cost of mitigation and enhancement measures specified in an approved exemption must be included in the overall costs of continuing the proposed action, and the applicant must report annually to the Council on Environmental Quality on compliance with mitigation and enhancement measures. Mitigation costs could be considerable and may deter applicants from seeking an exemption. An exemption from the ESC is permanent unless the Secretary later finds, based on the best scientific data available, that the exemption would result in the extinction of a species that was not the subject of consultation nor identified in a biological assessment and the ESC then determines within 60 days of the Secretary's finding that the exemption should not be permanent. In cases where the Secretary does not find that extinction will result, the exemption is permanent even with respect to species not identified in a biological assessment (BA), provided that a BA was prepared during the consultation. The ESA expressly states that the penalties that would normally apply to the taking of an endangered or threatened species do not apply to takings resulting from actions that are exempted. Exemptions apply to the specific federal agency action in the exemption application, not to the species. Consequently, even if an agency action is exempted, FWS or NMFS is still obligated to recover the species. So, for example, if the exempted action causes some portion of the range of a species to become uninhabitable (as happened with the Tellico Dam), any remaining range would become more important because there was less of it. In that remaining habitat, federal actions might receive more intense scrutiny due to the harm to the species caused by the exempted action, and the frequency of jeopardy opinions might increase. Alternatively, if the total habitat area would be unchanged, but quality of the species' habitat would be degraded under the exemption, then more scrutiny might be given to federal actions that affect the habitat (e.g., water temperature, timing, or quantity), as changes might add to the stress on the population and further slow the recovery of the species. Similarly, if the exempted action affects a critical food source, the Services might seek to enhance another food source, and so on. There are limits on the ESC's authority. (See Figure 1 , Steps 10 and 13.) The ESC cannot grant an exemption for an agency action if the Secretary of State, after a hearing and a review of the proposed agency action, certifies in writing that carrying out the action would violate a treaty or other international obligation of the United States. For example, if the species in jeopardy is a migratory bird and the action is prohibited under the Migratory Bird Treaty, then the Secretary of State may find that the action would violate that treaty, and no exemption could be granted. The Secretary of State must make this determination within 60 days "of any application made under this section." (The determination could be difficult, however, because the Interior Secretary's report that would fully describe the agency action would not be due for an additional 80 days, well after the deadline for the Secretary of State.) In contrast, the ESC must grant an exemption if the Secretary of Defense finds that the exemption is necessary for national security. (See Figure 1 , Step 13.) The language of this section does not make clear whether the ESC would still have to meet and vote, even though the result would already have been determined. While there have been a number of controversies over the years in which conflicts between military readiness and the ESA have been alleged, there have been no instances in which the Defense Department (DOD) has availed itself of this provision, even though the ESC result would be a certainty. DOD has claimed that the exemption provision is too cumbersome and time-consuming for its use, given the geographic array of its actions and their frequency. If there is a presidentially declared disaster, the ESA provides another option for an exemption under this process. ESA (16 U.S.C. §1536(p)) authorizes the President, after such a disaster, to make the determinations that would have been made by the Secretary and the ESC. The presidential exemption may be granted only to projects to replace or repair public facilities. To grant the exemption, the President must determine that the project is necessary to prevent the recurrence of a natural disaster and that the emergency situation does not allow ordinary procedures to be followed. The ESA provides that the ESC "shall accept the determinations of the President." It is unclear whether this provision means that the ESC must still be convened, even though acceptance of the determination is pre-ordained. This section of the law has not been invoked to date. If an agency action receives an exemption and avoids the penalties that otherwise would apply under the ESA, other underlying issues related to natural resources may still exist. Such conflicts often involve not only the listed species protected under the ESA but also species protected under other federal laws, state protections, and multiple levels of government, as well as a number of interest groups. As a result, the underlying conflict is rarely centered solely on threatened or endangered species. For example, in a controversy regarding river and dam management in the San Joaquin River basin and the federal Central Valley Project (CVP) in California, multiple lawsuits have been filed over the years based on both federal and state laws. These lawsuits have addressed a host of issues, such as irrigation water supply, fish and wildlife management, recreation, and the environment. The federal court decisions that formed the impetus for the San Joaquin River Restoration Settlement agreement were based not only on the ESA but also on a state law requiring dam owners to provide sufficient water for downstream fish habitat. In this and other CVP-related cases, water-flow restrictions due to ESA requirements are only one piece of the regulatory puzzle. State water quality flow requirements often limit management of pumps before ESA requirements are triggered, particularly during drought. Thus, at certain times of the year and under certain hydrological circumstances, an ESA exemption would not necessarily result in more water being pumped. In general, with respect to the ESA's interaction with state laws, where ESA requirements are stricter than state requirements or otherwise incompatible with them, then the ESA requirements will preempt the state requirements. However, in other instances, such as the aforementioned CVP-related cases, some state requirements are additional to and compatible with those of the ESA and both sets of requirements apply simultaneously. As outlined above, the exemption process is a complex affair, and even without extensions, could take 280 days. Because the resulting decision risks causing the extinction of a species, some would argue a rigorous process is appropriate; others still may find it onerous. But even if the process were simple, any potential exemption applicant would face these challenges: The applicant must fund any required mitigation measures; the funding obligation lasts for the life of the action—potentially forever, depending on the nature of the action. Because the exemption applies to the action and not to the species, FWS or NMFS must continue to attempt to recover the species. Consequently, the burden of conservation and recovery may fall more heavily elsewhere. A governor, trying to balance the interests of an entire state, might find this a particularly difficult obstacle. If conservation of a listed species is only one of various statutory obligations under federal or state laws, then an exemption from ESA for the action may not advance the action, because those other statutory obligations may still be required. Many parties to a dispute may be reluctant to appear publicly to side with the extinction of a species, no matter how uncharismatic. Moreover, if the increased risk of extinction provides only modest advancement for the action, the rewards of a successful exemption application may not seem worth the effort. As a practical matter, the consultation process itself offers federal agencies many opportunities to modify their actions to avoid jeopardizing species or adversely modifying their designated critical habitats, yet still proceed with their actions. The well-known implications of an ESA conflict generally prompt agencies to consider ESA consequences at a very early stage in their actions to avoid conflict later, and specifically to avoid the need for an exemption. Prospective applicants, whether a federal agency, a governor, or a license applicant, must balance the costs of the process described above with benefits (and costs) of winning an exemption. Even so, in many cases, some land and water resource users believe ESA protections for species to be onerous. The protection of threatened and endangered species is often only one of many complex issues surrounding debates over land use, water allocation, energy extraction, energy corridors, and the like. Parties to such debates have commonly struggled for years or even decades over the basic allocation of these resources, as illustrated by the conflicts over water resource management in California; water use in the Apalachicola-Chattahoochee basin in Alabama, Florida, and Georgia; river basin flooding in Tennessee's Tellico River; and timber harvest in the Pacific Northwest, to name only a few. But because the ESA has strong legal protections for listed species, it tends to force decisions on issues that have long been in conflict. When an exemption is considered, potential applicants may be unaware of the stringency of the process, the fact that the exemptions apply to the action rather than the species, the need for the applicant to fund potentially costly permanent mitigation, and the fact that after an exemption is granted, the burden of conservation may fall more heavily on any other areas that the species inhabits or on other resources that the species requires. These considerations likely have played a strong role in limiting interest in the exemption process. (See Appendix A , Appendix B , Appendix C , and Appendix D .) In addition, perhaps the consultation and negotiation stages provided for in the ESA accomplish the purpose of modifying proposed actions early in the planning and development stages and so avoid harm to listed species. These cautions may help explain why the exemption process has rarely been invoked in any recent case. If those involved in a project decide to proceed with an exemption application, the first step is to decide who can and should apply, and for what action. Then the exemption process described above may begin. The Secretary and then the ESC would have to make all of the required findings on which an exemption rests. Even if all of the required findings were made in favor of the applicant, mitigation determined (and the applicant, whether the action agency, the governor, or any permit applicant has the means to pay for it), and an exemption granted, controversy and legal challenges may continue. Other laws may still be in play and, as a result, conflicts may remain. Appendix A. Exemption Denied for Tellico Dam, Tennessee A dam on the Little Tennessee River was proposed by the Tennessee Valley Authority (TVA), based on arguments that it would aid navigation, power generation, and economic development. Opposition to the project arose early in the planning for the dam, because of concern over fishing, recreation, Native American religious sites, and loss of agricultural land. After discovery of the snail darter, project opponents had to decide whether to abandon their old arguments and pin their hopes on a small fish. According to one observer, "opponents would have preferred a weapon like a bald eagle or a bear or a buffalo. But what they had was [a] fish." Appendix B. Exemption for Grayrocks Dam, Wyoming and Nebraska The Platte River, in its lower reaches in Nebraska, is a major stopover site in the migration of endangered whooping cranes between southern Texas and north central Canada. FWS determined that the federal action agencies involved in permits for construction of the nonfederal Grayrocks Dam and Reservoir in Wyoming, along with existing projects in the Platte River basin, would have jeopardized the downstream habitat of cranes. Specifically, a reduction in instream flow as a consequence of the project as originally designed could have damaged the cranes' resting sites. (The reduction in total flow would also have threatened Nebraska irrigation interests, and caused the state to oppose Wyoming's plans.) The federal action agencies were the U.S. Army Corps of Engineers, because the dam's developers needed to obtain a Corps permit pursuant to the Clean Water Act, and the Rural Electrification Administration, which had guaranteed loans to the dam's developer. Appendix C. Exemption for BLM Timber Sales, Oregon Throughout the 1980s and 1990s, controversy abounded in the Pacific Northwest over timber harvests from federal lands. The various players included hikers, large and small timber companies, commercial fishermen and recreational anglers, Indian tribes, hunters, motorized recreation interests, water users, birders, and others. Key federal laws included the National Environmental Policy Act, the National Forest Management Act, and the Federal Land Policy and Management Act. And though the litigation history under these statutes regarding timber management in the Northwest is rich and complex, not until the listing of the northern spotted owl as threatened on June 26, 1990, was the ESA a major factor in the debate. The conflict arose because this species is heavily dependent in its entire life cycle on old growth forests of the type found in the Cascades in southern British Columbia, Washington, Oregon, and northern California. The same forest characteristics that make an area valuable to this species also make it valuable to the timber industry. The Bureau of Land Management (BLM) manages large tracts of old growth forest in Oregon, where conflicts over resource management had arisen many times; the presence of the threatened spotted owl was a new complication. BLM submitted its proposed FY1991 timber sale program to FWS for Section 7 consultation. The history below contains lawsuits and actions based on the ESA, but omits the many legal actions based on other statutes (e.g., the initial lawsuits against Forest Service timber sales under the National Forest Management Act). Appendix D. Three Attempts at an Exemption In addition to the three completed applications, there were three other instances in which applications were filed, but the applications were withdrawn or abandoned. Pittston Refinery, Eastport, Maine The Pittston Company wished to build an oil refinery at Eastport, ME, in the mouth of the Bay of Fundy, an area with one of the world's greatest tidal fluctuations (over 20 feet). In its BiOp on an EPA permit, FWS held that the refinery would jeopardize bald eagles, and NMFS held that the project would endanger whales. Initially, EPA denied Pittston's application for a permit to discharge effluent. In 1979, the company responded with two actions. First it sought an administrative appeal of the denial. Second, it applied for an exemption under ESA for its discharge permit. The company felt it was forced to take the two actions simultaneously because the ESA required an application to be filed within 90 days of the denial of a permit. In January 1979, the various parties agreed to suspend the exemption process while a compromise was sought. The effort at compromise was not successful. Environmental groups sued, asking an injunction to stop the exemption application. They argued that the case was brought prematurely, before the issue had finished with the administrative appeals process. In effect, they argued that the ESA itself was poorly written, in that it forced the applicant to carry out two procedures (appeal and exemption) simultaneously. The U.S. Justice Department agreed that the law was unclear and that the exemption process should not run concurrently with an appeal. The court eventually agreed that the exemption process could not begin until the appeals process was finished. This confusion, and apparent conflict, was addressed by Congress in the 1982 amendments to ESA. These amendments clarified that the exemption process was to be invoked only after the issuance of a BiOp and after other means of compliance had failed. In the case of a permit or license, the exemption process must also wait until after an agency formally denies the permit or license. The applicant may not simultaneously seek an administrative appeal and an exemption. Docking Area, Mound City, Illinois The Consolidated Grain and Barge Company (CGBC) sought to build a docking area for barges on the Ohio River at Mound City, IL. The area was habitat for the endangered orange-footed pearly mussel, Plethobasus cooperianus . CGBC had sought a permit from the Army Corps of Engineers (Corps) under the Rivers and Harbors Act of 1899 to construct the docking area. FWS issued a jeopardy BiOp to the Corps which denied the permit on that basis. Initially, the owner of the property agreed to provide funds for the exemption application, although CGBC was not willing to commit similar funds. On November 6, 1985, FWS published notice of the exemption application in the Federal Register . On December 6, 1985, FWS published a Federal Register notice of a hearing to be held in St. Louis, MO, on January 28, 1986. The notice indicated that the DOI Secretary agreed that the threshold criteria for beginning the exemption process (see Box 12, Figure 1 ) had been met, and set the details for the next stage of the process, that is, the hearing. The notice also reminded interested parties that the applicant had the burden of proof in the proceedings. At a pre-hearing conference with an administrative law judge on January 8, 1986, CGBC sent no one to represent its interests. A partner in a law firm of the lawyer hired by the landowner was present, but said he had limited information concerning the issue. He had no list of witnesses on which to call. The lawyer asked for a one-week extension of the hearing, but before it was held, the exemption application was withdrawn. Dredging Alligator Pass in Suwanee Sound, Florida On July 30, 1986, the consulting engineer of the Suwanee River Authority (SRA) applied for an exemption for a project to dredge Alligator Pass in Suwanee Sound, FL, an area that provided habitat for the endangered manatee. It is not clear that the consulting engineer had authority from the SRA to apply on its behalf. The project needed a permit from the Corps, which had denied it, primarily on the grounds of the presence of manatees. On August 12, 1986, the board of the SRA refused to ratify the actions of the consulting engineer and asked that the exemption application be withdrawn. In a letter on his own stationery, the engineer asked that the application be continued. After a further exchange of contradictory letters, the withdrawal stood. Appendix E. California Central Valley Project and State Water Project (Delta Pumping) Two existing federal BiOps affect coordinated operation of the federal Central Valley Project (CVP) and the California State Water Project (SWP), two of the largest water resource projects in the country. Of particular concern to many Members of Congress has been the effect of ESA pumping restrictions on water supplies available from these projects to water users in central and southern California. Many water users saw dramatically reduced supplies during a multiyear drought—in some years, receiving no water from the CVP. Whereas some parties have advocated eliminating or otherwise relaxing these pumping restrictions, others have voiced concerns about such efforts on the multiple threatened and endangered species in question, such as the Delta smelt and various salmon and other species. Although other factors, such as state water quality regulations and hydrologic limitations, play a role in how much water can be pumped and made available to water users, much attention has been paid to restrictions on project operations due to implementation of the ESA. In 2009, some parties advocated for petitioning the governor and the President to begin the ESA exemption process in response to reasonable and prudent alternatives (RPAs) developed during the ESA consultation process on the coordinated operation of the CVP and SWP. Since then, most action has been aimed at developing legislation to address the ESA restrictions. In the 114 th Congress, legislative activity focused primarily on H.R. 2898 S. 1894 , and S. 2533 . While all three bills contained provisions pertaining to pumping levels and threatened and endangered fish species, none included provisions seeking or supporting exemptions under the ESA exemption process. Provisions allowing increased pumping beyond the RPA limits under certain conditions were included in S. 612 , the Water Infrastructure Improvements for the Nation (WIIN) Act, which was signed into law on December 16, 2016 ( P.L. 114-322 ). New legislation in the 115 th Congress also could address CVP and SWP operations and implementation of the ESA.

The Endangered Species Act (ESA) is designed to protect species from extinction, but it includes an exemption process for those unusual cases where the public benefit from an action is determined to outweigh the harm to the species. This process was created by a 1978 amendment to the ESA, but it is rarely used. This report will discuss the exemption process for an agency action, with examples from past controversies, and its potential for application to actions that may affect current controversies, such as water supply. The ESA mandates listing and protecting species that are endangered or threatened with extinction. Listing a species limits activities that could affect that species and provides penalties for taking individuals of that species. The ESA also requires federal agencies to consult with the Fish and Wildlife Service or the National Marine Fisheries Service (together, the Services) to determine whether a federal action may jeopardize the continued existence of a species or harm its critical habitat. The consultation process may lead to an opinion by one of the Services that the action will jeopardize listed species or harm their critical habitats unless certain reasonable and prudent alternatives are included in the action. Rarely, the federal action agency may hold that those alternatives are inconsistent with the agency action. In other extremely rare cases, the Services may find that no alternatives are available that would allow the project to proceed and still prevent jeopardy. In either case, the following are the categories of potential applicants that can apply for an exemption for a federal action despite its effects on listed species or their critical habitat: the federal action agency interested in proceeding with the action, an applicant for a federal license or permit whose application was denied primarily because of the prohibitions of ESA requiring that federal agency actions avoid jeopardy to threatened or endangered species or harm to their critical habitats, or the governor of the state where the action was to have occurred. An exemption application is considered by a specially convened committee which may exempt the federal agency's action from the prohibitions of the ESA. The exemption process allows major economic factors to be judged to outweigh the ESA's mandate to recover a species when the federal action is found to be in the public interest and is nationally or regionally significant. The exemption process has been invoked with a dam on the Tellico River (TN), a water project in the Platt River (WY and NE), and timber sales (OR). In three other instances, the process was begun but was aborted before a decision was reached. In addition, there has been interest over the years in invoking the process in light of controversies over management of federal and state water resource projects in California, although no application has ever been filed. When a project achieves such levels of controversy, Congress is sometimes asked to intervene in the outcome, as it did in the case of the Tellico Dam and an endangered fish in the late 1970s.

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Since the enactment of the individual income tax in 1913, the appropriate taxation of capital gains income has been a perennial topic of debate in Congress. Every session, numerous bills are introduced that would change the way capital gains income is taxed. Congress has also shown a continuing interest in the tax treatment of capital losses. With the financial turmoil and the volatile stock market, many have proposed increasing the limit on capital losses that can be deducted against ordinary income (the loss limit). Some proposals would increase the loss limit to $10,000 or to $15,000 from its current $3,000. A limit on the deductibility of capital losses against ordinary income has long been imposed, in part because gains and losses are taxed or deducted only when realized. An individual who is actually earning money on his portfolio can achieve tax benefits by realizing losses and not gains (and can hold assets with gains until death when no tax will ever be paid). The loss limit prevents this selective realization of losses from being a significant problem. The problem of losses is further exacerbated by the current tax system, where the treatment of capital gains and losses is asymmetrical. Long-term gains are taxed at a maximum rate of 15%. Long-term losses are deductible without limit against short-term capital gains and net long-term losses are deductible against $3,000 of ordinary income. Both short-term capital gains and ordinary income can be taxed at rates of up to 35%. This differential allows taxpayers to time their gains and losses so as to minimize income taxes. (For example, by realizing and deducting losses in one tax year at 35% while waiting until the next tax year to realize and pay taxes on gains at 15%). Increasing the net capital loss deduction would increase the rewards of gaming the system. The empirical evidence indicates that capital gains income is heavily concentrated in the upper income ranges. It is probable that large capital losses are also concentrated in the same income ranges. Taxpayers in the middle income ranges tend to hold capital gains producing assets as part of tax favored retirement savings plans. The assets in these plans are not affected by the net loss restrictions. As a consequence, the benefits of increasing the net loss deduction would tend to accrue to taxpayers in the upper income ranges. It is also unclear whether increasing the net loss deduction would stimulate the economy. Economic analysis suggests that measures to stimulate the economy should focus on spending or on tax cuts likely to be spent, that will directly increase aggregate demand. An expanded deduction for capital losses has a tenuous connection to expanded spending; thus, presumably, the argument is that such a tax benefit will benefit the stock market. However, it is not at all certain that an increase in loss deduction would increase the stock market; it might increase sales of poorly performing stocks and depress these markets further. This report provides an overview of these issues related to the tax treatment of capital losses. It explains the current income tax treatment of losses, describes the historical treatment of losses, provides examples of the tax gaming opportunities associated with the net loss deduction, examines the distributional issues, and discusses the possible stimulative effects of an increase in the net loss deduction. Under current income tax law, a capital gain or loss is the result of a sale or exchange of a capital asset (such as corporate stock or real estate). If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Capital assets held longer than 12 months are considered long-term assets while assets held 12 months or less are considered short-term assets. Capital gains on short-term assets are taxed at regular income tax rates. Gains on long-term assets sold or exchanged on or after May 6, 2003, and before January 1, 2013, are taxed at a maximum tax rate of 15%. For these assets, the maximum long-term capital gains tax rate is 0% for individuals in the 10% and15% regular marginal income tax rate brackets. Losses on the sales of capital assets are fully deductible against the gains from the sales of capital assets. (Losses on the sale of a principal residence are not deductible and losses on business assets are treated as ordinary losses and deductible against business income.) However, when losses exceed gains, there is a $3,000 annual limit on the amount of capital losses that may be deducted against other types of income. Determining the amount of capital losses under the federal individual income tax involves a multi-step process. First, short-term capital losses (on assets held less than 12 months) are deducted from short-term capital gains. Second, long-term capital losses (on assets held for more than 12 months) are deducted from long-term capital gains. Next, net short-term gains or losses are combined with net long-term gains or losses. If the combination of short-term and long-term gains and losses produces a net loss, then that net loss is deductible against other types of income up to a limit of $3,000. Net losses in excess of this $3,000 limit may be carried forward indefinitely and deducted in future years, again subject to the $3,000 annual limit. Historically, Congress has repeatedly grappled with the problem of how to tax capital gains and losses. Ideally, a tax consistent with a theoretically correct measure of income would be assessed on real (inflation-adjusted) income when that income accrues to the taxpayer. Conversely, real losses should be deducted as they accrue to the taxpayer. However, putting theory into practice has been a difficult exercise. Since 1913, there has been considerable legislative change in the tax treatment of capital gains income and loss. To provide perspective for the current debate, a brief overview of the major legislative changes affecting capital losses follows. Between 1913 and 1916, capital losses were deductible only if the losses were associated with a taxpayer's trade or business. Between 1916 and 1918, capital losses were deductible up to the amount of any capital gains, regardless of whether the gains or losses were associated with a taxpayer's trade or business. From 1918 to 1921, capital losses in excess of capital gains were deductible against ordinary income. The Revenue Act of 1921 significantly changed the tax treatment of capital gains and losses. Assets were divided into short and long-term assets. Short-term gains were taxed at regular income tax rates and excess short-term losses were deductible against ordinary income. Long-term gains were eligible for tax at a flat rate of 12.5%. Net excess long-term losses were deductible against other types of income at ordinary income tax rates which, including surtax rates, went as high as 56%. This system created an asymmetrical treatment of long-term gains and losses. Excess long-term losses could be deducted at much higher tax rates than the rates applied to long-term gains. This asymmetry was rectified by the Revenue Act of 1924, which instituted a tax credit of 12.5% for net long-term losses. This approach remained in effect, with only minor modifications, between 1924 and 1938. The Revenue Act of 1938, however, introduced changes in the tax treatment of gains and losses from the sale of capital assets. Gains and losses were classified as short-term if the capital asset had been held 18 months or less and long-term if the asset had been held for longer than 18 months. Short-term losses were deductible up to the amount of short-term gains. Short-term losses in excess of short-term gains could be carried forward for one year and used as an offset to short-term gains in that succeeding year. The carryover could not exceed net income in the taxable year the loss was incurred. Net short-term gains were included in taxable income and taxed at regular tax rates. For assets held more than 18 months but less than 24 months, 66.66% of the gain or loss was recognized. For assets held longer than 24 months, 50% of the gain from the sale of that asset was recognized and included in taxable income. Net recognized long-term losses could be deducted against other forms of income without limit. This treatment, however, introduced a new inconsistency into the tax system because while only 50% of any long-term capital gain was included in the tax base, 100% of any net long-term loss was deductible from the tax base. The next significant change in the tax treatment of capital losses occurred during World War II. The Revenue Act of 1942 changed the tax treatment of capital losses in two significant ways. First, it consolidated the tax treatment of short- and long-term losses. Second, it established a $1,000 limit on the amount of ordinary income that could be offset by combined short- and long-term net capital loss. Finally, it created a five-year carry forward for net-capital losses that could be used to offset capital gains and up to $1,000 of ordinary income in succeeding years. Once again, this change introduced an inconsistency into the tax treatment of gains and losses because it allowed taxpayers to use $1 in net long-term losses to offset $1 in net short-term gains. Since only 50% of a net long-term gain was included in taxable income, including 100% of a net long-term loss created an asymmetry. For instance, if a taxpayer had a net long-term loss of $100, then it could be used to offset $100 of net short-term gains. Symmetrical treatment of long-term gains and losses, however, would allow only 50% of a net long-term loss to be deducted against net short-term gains ($100 of net long-term loss could only offset $50 of net short-term gain). This asymmetry was corrected in the Revenue Act of 1951 which eliminated the double counting of net long-term losses. The Revenue Act of 1964 repealed the five-year loss carryover for capital losses and replaced it with a unlimited loss carryover. Net losses, however, were still deductible against only $1,000 of ordinary income in any given year. The Tax Reform Act of 1969 also removed a dichotomy in the tax treatment of long-term gains and losses that had existed since 1938 by imposing a 50% limitation on the amount of net long-term losses that could be used to offset ordinary income. Under prior law, even though only 50% of net long-term gains were subject to tax, net long-term losses could be deducted in full and used to offset up to $1,000 of ordinary income. The 1969 Act repealed this provision and established a new 50% limit on the deductibility of net long-term losses, subject to the same $1,000 limit on ordinary income (hence, it took $2 of long-term loss to offset $1 of ordinary income). In addition, the law specified that the nondeductible portion of net long-term losses could not be carried forward to be deducted in succeeding years. The Tax Reform Act of 1976 increased the capital loss offset against ordinary income. Under prior law, net capital losses could offset up to $1,000 of ordinary income. The 1976 Act increased the capital loss offset limit to $2,000 in 1977 and $3,000 for tax years starting after 1977. The Revenue Act of 1978 reduced the tax rate on long-term capital gains income by increasing the exclusion from tax for long-term capital gains from 50% to 60%. The 1978 Act, however, did not reduce the limit on the deductibility of net long-term losses. Hence, while only 40% of long-term gains were included in the tax base, 50% of losses were excluded from the tax base. The Tax Reform Act of 1986 repealed the net capital gain deduction for individuals. Both short-term and long-term capital gains income were included in taxable income and taxed in full at regular income tax rates. Regular statutory income rates under the act were reduced from a maximum of 50% to 33% (28% statutory rate plus a 5% surcharge). The tax treatment of capital losses was changed by eliminating the 50% limitation on deductibility of net long-term losses. Losses could be netted against gains and any excess losses, whether short or long term, could be deducted in full against up to $3,000 of ordinary income. Net losses in excess of this amount could be carried forward indefinitely. Gradually changes were made that caused capital gains to be tax favored again. When tax rates were revised in 1990 to eliminate the "bubble" arising from the surcharge, a maximum rate of 28% was set for capital gains, slightly lower than the top rate of 31%. When tax rates were increased in 1993 for very high income individuals (adding a 36% and 39.6% rate), this 28% top tax rate on long-term gains was maintained, causing a wider gap between taxation of ordinary income and capital gains income. The growing asymmetry between taxes on capital gains and losses was not addressed. The Taxpayer Relief Act of 1997 was the latest major change in the tax treatment of capital gains and losses. It established the current law treatment of gains by lowering the maximum tax rate on long-term capital gains income to 20% (and creating a 10% maximum capital gains tax rate for individuals in the 15% tax bracket). The act did not change the tax treatment of capital losses. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the 10% and 20% long-term capital gains tax rates to 5% and 15% for tax years before 2009. The reduced rates were extended through to the end of tax year 2010 by the Tax Increase Preventive and Reconciliation Act of 2005. Neither act changed the treatment of capital losses. The tax treatment of capital gains and losses has changed repeatedly over the years. Some of the legislative changes that occurred in the past were attempts to reestablish symmetry between the tax treatment of capital gains and capital losses. Under current law, asymmetries between the tax treatment of capital gains and losses remain. Currently, net long-term losses are deductible against net short-term gains without limit. This rule introduces inconsistencies because net long-term gains are taxed at a maximum rate of 15% while net long-term losses can be deducted against short-term gains which can be taxed at rates up to 35%. Additionally, net long-term losses can be deducted against up to $3,000 of ordinary income even though the maximum rate on ordinary income is 35% while the maximum rate on long-term gains is 15%. The recent downturn in the stock market has prompted some analysts to suggest increasing the net capital loss limitation as a means of softening the downturn for some investors. However, simply increasing the loss limitation would tend to increase the dichotomy between the tax treatment of gains and losses. Given these suggestions, a review of the rationale behind the net loss limitation may prove valuable. The loss limitation was originally enacted because taxpayers have control over the timing of the realization of their capital gains and losses. They can elect to sell assets with losses and hold assets with gains, thus minimizing their capital income tax liabilities. When capital gains income is taxed more lightly than other types of income, allowing capital losses to offset other income without limit increases a taxpayer's ability to minimize income taxes by altering the timing of the realization of gains and losses. For example, consider the case of a taxpayer who, on the last day of a tax year, wishes to sell two assets. The sale of the first asset would produce a long-term gain of $20,000 while the sale of the second asset would produce a long-term loss of $20,000. If the taxpayer sold both assets in the same tax year, then the two sales would net to zero and there would be no taxes owed on the transactions. However, if there were no loss limitation, then the taxpayer could significantly reduce his taxes by realizing the gain this tax year and postponing the realization of the loss until the next tax year (or vice versa). Realization of the $20,000 long-term gain in the current tax year would cost the taxpayer $3,000 in federal income taxes (15% maximum long-term capital gains tax rate times the $20,000 capital gain). By waiting and taking the loss the next tax year, the taxpayer could reduce his federal income taxes by $7,000 (35% maximum tax rate on ordinary income times the $20,000 long-term loss). Hence, with no capital loss limitation, the taxpayer could reduce his net federal income taxes by $4,000 simply by changing the timing of the realizations of gains and losses. It should be noted that current law allows for an unlimited carry forward of excess losses. Hence, taxpayers do not forfeit the full value of excess losses because they can deduct those losses in future years. The actual cost to the taxpayer of forgoing the full loss in the current year is the interest that would have been earned on the additional tax reduction that would have been realized had there been no excess loss limitation. For example, consider a scenario where a taxpayer has a net long-term capital loss of $20,000. If there were no loss limitation, the taxpayer could deduct the entire loss against other income in the first year and, assuming the highest marginal tax rate of 35%, reduce his income tax liability by $7,000 ($20,000 times 0.35). Now consider the situation with a $3,000 annual loss limitation. If the taxpayer had no net capital gains in any subsequent year, then it would take the taxpayer seven years to deduct the full $20,000 capital loss ($3,000 loss deduction for six years and a $2,000 loss deduction in the seventh year). Once again assuming the taxpayer faces the highest marginal tax rate of 35% (and that the rate does not change over the seven year period) the taxpayer will reduce his taxes over the period by $7,000. Since money has a time value, however, the $7,000 in tax savings taken over seven years is not as valuable as the $7,000 in tax savings taken in the first year when there was no loss limitation. If an interest rate of 5% is assumed, then the present value of the $7,000 in tax savings over seven years is $6,118. So under this worst case scenario, in present value terms, the annual capital loss limitation would reduce the tax savings in this example by approximately $882. It is also worth noting that if the tax rate on long-term gains and losses were symmetrical at 15%, then the full deduction of a $20,000 net long-term loss would reduce the taxpayer's income tax liability by only $3,000 ($20,000 loss times 15% tax rate). Hence, even with the annual loss limitation, taxpayers with net long-term capital losses receive more tax savings under the current system than if there were a symmetrical tax rate on long-term gains and losses. (In the preceding example where the $20,000 was deducted at regular income tax rates over seven years the present value of the tax savings was $6,118 versus a $3,000 tax savings if there were a 15% symmetrical tax rate on both capital gains and losses). In most cases, the current system, even without indexing the $3,000 loss for inflation, is more generous than the system that existed in 1978. The empirical evidence establishes that capital gains are concentrated at the higher end of the income range. In 2006, the top 3% of taxpayers with over $200,000 in adjusted gross income earned 91% of schedule D capital gains. It has also long been recognized that these concentrations are somewhat overstated because large capital gains realizations tend to push individuals into higher brackets and an annual snapshot can overstate the concentration. One way to correct for this effect is to sort individuals by long-term average incomes which requires special tax tabulations. The most recent study to do so (using a somewhat different measure of income, but reporting by population share) indicated that the top 1% who earned over $200,000 from 1979-1988 received 57% of gains, and the top 3% who earned over $100,000 received 73% of the gains. By interpolation, we can see that about two-thirds of gains are received by the top 2% of the income distribution. The distortion relating to gains works in the opposite direction in the case of losses, understates the share of losses going to high income individuals, and may be much more serious. Thus, looking at losses by income class may not be very meaningful. For example, the top 3% accounted for about 30% of losses. However, there are significant losses in very low income classes that are almost certainly people whose incomes are normally high. For example, another 10% of losses are realized by individuals with no adjusted gross income. Since gains are normally much larger than losses, this distortion can be quite serious and calculations such as these probably do not tell us very much. A better calculation is the permanent capital gains share, which suggests, as noted above, that about two-thirds of gains are realized by individuals in the top 2% of the permanent income distribution, and a similar finding is probably appropriate for losses. There are other reasons to expect that lower and middle income taxpayers are unlikely to be much affected by the expansion of capital losses. First, relatively few low and middle income families directly hold stock. About 14% of families with income below $75,000 directly own corporate stock and about 35% of families with income between $75,000 and $100,000 directly own stock. Secondly, many of their assets are held (and are increasingly being held) in tax favored forms. In 2001, 29% of equities held by individuals were held in pensions (either private or state and local); moreover about of 8% of stock is held in individual retirement accounts. Assets held in these accounts are not affected by loss restrictions because in the case of traditional IRAs and pension plans the original contributions have already been deducted from income. Hence, any possible loss on the original investment has been pre-deducted from taxable income. In the case of Roth IRAs, since gains on investments are not subject to tax upon withdrawal, losses on investments should not be deducted from income. Another 7% are held in life insurance plans which are also not subject to tax. Altogether, these assets account for over 40% of equities and they are likely to be proportionally much more important for the middle class. In addition, moderate income taxpayers are more likely to hold equities in mutual funds that have mixed portfolios and typically do not report losses because they hold so many types of stocks. Only about 25% of distributions from mutual funds are reported on tax returns because the remainder of distributions occur in pension and retirement accounts. The major sources of realized capital losses for 1999 (the latest year for which this information is available) are shown in Table 1 . The largest source of losses is the sale of corporate stock, which accounts for 61% of losses reported in 1999. Other securities (for example, mutual fund shares and options) accounted for another 15%. In general, most of the capital losses are realized on assets that are predominantly owned by higher income taxpayers. Most taxpayers with incomes below $200,000 do not file a schedule D and thus have no capital losses (see Table 2 ). In contrast, over 90% of taxpayers with income over $1 million file a schedule D. Direct evidence from tax returns does suggest that only a small fraction of taxpayers experience a net capital loss (less than 7% in total). Excluding the "No Income" class, about 6% have any loss at all. Even among very high income taxpayers, less than 20% report a net capital loss on their schedule D. These shares would probably be even smaller for population arrayed according to lifetime income. Taxpayers with net capital losses can deduct up to $3,000 against ordinary income, but about 60% are subject to the loss limit and have to carryover the excess losses to subsequent years. Evidence indicates that of individuals who could not deduct their losses in full, two thirds were able to fully deduct losses within two years and more than 90% in six years. One study concluded that in 2003 more than half of the benefit of raising the exclusion to $6,000 would be received by tax filers with incomes over $100,000, who account for 11% of tax filers. Thus, the evidence suggests that raising the capital loss limit would benefit a relative small proportion of high income individuals. The primary objective of recent economic proposals is to stimulate the economy. Normally a tax benefit that favors individuals with high permanent incomes (as does a capital gains tax cut) is a relatively ineffective way to stimulate the economy because these individuals tend to have a higher propensity to save, and it is spending, not saving, that stimulates the economy. The most effective economic stimulus is one that most closely translates dollar for dollar into spending. Direct government spending on goods and services would tend to rank as the most effective, followed by transfers and tax cuts for lower income individuals. One argument that might be made for providing capital gains tax relief is that it would increase the value of the stock market and thus investor confidence. Indeed, such an argument has been made for a capital gains tax cut in the past. Such a link is weaker and more uncertain than a direct stimulus to the economy via spending increases or cuts in taxes aimed at lower income individuals. Indeed, it is not altogether certain that capital gains tax relief would increase stock market values—the evidence is mixed. Stock markets rise when increases in offers to buy exceed increases in offers to sell. Capital gains tax revisions may be more likely to increase sales than purchases in the short run through an unlocking effect, and this effect could be particularly pronounced in the case of an expanded capital loss deduction. Although these benefits may stimulate the stock market because they make stocks more attractive investments, they also create a short-term incentive to sell—and an incentive to sell the most depressed stocks. Thus, if the method of stimulating the economy is expected to work via an increase in stock prices, such a tax revision whose effect is expected via a boost in the stock market could easily depress stock prices further. Overall, it is a uncertain method of stimulating the economy. Several reasons have been advanced to increase the net capital loss limit against ordinary income: as part of an economic stimulus plan, as a means of restoring confidence in the stock market, and to restore the value of the loss limitation to its 1978 level. An increase in the net capital loss limit may not be an effective device to stimulate aggregate demand. In the short run, an increase in the loss limitation could produce an incentive to sell stock, which could depress stock prices and erode confidence even further. Furthermore, the empirical evidence suggests that the tax benefits of an increase in the net capital loss limitation would be received by a relatively small number of higher income individuals. The restoration of the value of the loss limitation to its 1978 level is more complicated to address, but two important comments may be made. First, there is no way to determine that a particular time period had achieved the optimal net capital lost limitation, although historically, the loss limit has been quite small. Second, while correcting the $3,000 loss limit to reflect price changes since 1978 would increase its value to about $10,000 in 2010 dollars, net long-term capital losses are generally treated more preferentially than they were prior to 1978 because of the asymmetry between loss and gain, which was never addressed during recent tax changes. Restoration of historical treatment would also require an adjustment for asymmetry. This problem with asymmetry has been growing increasingly important through the tax changes of 1990, 1993, 1997, and 2003. Raising the limit on losses without addressing asymmetry will expand opportunities to game the system. Achieving full symmetry in the system requires that the tax rate differential between short and long-term gains and losses be accounted for during the netting process. The current rate differential is approximately two to one (35% maximum tax rate on ordinary income and short-term capital gains versus an 15% maximum tax rate on long-term capital gains). Given this rate differential, symmetry could be achieved in the netting process through the following steps: In the case of a net short-term gain and a net long-term loss, $2 of net long-term losses should be required to offset $1 of short-term gain. If a net loss position remains, $2 of long-term losses should be required to offset $1 of ordinary income up to the net loss limitation. Any remaining net loss would be carried forward. In the case of a net short-term loss and a net long-term loss the simplest way is to begin with short-term losses which can be used on a dollar for dollar basis to offset ordinary income. If short-term losses exceed the limit they would be carried forward along with all long-term losses. If net short-term losses are less than the loss limitation, then $2 of net long-term loss can be used to offset each $1 remaining in the net loss limitation. Any remaining net long-term loss would be carried forward. In the case of a net short-term loss and a net long-term gain each $1 of net short-term loss should offset $2 of net long-term gain. Any net loss remaining should offset ordinary income on a dollar for dollar basis up to the net loss limitation. Any remaining net loss would be carried forward. Although the netting principles outlined above may appear complicated, they are no more complicated to implement on tax forms than the current netting procedures. Another method for achieving symmetry would be to institute a tax credit of 15% (or whatever the maximum capital gain tax rate is) for capital losses. The tax credit could be capped and the cap could be indexed to inflation. This will benefit taxpayers in the 10% and 15% tax brackets because the maximum capital gains tax rate is 0% for these taxpayers (until 2013). But these taxpayers mostly do not report capital gains and losses. This is the basic approach taken between 1924 and 1938.

Several reasons have been advanced for increasing the net capital loss limit against ordinary income: as part of an economic stimulus plan, as a means of restoring confidence in the stock market, and to restore the value of the loss limitation to its 1978 level. Under current law, long-term and short-term losses are netted against their respective gains and then against each other, but if any net loss remains it can offset up to $3,000 of ordinary income each year. Capital loss limits are imposed because individuals who own stock directly decide when to realize gains and losses. The limit constrains individuals from reducing their taxes by realizing losses while holding assets with gains until death when taxes are avoided completely. Current treatment of gains and losses exhibits an asymmetry because long-term gains are taxed at lower rates, but net long-term losses can offset income taxed at full rates. Individuals can game the system and minimize taxes by selectively realizing gains and losses, and for that reason the historical development of capital gains rules contains numerous instances of tax revisions directed at addressing asymmetry. The current asymmetry has grown as successive tax changes introduced increasingly favorable treatment of gains. Expansion of the loss limit would increase "gaming" opportunities. In most cases, this asymmetry makes current treatment more generous than it was in the past, although the capital loss limit has not increased since 1978. Capital loss limit expansions, like capital gains tax benefits, would primarily favor higher income individuals who are more likely to hold stock. Most stock shares held by moderate income individuals are in retirement savings plans (such as pensions and individual retirement accounts) that are not affected by the loss limit. Statistics also suggest that only a tiny fraction of individuals in most income classes experience a loss and that the loss can usually be deducted relatively quickly. One reason for proposing an increase in the loss limit is to stimulate the economy, by increasing the value of the stock market and investor confidence. Economic theory, however, suggests that the most certain method of stimulus is to increase spending directly or cut taxes of those with the highest marginal propensity to consume, generally lower income individuals. Expanding the capital loss limit is an indirect method, and is uncertain as well. Increased capital loss limits could reduce stock market values in the short run by encouraging individuals to sell. Adjusting the limit to reflect inflation since 1978 would result in an increase in the dollar limit to about $10,000. However, most people are better off now than they would be if the $3,000 had been indexed for inflation if capital losses were excludable to the same extent as long-term capital gains were taxable. For higher income individuals, restoring symmetry would require using about $2 in long-term loss to offset each dollar of ordinary income. Fully symmetric treatment would also require the same adjustment when offsetting short-term gains with long-term losses. This report will be updated to reflect legislative developments.

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The National Labor Relations Act (NLRA or "the Act") recognizes the right of employees to engage in collective bargaining through representatives of their own choosing. By "encouraging the practice and procedure of collective bargaining," the Act attempts to mitigate and eliminate labor-related obstructions to the free flow of commerce. Although union membership has declined dramatically since the 1950s, congressional interest in the NLRA remains significant. In the 112 th Congress, over 30 bills have been introduced to amend the NLRA. Some of these bills address the timing of union representation elections, while others are concerned with varying aspects of the NLRA, such as the activities of the National Labor Relations Board (NLRB), which implements and administers the Act. Since the NLRA's enactment in 1935, the NLRB and the courts have considered a variety of issues arising under the Act. This report reviews selected decisions of the NLRB and the courts that involve topics that continue to be relevant for employers and unions during the collective bargaining process. The right to engage in collective bargaining under the NLRA does not apply to all individuals employed by an employer. Rather, the right extends only to "employees." Section 2(3) of the NLRA states that an employee "shall include any employee ... but shall not include any individual ... employed as a supervisor." An employee's job title does not determine whether an individual is a supervisor for purposes of the NLRA. Instead, the term "supervisor" is defined by the Act to include any individual with the authority to perform any one of 12 specified functions, if the exercise of such authority requires the use of independent judgment and is not merely routine or clerical. Section 2(11) of the NLRA states: The term "supervisor" means any individual having authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action, if in connection with the foregoing the exercise of such authority is not of a merely routine or clerical nature, but requires the use of independent judgment. Because the 12 functions and the term "independent judgment" are not further defined, the NLRB and U.S. Supreme Court have sought to provide meaning to this language. In NLRB v. Kentucky River Community Care, Inc ., the Court considered whether certain nurses should be classified as supervisors for purposes of the NLRA when their judgment was informed by professional or technical training or experience. Kentucky River Community Care, the operator of a care facility for individuals with mental retardation and illness, sought to exclude six registered nurses (RNs) from a bargaining unit on the grounds that they were supervisors. The NLRB concluded that the nurses were not supervisors because they failed to exercise sufficient independent judgment. According to the NLRB, the nurses used "ordinary professional or technical judgment" in directing less-skilled employees to deliver services in accordance with employer-specified standards. The U.S. Court of Appeals for the Sixth Circuit rejected the NLRB's position, and the Court ultimately affirmed the Sixth Circuit's decision. The Kentucky River Court understood section 2(11) of the NLRA to set forth a three-part test for determining supervisory status. Employees will be considered supervisors if (1) they hold the authority to engage in any one of the twelve supervisory functions identified in section 2(11) of the NLRA; (2) their exercise of authority is not of a "merely routine or clerical nature, but requires the use of independent judgment," and (3) their authority is held in the interest of the employer. At issue in Kentucky River , was the second part of the test. Although the Court recognized the NLRB's discretion to clarify the meaning of the term "independent judgment," it maintained that it was inappropriate for the NLRB to characterize judgment that reflects "ordinary professional or technical judgment" as failing to be independent judgment. The Court believed that the NLRB's reference to "ordinary or technical judgment" established a "startling categorical exclusion" that was not suggested by the NLRA's statutory text. The Court observed: What supervisory judgment worth exercising, one must wonder, does not rest on 'professional or technical skill or experience?' If the Board applied this aspect of its test to every exercise of a supervisory function, it would virtually eliminate 'supervisors' from the Act. In addition, the Court indicated that it was unaware of any NLRB decision that concluded that a supervisor's judgment ceased to be independent judgment because it depended on the supervisor's professional or technical training or experience. The Court maintained that when an employee exercises one of the functions identified in section 2(11) with judgment that possesses a sufficient degree of independence, the NLRB "invariably finds supervisory status." Four justices dissented from the majority's position on independent judgment. The dissent maintained that the NLRB's interpretation of independent judgment was fully rational and consistent with the NLRA. The dissent noted: "The term 'independent judgment' is indisputably ambiguous, and it is settled law that the NLRB's interpretation of ambiguous language in the [NLRA] is entitled to deference. In 2006, the NLRB revisited the issue of supervisory status in Oakwood Healthcare, Inc . Oakwood Healthcare employed approximately 181 RNs in 10 patient care units at an acute care hospital. Many of these nurses served as charge nurses who were responsible for overseeing their patient care units and assigning other RNs, technicians, and medical personnel on their shifts. Some of the RNs worked permanently as charge nurses, while others rotated into the charge nurse position. Oakwood Healthcare sought to exclude both the permanent and the rotating charge nurses from a proposed bargaining unit on the grounds that they were supervisors within the meaning of section 2(11). Oakwood Healthcare maintained that the charge nurses were supervisors because they "used independent judgment in assigning and responsibly directing employees." The NLRB viewed Oakwood Healthcare, Inc . as an opportunity to define the terms "assign," "responsibly to direct," and "independent judgment" as they are used in section 2(11) of the NLRA. With each term, the NLRB considered the language used by Congress, as well as the NLRA's legislative history, applicable policy considerations, and Supreme Court precedent. The NLRB concluded that the term "assign" should be construed to refer to the act of designating an employee to a place (such as a location or department), appointing an employee to a time, or giving significant overall duties or tasks to an employee. The NLRB noted that in the health care setting, the term "encompasses the charge nurses' responsibility to assign nurses and aides to particular patients." The term would not apply, however, to an individual who simply chooses the order in which an employee will perform discrete tasks within an assignment. Citing the legislative history of section 2(11), the NLRB interpreted the term "responsibly to direct" to apply to individuals who not only oversee the work being performed, but are held responsible if the work is done poorly or not at all. The NLRB observed: [F]or direction to be 'responsible,' the person directing and performing the oversight of the employee must be accountable for the performance of the task by the other, such that some adverse consequence may befall the one providing the oversight if the tasks performed by the employee are not performed properly. This interpretation of 'responsibly to direct' is consistent with post- Kentucky River Board decisions that considered an accountability element for 'responsibly to direct.' According to the NLRB, to establish accountability for purposes of responsible direction, it must be shown that the employer delegated to the putative supervisor the authority to direct the work and the authority to take corrective action. The possibility of adverse consequences for the putative supervisor must also be established. With regard to the term "independent judgment," the NLRB maintained that at a minimum an individual must act or effectively recommend action that is "free of the control of others and form an opinion or evaluation by discerning and comparing data." The NLRB further elaborated that a judgment is not independent if it is dictated or controlled by detailed instructions in company policies, the verbal instructions of a higher authority, or the provisions of a collective bargaining agreement. The NLRB sought to interpret the term "independent judgment" in light of the phrase "not of a merely routine or clerical nature," which appears before "independent judgment" in section 2(11). The NLRB stated: If there is only one obvious and self-evident choice ... or if the assignment is made solely on the basis of equalizing workloads, then the assignment is routine or clerical in nature and does not implicate independent judgment, even if it is made free of the control of others and involves forming an opinion or evaluation by discerning and comparing data. Applying the new definitions for the terms "assign," "responsibly to direct," and "independent judgment," the NLRB concluded that 12 permanent charge nurses assigned to five of the 10 patient care units were supervisors for purposes of the NLRA. The NLRB declined to find that any of the charge nurses responsibly directed other employees. The NLRB noted that the charge nurses were not subject to discipline or lower evaluations if employees who were subject to the nurses failed to adequately performed their tasks. However, in five of the 10 patient care units, the NLRB found that the charge nurses did assign employees within the meaning of the NLRA. These nurses assigned employees to patients and assigned overall tasks to the employees. The charge nurses in the five units were unlike emergency room charge nurses who simply placed staff in geographic areas within the emergency room. The NLRB determined that the 12 charge nurses exercised independent judgment in accordance with section 2(11). The charge nurses made assignments in light of the skill sets of employees and the nursing time patients would require on a given shift. The NLRB noted that the "process of equalizing work loads at the hospital involves independent judgment." While Oakwood Healthcare maintained a written policy for assigning nursing personnel to deliver care to patients, the NLRB observed that charge nurses were given considerable latitude in making decisions on how to assign nursing personnel. Ultimately, the NLRB concluded that when a charge nurse makes an assignment based on the skill, experience, and temperament of nursing personnel and the patients, that nurse has "exercised the requisite discretion to make the assignment a supervisory function 'requir[ing] the use of independent judgment.'" In addition to recognizing the right of employees to engage in collective bargaining, the NLRA prohibits certain misconduct by both employers and unions that interferes with that right. Section 8(a)(1) of the Act states that it shall be an unfair labor practice for an employer to "interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7." Similarly, section 8(b)(1)(A) of the NLRA provides that it shall be an unfair labor practice for a labor organization or its agents to "restrain or coerce ... employees in the exercise of the rights guaranteed in section 7 ..." Although the NLRB has suggested in the past that Congress did not intend for section 8(b)(1)(A) to be given the broad application sometimes accorded to section 8(a)(1), section 8(b)(1)(A) appears to be viewed generally as a counterpart to section 8(a)(1). Indeed, in Capital Service, Inc. v. NLRB , a 1953 case involving a union boycott of goods manufactured by employees who resisted unionization, the U.S. Court of Appeals for the Ninth Circuit observed that it was "inconceivable" that the NLRA "intended the identical words 'restrain or coerce' of 8(a)(1) and 8(b)(1) to have a different meaning when applied to a labor organization from that when applied to an employer." To determine whether an unfair labor practice has been committed under either subsection, a reviewing court asks the same question: whether the misconduct "reasonably tends" to restrain or coerce employees in the exercise of their rights under the NLRA. Courts have emphasized that the actual effect of the misconduct is immaterial. In Int'l Union of Operating Engineers, AFL-CIO v. NLRB , a 1964 case involving picketing and the right of employees to refrain from union activities, the Third Circuit maintained: "That no one was in fact coerced or intimidated is of no relevance. The test of coercion and intimidation is not whether the misconduct proves effective." Section 8(a)(1) of the NLRA prohibits not only the use or threatened use of violence against an employee for exercising his rights under section 7 of the Act, but also verbal threats to adversely affect an employee's employment status or working conditions. In NLRB v. Gissel Packing Co., Inc ., the Supreme Court explained: [A]n employer is free to communicate to his employees any of his general views about unionism or any of his specific views about a particular union, so long as the communications do not contain a 'threat of reprisal or force or promise of benefit.' He may even make a prediction as to the precise effects he believes unionization will have on his company. In such a case, however, the prediction must be carefully phrased on the basis of objective fact to convey an employer's belief as to demonstrably probable consequences beyond his control or to convey a management decision already arrived at to close the plant in case of unionization. Whether an employer's communication to its employees constitutes an unlawful threat for purposes of section 8(a)(1) is generally fact-specific and requires consideration of the totality of the circumstances. The Gissel Court noted that any assessment of the precise scope of employer expression "must be made in the context of its labor relations setting" and must take into account the economic dependence of the employees on their employers. An employer's interrogation of its employees as to union sympathy and affiliation may also violate section 8(a)(1) of the Act because such an interrogation has a "natural tendency to instill in the minds of employees fear of discrimination on the basis of the information the employer has obtained." In Blue Flash Express, Inc ., the NLRB indicated that it would consider five factors when determining whether an interrogation reasonably tends to restrain or interfere with the exercise of rights guaranteed by the NLRA: the timing of the interrogation; the place of the interrogation; the information sought during the interrogation; the identity of the interrogator; and the employer's conceded preference with respect to the subject of the interrogation. Using these factors, the Board found a violation of section 8(a)(1) when an employer interrogated an employee after a performance review, despite resistance by the employee. The Board also found a violation when an interrogation was conducted by a high-level supervisor, without a legitimate purpose, and without any assurances against reprisals. The use or threatened use of violence by a union or one of its agents is similarly considered an unfair labor practice under section 8(b)(1)(A) of the NLRA. Other acts by unions have been found to violate section 8(b)(1)(A), including encouraging employees to quit their jobs because they were not members of the union, and threatening discharge for failure to sign union authorization cards. In Local Union No. 697 (UE & C Catalytic, Inc.) , the NLRB found a violation of section 8(b)(1)(A) when a local union engaged in a pattern of misconduct to get members of other unions employed at an Amoco refinery, identified as "travelers," to abandon their jobs because they were not members of the local union and because a large number of local members were out of work. The pattern of misconduct included repeated requests and suggestions that the travelers quit their jobs and volunteer for layoffs. The local also devised a credentialing system just for the travelers and refused to renew some of the credentials. The NLRB concluded that the local's efforts were coercive and meant to intimidate the travelers into leaving the refinery: "It wanted the travelers to leave the Amoco jobsite because they were not members of [the local] and because members were out of work." The NLRB has indicated that section 8(b)(1)(A) "broadly interdicts any union conduct threatening job security of employees because of the employees' refusal or failure to abide by union membership conditions." By telling employees that they must sign a union authorization card or be subject to termination, a union makes "an implied threat of reprisal calculated to interfere with the employees' statutory right to refrain from any and all union activities." Unions have been found to violate section 8(b)(1)(A) by engaging in other misconduct, including attempting to cause an employer to discharge employees because they opposed the union leadership, refusing to refer dissident union members for jobs, and threatening employees with the loss of employment if they contested a union election. While section 8(a)(1) of the NLRA does prohibit an employer from interfering with the right of employees to engage in collective bargaining, the NLRB has long maintained that an employer may make antiunion, but noncoercive, speeches to their employees on company time and on company property without allowing a union an equal opportunity to reply. In Livingston Shirt Corp ., the NLRB noted: [W]e find nothing in the statute which even hints at any congressional intent to restrict an employer in the use of his own premises for the purpose of airing his views. On the contrary, an employer's premises are the natural forum for him just as the union hall is the inviolable forum for the union to assemble and address employees. We do not believe that unions will be unduly hindered in their right to carry on organizational activities by our refusal to open up to them the employer's premises for group meetings, particularly since this is an area from which they have traditionally been excluded, and there remains open to them all the customary means for communicating with employees. Last-minute speeches made by employers, however, have been distinguished from other pre-election speeches. In Peerless Plywood Co ., decided the same day as Livingston Shirt , the NLRB declared that employers and unions are prohibited from making election speeches on company time to massed assemblies of employees within 24 hours before an election. The NLRB maintained that such speeches interfere with a free election by creating a "mass psychology which overrides arguments made through other campaign media and giv[ing] an unfair advantage to the party, whether employer or union, who in this manner obtains the last most telling word." In 1956, the Court considered whether an employer could prohibit the distribution of union literature on its company-owned parking lots by nonemployee union organizers. In NLRB v. Babcock & Wilson Co ., the employer contended that it had a consistent policy against all pamphleteering and that it was not attempting to impede its employees' collective bargaining rights when it restricted the distribution of union literature on company property. The Court maintained an employer cannot be compelled to allow the distribution of union literature on its premises if a union can reach employees through other channels of communication. If, however, the employer's location and the employees' residences place the employees beyond the reach of reasonable union efforts to communicate with them, the employer must allow the union to approach its employees on its property. In Babcoc k , the Court ultimately found that the employer's restrictions were permissible because its plants were close to the communities where a large percentage of employees lived, and various methods of communication were available to the union. In Lechmere v. NLRB , a 1992 case involving the efforts of the United Food and Commercial Workers Union, AFL-CIO, to organize employees at a retail store, the Court reaffirmed its holding in Babcock . Rejecting the NLRB's conclusion that there were no reasonable, alternative means for the union to communicate with Lechmere's employees, the Court emphasized that Babcock requires access to an employer's property only when the employer's location and the employees' residences place the employees beyond the reach of reasonable union efforts to communicate with them. The Court identified logging camps, mining camps, and mountain resort hotels as "classic examples" where union access would be permitted. The Court further noted that the union has the heavy burden of establishing employee isolation and showing that no other reasonable means of communicating with employees exists. As in Babcock , the Court in Lechmere found that the union did have reasonable access to the retail employees and that this accessibility was suggested by the union's success in contacting a substantial percentage of them directly via mailings, phone calls, and home visits.

The National Labor Relations Act (NLRA or "the Act") recognizes the right of employees to engage in collective bargaining through representatives of their own choosing. By "encouraging the practice and procedure of collective bargaining," the Act attempts to mitigate and eliminate labor-related obstructions to the free flow of commerce. Although union membership has declined dramatically since the 1950s, congressional interest in the NLRA remains significant. In the 112th Congress, over 30 bills have been introduced to amend the NLRA. Some of these bills address the timing of union representation elections, while others are concerned with varying aspects of the NLRA, such as the activities of the National Labor Relations Board (NLRB), which implements and administers the Act. Since the NLRA's enactment in 1935, the NLRB and the courts have considered a variety of issues arising under the Act. This report reviews selected decisions of the NLRB and the courts on three of them. Determining when an employee may be deemed a supervisor for purposes of coverage under the Act is important because the right to engage in collective bargaining is extended only to employees under the NLRA. Employees who are properly classified as supervisors are not afforded collective bargaining rights. Both employers and unions are prohibited from restraining or coercing employees in the exercise of the rights guaranteed to them under the Act. In general, to determine whether an unfair labor practice has been committed by either an employer or union, a reviewing court asks whether the misconduct "reasonably tends" to restrain or coerce employees in the exercise of their rights under the NLRA. Courts have emphasized that the actual effect of the misconduct is immaterial. Finally, pre-election communication with employees may influence the outcome of a representation election. While the NLRA does prohibit an employer from interfering with an employee's collective bargaining rights, decisions discussed in this report indicate that an employer does not violate the Act in all cases when it denies a union access to its property.

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Banks play a central role in the financial system by connecting borrowers to savers and allocating capital across the economy. As a result, banking is vital to the health and growth of the U.S. economy. In addition, banking is an inherently risky activity involving extending credit and taking on liabilities. Therefore, banking can generate tremendous societal and economic benefits, but banking panics and failures can create devastating losses. Over time, a regulatory system designed to foster the benefits of banking while limiting risks has developed, and both banks and regulation have coevolved as market conditions have changed and different risks have emerged. For these reasons, Congress often considers policies related to the banking industry. Recent years have been a particularly transformative period for banking. The 2008-2009 financial crisis threatened the total collapse of the financial system and the real economy. Many assert only huge and unprecedented government interventions staved off this collapse. Others argue that government interventions were unnecessary or potentially exacerbated the crisis. In addition, many argue the crisis revealed that the financial system was excessively risky and the regulatory system had serious weaknesses. Many regulatory changes were made in response to perceived weaknesses in the financial regulatory system, including to bank regulation. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ( P.L. 111-203 ; Dodd-Frank Act) in 2010 with the intention of strengthening regulation and addressing risks. In addition, U.S. and international bank regulators agreed to the Basel III Accords—an international framework for bank regulation—which called for making certain bank regulations more stringent. In the ensuing years, some observers have raised concerns that the potential benefits of the regulatory changes (better-managed risks, increased consumer protection, greater systemic stability, etc.) are outweighed by the potential costs (e.g., reduced credit availability for consumers and businesses, and slower economic growth). Meanwhile, market forces and economic conditions continue to affect the banking industry coincident with the implementation of new regulation. This report provides a broad overview of selected banking-related issues, including prudential regulation, consumer protection, "too big to fail" (TBTF) banks, community banking, regulatory agency structures and independence, and recent market and economic trends. It is not an exhaustive look at all bank policy issues, nor is it a detailed examination of any one issue. Rather, it provides concise background and analyses of certain prominent issues that have been the subject of recent discussion and debate. In addition, this report provides a list of Congressional Research Service reports that examine specific bills—including the Financial CHOICE Act ( H.R. 10 ) and the Economic Growth, Regulatory Relief, and Consumer Protection Act ( S. 2155 ). Bank failures can inflict large losses on stakeholders, including taxpayers via government "safety nets" such as deposit insurance and Federal Reserve lending facilities. Furthermore, some argue that in the presence of deposit insurance, commercial banks may be subject to moral hazard —a willingness to take on excessive risk because of external protection against losses. In addition, failures can cause systemic stress and sharp contraction in economic activity if they are large or widespread. To make such failures less likely—and to reduce losses when they do occur—regulators utilize prudential regulation. These "safety and soundness" regulations are designed to ensure banks are safely profitable and to reduce the risk of failure. This section provides background on these regulations and analyzes selected issues related to them, including regulatory requirements related to capital ratios, including leverage ratios and risk-weighted capital ratios; and restrictions on permissible activities, such as the Volcker Rule (which restricts proprietary trading). A bank's balance sheet is divided into assets, liabilities, and capital. Assets are largely the value of loans owed to the bank and securities owned by the bank. To make loans and buy securities, a bank secures funding by either issuing liabilities or raising capital. A bank's liabilities are largely the value of deposits and borrowings the bank owes savers and creditors. Capital is raised through various methods, including issuing equity to shareholders or issuing special types of bonds that can be converted into equity. Capital—unlike liabilities—does not require repayment of a specified amount of money, and so its value can fluctuate. Banks profit in part because many of their assets are generally riskier, longer-term, and more illiquid than their liabilities, which allows the banks to earn more interest on their assets than they pay on their liabilities. The practice is usually profitable, but does expose banks to risks that can potentially lead to failure. While the value of bank assets can decrease, liabilities generally cannot. Capital, though, gives the bank the ability to absorb losses. When asset value declines, capital value does as well, allowing the bank to meet its rigid liability obligations and avoid failure. Based on these balance sheet characteristics, failures can be reduced if (1) banks are better able to absorb losses or (2) they are less likely to experience unsustainably large losses. To increase the ability to absorb losses, regulators can require banks to hold a minimum level of capital, liquidity, or stable funding. These levels are expressed as ratios between items on bank balance sheets and are called regulatory ratio requirements . To reduce the likelihood and size of potential losses, regulators prohibit banks from activities that could create excessive risks, implementing permissible activity restrictions . Banks have been subject to ratio requirements for decades. U.S. bank regulators first established explicit numerical ratio requirements in 1981. In 1988, they adopted the Basel Capital Accords proposed by the Basel Committee on Banking Supervision (BCBS)—an international group of bank regulators that sets international standards—which were the precursor to the ratio requirement regime used in the United States today. Those requirements—now known as "Basel I"—were revised in 2004, establishing the "Basel II" requirements that were in effect at the onset of the crisis in 2008. In 2010, the BCBS agreed to the "Basel III" standards. Pursuant to this agreement, U.S. regulators finalized new capital requirements in 2013, with full implementation expected by 2019; finalized a liquidity requirement for large banks in 2014, with full implementation expected in 2017; and proposed a funding ratio for large banks in 2016. Restrictions on permissible activities have also evolved over time and generally were made more stringent following the crisis to address potential weaknesses. Historical examples of such restrictions are found in Sections 16, 20, 21, and 32 of the Banking Act of 1933 (P.L. 73-66)—commonly referred to as the Glass-Steagall Act. Glass-Steagall generally prohibited certain deposit-taking banks from engaging in certain securities markets activities associated with investment banks, such as speculative investment in equity securities. Over time, regulators became more permissive in their interpretation of Glass-Steagall, allowing banks to participate in more securities market activities, directly or through affiliations. In 1999, the Gramm-Leach-Bliley Act repealed two provisions of Glass-Steagall, further expanding permissible activities for certain banks. The financial crisis elevated the debate over what activities banks should be allowed to engage in. Certain provisions in Dodd-Frank placed restrictions on permissible activities to reduce banks' riskiness. Section 619 of Dodd-Frank—often referred to as the "Volcker Rule"—differs from Glass-Steagall provisions in important ways. However, it was generally designed to achieve a similar goal of separating proprietary trading —owning and trading securities for the bank's own portfolio with the aim of profiting from price changes—from depository banking. Banks are required to satisfy several different regulatory ratio requirements. A detailed examination of how these ratios are calculated is beyond the scope of this report. This examination of the policy issue only requires noting that capital ratios fall into one of two main types—a leverage ratio or a risk-weighted ratio. A leverage ratio treats all assets the same, requiring banks to hold the same amount of capital against the asset regardless of how risky each asset is. A risk-weighted ratio assigns a risk weight—a number based on the riskiness of the asset that the asset value is multiplied by—to account for the fact that some assets are more likely to lose value than others. Riskier assets receive a higher risk weight, which requires banks to hold more capital—to better enable them to absorb losses—to meet the ratio requirement. In regard to the simple leverage ratio, most banks are required to meet a 4% leverage ratio. The required risk-weighted ratios depend on bank size and capital quality (some types of capital are considered to be less effective at absorbing losses than other types, and thus considered lower quality). Most banks are required to meet a 4.5% risk-weighted ratio for the highest-quality capital and a ratio of between 6% and 8% for lower-quality capital. Banks are then required to have an additional 2.5% of high-quality capital on top of those levels as part of the "capital conservation buffer." The largest banks are required to hold more capital than smaller, less complex banks. These ratios for large banks will be covered in the " Enhanced Prudential Regulation " section below. Some observers argue that it is important to have both a risk-weighted ratio and a leverage ratio because the two complement each other. Riskier assets generally offer a greater rate of return to compensate the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold riskier assets because the same amount of capital must be held against risky and safe assets. Therefore, a leverage ratio alone may not fully account for a bank's riskiness because a bank with a high concentration of very risky assets could have a similar ratio to a bank with a high concentration of very safe assets. However, others assert the use of risk-weighted ratios should be limited. Risk weights assigned to particular classes of assets could potentially be an inaccurate estimation of some assets' true risk, especially since they cannot be adjusted as quickly as asset risk might change. Banks may have an incentive to overly invest in assets with risk weights that are set too low (they would receive the high potential rate of return of a risky asset, but have to hold only enough capital to protect against losses of a safe asset), or inversely to underinvest in assets with risk weights that are set too high. Some observers believe that the risk weights in place prior to the financial crisis were poorly calibrated and "encouraged financial firms to crowd into" risky assets, exacerbating the downturn. For example, banks held highly rated mortgage-backed securities (MBSs) before the crisis, in part because those assets offered a higher rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the crisis. Another criticism is that the risk-weighted system involves "needless complexity" and is an example of regulator micromanagement. The complexity could benefit the largest banks that have the resources to absorb the added regulatory cost compared to small banks that could find compliance costs more burdensome. Community bank compliance issues will be covered in more detail in the " Regulatory Burden on Community Banks " section later in the report. In addition to the specific issue of whether to use both leverage and risk-weighted ratios or just a leverage ratio, the role regulatory ratios in general play in bank regulation is a broader issue. Prudential regulation involves requirements besides capital ratios, such as liquidity requirements, asset concentration guidelines, and counterparty limits. Some argue that capital is essential to absorbing losses and, as long as sufficient capital is in place, banks should not be subject to some of these additional regulatory restrictions. However, others believe that the different components of prudential regulation each play an important role in ensuring the safety and soundness of financial institutions and are essential complements to bank capital. Finally, whether the benefits of prudential regulation—such as the increase in bank safety and the increase in financial system stability—are outweighed by the potential costs of reduced credit availability and economic growth is an issue subject to much debate. Capital is typically a more expensive source of funding for banks than liabilities. Thus, requiring banks to hold higher levels of capital may make funding more expensive, and so banks may choose to reduce the amount of credit available. Some studies indicate this could slow economic growth. However, no economic consensus exists on this issue, because a more stable banking system with fewer crises and failures may lead to higher long-run economic growth. In addition, estimating the value of regulatory costs and benefits is subject to considerable uncertainty, due to difficulties and assumptions involved in complex economic modeling and estimation. Therefore, this issue is unlikely to be conclusively resolved quickly or easily. If Congress decides to reduce regulatory reliance on risk-weighted ratios, it could provide a statutory exemption for banks that otherwise demonstrate they are operating in a safe manner from being subject to risk-weighted ratios. These banks' regulatory burden could be further reduced by exempting them from other prudential regulation, such as liquidity requirements, stress-testing, and dividend limitations. Exempted banks could include those that satisfy a higher simple leverage ratio, or receive a high safety and soundness rating from the bank's prudential regulator. Another possible set of changes would be to change the risk weights assigned to specific asset classes. For example, in the case that an asset type was assigned a risk weight that was too high and would likely cause unwanted market distortions, Congress could mandate that asset type be assigned a lower weight. The Volcker Rule generally prohibits depository banks from engaging in proprietary trading or sponsoring a hedge fund or private equity fund. Proponents argue that proprietary trading would add further risk to the inherently risky business of commercial banking. Furthermore, because other types of institutions are very active in proprietary trading and better suited for it, bank involvement is unnecessary for the financial system. Finally, proponents assert moral hazard is problematic for banks in these risky activities. Because deposits—an important source of bank funding—are insured by the government, a bank could potentially take on excessive risk without concern about losing this funding. Thus, support for the Volcker Rule has often been posed as preventing banks from "gambling" in securities markets with taxpayer-backed deposits. Some observers doubt the necessity of the Volcker Rule. They assert that proprietary trading at commercial banks did not play a role in the financial crisis, noting that issues that played a direct role in the crisis—including failures of large investment banks and insurers and losses on loans held by commercial banks—would not have been prevented by the rule. The effectiveness of the Volcker Rule in reducing bank risk is also disputed. While the activities prohibited under the Volcker Rule pose risks, it is not clear whether they pose greater risks to bank solvency and financial stability than "traditional" banking activities, such as mortgage lending. Furthermore, taking on additional risks in different markets might diversify a bank's risk profile, making it less likely to fail. Some suggest that restricting certain activities only at depository bank subsidiaries and allowing them at completely separate nonbank subsidiaries may appropriately protect deposits while allowing diversification in the larger organization. Some contend that the Volcker Rule imposes a regulatory burden that could affect banks' involvement in beneficial trading activities and reduce financial market efficiency. The rule includes exceptions for when bank trading is deemed appropriate—such as when a bank is hedging against risks and market-making. This poses practical supervisory problems. For example, how can regulators determine whether a broker-dealer is holding a security for market-making, as a hedge against another risk, or as a speculative investment? Differentiating among these motives creates regulatory complexity and compliance costs that could affect bank trading behavior. In addition, whether relatively small banks should be exempt from the rule is a debated issue. Some observers contend that the vast majority of community banks do not face compliance obligations under the rule and do not face an excessive burden by being subject to it. They argue that community banks subject to compliance requirements, those with traditional hedging activities, can comply simply by having clear policies and procedures in place that can be reviewed during the normal examination process. In addition, they assert the community banks that are engaged in complex trading should have the expertise to comply with the Volcker Rule. Others argue that the act of evaluating the Volcker Rule to ensure banks' compliance is burdensome in and of itself. They support a community bank exemption so that community banks and supervisors would not have to dedicate resources to complying with and enforcing a regulation whose rationale is unlikely to apply to smaller banks. Several different approaches are available if Congress decided to amend the prohibitions mandated by the Volcker Rule. If it is determined that any ban on proprietary trading by commercial banks is unnecessary, unduly burdensome, or too difficult to enforce, then Congress could repeal the rule and not replace it with different prohibitions. If instead the issue is that the rule as currently formulated is problematic, then Congress could repeal the rule and replace it with different provisions, perhaps similar to those in the Glass-Steagall Act. Finally, if it is only the rule's applicability to small banks that is problematic, Congress could enact an exemption for a certain class of banks. Financial products can be complex and potentially difficult for consumers to fully understand. Also, consumers seeking loans or financial services could be vulnerable to deceptive or unfair practices. To reduce the occurrence of bad outcomes, laws and regulations have been put in place to protect consumers. This section provides background on consumer protection and analyzes issues related to it, including the degree to which the Consumer Financial Protection Bureau's (CFPB's) authorities, structure, regulations, and enforcement actions have struck the appropriate balance between protecting consumers and the availability of credit; and whether certain mortgage lending rules have struck the appropriate balance between protecting consumers and the availability of credit. Financial transactions are subject to various state and federal laws designed to protect consumers and ensure that lenders use fair lending practices. Federal laws and regulations take a variety of approaches and address different areas of concern. Disclosure requirements are intended to ensure consumers adequately understand the costs and other features and terms of financial products. Unfair, deceptive, or abusive acts and practices are prohibited. Fair lending laws prohibit discrimination in credit transactions based upon certain borrower characteristics, including sex, race, religion, or age, among others. In addition, banks are subject to consumer compliance regulation, intended to ensure that banks are in compliance with relevant consumer-protection and fair-lending laws. For many observers, the onset of the financial crisis revealed weaknesses in the regulatory system as it related to consumer protection. In particular, many observers assert mortgages that were made using weak underwriting standards and arguably deceptive practices precipitated the crisis when the borrowers defaulted at increasingly high rates. In response, the Dodd-Frank Act established the CFPB—a new regulatory agency focused on consumer protection in financial transactions with wide-reaching authorities to regulate consumer financial products such as mortgages. In addition, other Dodd-Frank provisions directed agencies—including banking regulators and the CFPB—to implement new mortgage lending rules and amend existing ones. Prior to the Dodd-Frank Act, federal banking regulators—the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—were charged with the two-pronged mandate of regulating for both safety and soundness (prudential regulation, discussed in previous sections) as well as consumer compliance. The CFPB was established with the single mandate to implement and enforce federal consumer financial law while ensuring consumers can access financial products and services. The CFPB also works to ensure the markets for consumer financial services and products are fair, transparent, and competitive. To achieve these outcomes, the CFPB was granted certain regulatory authorities over banks, as well as certain other nonbank providers of consumer products and services. Those powers vary based on whether a bank holds more or less than $10 billion in assets. Regulatory authorities related to consumer compliance fall into three broad categories: supervisory , which includes the power to examine and impose reporting requirements on financial institutions; enforcement of various consumer-protection laws and regulations; and rulemaking , which includes the power to prescribe regulations pursuant to federal consumer-protection laws that govern a broad and diverse set of consumer financial activities and services. For banks with more than $10 billion in assets, the CFPB is the primary regulator for consumer compliance, whereas safety and soundness regulation continues to be performed by the prudential regulator. As a regulator of larger banks, the CFPB has rulemaking, supervisory, and enforcement authorities. A large bank, therefore, has different regulators for consumer protection and safety and soundness. For banks with $10 billion or less in assets, the rulemaking, supervisory, and enforcement authorities for consumer protection are divided between the CFPB and a prudential regulator. The CFPB may issue rules that apply to smaller banks, but the prudential regulators maintain primary supervisory and enforcement authority for consumer protection. The CFPB has limited supervisory and enforcement powers over small banks. It can participate in examinations performed by the prudential regulator on a sampling basis. Also, the CFPB may refer potential enforcement actions against small banks to the banks' prudential regulators, but the prudential regulators are not bound to take any substantive steps beyond responding to the referral. The CFPB has been a controversial product of the Dodd-Frank Act. Some observers question if the CFPB as an institution is structured appropriately to achieve the correct balance between independence on the one hand and transparency and accountability on the other. The CFPB is led by a director rather than a board and is funded by the Federal Reserve rather than the traditional appropriations process. Some argue that a single director leads to a lack of diversity of viewpoints, and that funding outside the traditional appropriations process could result in a lack of accountability at an agency. The CFPB's relatively narrow mandate and the "for cause" removal protection for its director are also contentious issues. However, supporters of the CFPB argue other aspects of its structure provide sufficient transparency and accountability, including the director's biannual testimony before Congress and the cap on CFPB funding. They further argue it is important to ensure the CFPB is somewhat insulated from political pressures and can focus on the technical aspect of policymaking. This issue as it relates to all financial regulators is further examined in the section entitled " Regulatory Agency Design and Independence " found later in this report. Another policy issue is whether the CFPB's rulemaking and enforcement have struck an appropriate balance between protecting consumers and ensuring that consumers have access to financial products. The CFPB has implemented rules mandated by the Dodd-Frank Act, but regulations it has promulgated under its general authorities—such as oversight of auto lending and a rule that extends credit card-like protections to prepaid cards—are at the center of this debate. Some observers assert lenders have been subject to unduly burdensome regulations and overzealous enforcement by the CFPB in recent years, resulting in costs that outweigh the benefits. They argue that CFPB regulation increases the cost of providing certain financial products to the point that institutions reduce the availability of needed credit sources. However, the CFPB came under new leadership on November 27, 2017, and has indicated it will review aspects of its regulation and enforcement. Some observers have since asserted that certain alterations in CFPB regulation and enforcement since the leadership change have made the agency too lenient toward certain financial service providers and unduly weakened consumer protections. Other observers believe the CFPB has struck an appropriate balance in its rulemaking between protecting consumers and ensuring that credit availability is not restricted due to overly burdensome regulations on financial institutions. Analysis of whether or the degree to which recent rulemakings have restricted the availability of credit is complicated by the concurrent effects of economic conditions and the financial crisis on credit conditions. Also, many significant CFPB rulemakings have been in effect only since early 2014 or later, and the lack of a track record and data is an additional barrier to conclusive examination of the issue. A third issue is whether the $10 billion asset threshold at which the CFPB becomes a bank's primary regulator for consumer compliance is set at an appropriate level. Many think having two separate agencies handle supervision for prudential regulation and consumer protection compliance would be unnecessarily burdensome for small banks. However, there is disagreement over the size at which that becomes the case. Supporters of raising the threshold argue it would appropriately reduce the regulatory burden on banks that are still relatively small, and "would still be examined by their primary regulators who are required by law to enforce the CFPB rules and regulations," and the change would only mean banks "wouldn't have to go through yet another exam with the CFPB in addition to the ones they already have to go through with their primary regulators." Critics of raising the threshold argue it exempts large institutions that warrant closer supervision. They note that banks that were "some of the worst violators of consumer protections" in the housing bubble were fairly close to that threshold, with IndyMac at approximately $30 billion in assets being a highlighted example. Broadly, if Congress decided to restrict the CFPB's regulatory authority in financial markets, it could alter its mandate, structure, or authorities. If it is determined that the CFPB is overly focused on consumer protection to the extent that it is restricting credit availability, the agency's mandate could be expanded to a dual mandate that includes the goal of expanding consumer credit availability. Agency accountability could be increased by bringing it into the appropriations process or altering features of its leadership (e.g., by removing the director's "for cause" protections or replacing the directorship with a commission or board). In addition, CFPB rulemaking, supervisory, or enforcement authorities could be altered or removed. During the early 2000s, housing prices and sales—and the origination of home mortgages to finance the sales—increased rapidly. However, the housing boom subsequently was revealed to be a "bubble"—the real economic forces that should underpin the housing market did not warrant the rapid expansion. In 2007, home prices began falling resulting in reduced household wealth, which in turn resulted in a surge in mortgage defaults, delinquencies, and foreclosures. Ultimately, the bursting of the bubble would play a significant role in the cascade of events that culminated in the financial crisis. Many factors contributed to the housing bubble and its collapse, and there is significant debate about the underlying causes even a decade later. Many observers, however, point to relaxed mortgage underwriting standards, an expansion of nontraditional mortgage products, and misaligned incentives among various participants as underlying causes. These features arguably led to too many mortgages being made imprudently by lenders to borrowers who would not repay them. Mortgage lending has long been subject to regulations intended to protect homeowners and to prevent risky loans, but the issues evident in the financial crisis spurred calls for reform. The Dodd-Frank Act made a number of changes to the mortgage system. For example, the law required lenders to use certain documented and verified information to determine whether a prospective borrower had the ability to repay the loan and increased the amount of data lenders would have to report under the Home Mortgage Disclosure Act ( P.L. 94-200 ). A long-standing issue in the regulation of mortgages and other consumer financial services is the perceived trade-off between protecting consumers and the availability of credit. Providers of financial goods and services may incur costs to ensure they are complying with all applicable laws and regulations. If regulation intended to protect consumers increases the cost of providing a financial product, a company may—depending on market factors and business considerations—reduce how much of that product it is willing to provide, and may provide it more selectively. Those who still receive the product may benefit from the enhanced disclosure or added legal protections of the regulation, but that benefit may result in a higher price for the product. Some policymakers generally believe that the postcrisis mortgage rules have struck the appropriate balance between protecting consumers and ensuring that credit availability is not restricted due to overly burdensome regulations. They contend that the regulations are intended to prevent those unable to repay their loans from receiving credit and have been appropriately tailored to ensure that those who can repay are able to receive credit. Critics counter that some rules have imposed compliance costs on lenders of all sizes, resulting in less credit available to consumers and restricting the types of products available to them. Some assert this is especially true for certain types of mortgages, such as mortgages for homes in rural areas or for manufactured housing. They further argue that the rules for certain types of lenders, usually small lenders, are unduly burdensome. No consensus exists on whether or to what degree mortgage rules have unduly restricted the availability of mortgages, in part because it is difficult to isolate the effects of rules and the effects of broader economic and market forces. A variety of experts and organizations attempt to measure the availability of mortgage credit, and although their methods vary, it is generally agreed that mortgage credit is tighter than it was in the years prior to the housing bubble and subsequent housing market turmoil. However, whether this should be interpreted as a desirable correction to precrisis excesses or an unnecessary restriction on credit availability is subject to debate. If Congress finds that certain mortgage lending rules limit mortgage availability more than is justified by the realized benefits of consumer protection, it could amend certain provisions in Dodd-Frank that mandate those rules or otherwise direct regulators to relax certain rules. Some bank holding companies (BHCs) have hundreds of billions or trillions of dollars in assets and are deeply interconnected with other financial institutions. A bank may be so large that the leadership of the bank and market participants may believe that the government would save it if it became distressed. This belief could arise from the determination that the institution is so important to the country's financial system—and that its failure would be so costly to the economy and society—that the government would feel compelled to avoid that outcome. An institution of this size and complexity is said to be "too big to fail" (TBTF). TBTF institutions may have incentives to be excessively risky, gain unfair advantages in the market for funding, and expose taxpayers to losses. This section provides background on TBTF institutions and analyzes some prominent issues related to them, including enhanced prudential regulation for large banks, including enhanced cap i tal requirements , liquidity requirements , living wills , and stress-testing ; and measures taken to reduce market expectation of government support for failing institutions, such as the Orderly Liquidation Authority (OLA). Several market forces likely drive banks and other financial institutions to grow in size and complexity, thereby potentially increasing efficiency and improving financial and economic outcomes. For example, marginal costs can be reduced through economies of scale; consumers could be offered convenient "one-stop shopping" for a variety of financial products and services; and bank risk can be diversified by spreading exposures over multiple business lines and geographic markets. These market forces—along with the relaxation of certain regulations—likely drove some banks to become very large and complex in the years preceding the crisis. At the end of 1997, two insured depository institutions held more than $250 billion in assets, and together accounted for about 9.3% of total industry assets. By the end of 2007, six banks held 40.9% of industry assets. The trend has generally continued, and at the end of 2016, nine banks held more than $250 billion in assets, accounting for 50.3% of industry assets. However, many observers assert that when a financial institution exceeds a certain size, complexity, or interconnectedness, the institution—as well as its creditors and investors—may be incented to take on excessive risk. Companies in a market economy are generally restrained in their risk-taking by market discipline —market forces create incentives to carefully assess and appropriately manage potential losses. Shareholders and creditors want the likelihood of loss to be appropriately balanced with potential returns. However, banks of a certain size or complexity may create moral hazard —a situation in which a person or company is willing to take on outsized risks, because it believes it can profit from the potential gains while being protected from the potential losses. In the case of large banks, this perceived protection against loss comes from a belief that a large bank will receive government support in the event it becomes distressed. Very large institutions may be deeply interconnected with other financial institutions, and stress at one institution could quickly spread throughout the financial system. The resultant contagion effects could potentially cause devastating economic and social outcomes. If a TBTF bank believed government would intervene in such an event, the TBTF bank may take on excessive risks. Also, a TBTF institution could enjoy lower funding costs than competitors, as investors and creditors also may have expectations of government support for the institution. Many assert that certain events of the financial crisis of 2008-2009 were a demonstration of TBTF-related problems. Large institutions had taken on large risks, and when they resulted in large losses, the institutions came under threat of failure. In some cases, the U.S. government took actions to stabilize the financial system and individual institutions. Large bank-related actions included capital injections to nine of the largest banks conducted by the Treasury under the Troubled Asset Relief Program, and the government-assisted acquisition of Wachovia by Wells Fargo. In general, two approaches have been used through Dodd-Frank provisions and the Basel III Accords to reduce or eliminate the problem of TBTF. One is to reduce potentially excessive risk-taking at large, complex, and interconnected financial institutions—including banks—through enhanced prudential regulation . Another is to reduce the need for and market expectations of government support in the event such an institution were failing. Aspects of both of these measures are subject to policy debate. Enhanced prudential regulation is intended to reduce the likelihood of large bank failure through measures that include higher capital ratios, enhanced liquidity standards, and Federal Reserve stress-testing for the nation's largest banks. As explained in the " Regulatory Ratio Requirements " section, capital ratios are a measure of a bank's ability to absorb losses. Generally, U.S. banks and BHCs holding more than $50 billion in assets are required to hold more capital than other banks. Enhanced liquidity standards require certain large BHCs to maintain enough liquid assets—assets that can be easily converted into cash at low cost—sufficient to cover net cash outflows that might occur during a 30-day period during a time of financial stress. Federal Reserve stress-testing involves the Federal Reserve evaluating the ability of large banks to remain adequately capitalized during hypothetical economic and financial downturns. Living will requirements involve periodically preparing resolution plans for review by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). Enhanced prudential regulation is a rules-based approach to addressing TBTF problems. One's assessment of the efficacy and efficiency of a rules-based approach is likely to largely depend on one's assessment of whether rules-based or market-discipline-based risk assessments—to whatever degree they may or may not be distorted by TBTF incentives—can more accurately identify risk and incent firms to appropriately react to and manage those risks. Proponents of enhanced prudential regulation note that market forces failed to restrain large institutions from taking risks leading up to the financial crisis that would ultimately result in the institutions facing failure. Furthermore, proponents argue that even if market participants are better able to identify risk accurately than are regulators, market participants have a higher tolerance for risk than society as a whole because they are unlikely to internalize the systemic risks associated with a TBTF firm's failure. In addition, regulators potentially have greater access to relevant information on risk than creditors and counterparties of large, complex, and potentially opaque firms. Finally, proponents assert that the practices required by the enhanced prudential regulation are "best practices" that any sophisticated, well-managed bank should follow to prudently manage risk. Opponents argue that regulators are not effective in curtailing risk-taking, and point to several potential shortcomings. They cite regulator inability or unwillingness to prevent excessive risk-taking at certain firms leading up to the crisis. In addition, they argue that regulators may have adapted to weaknesses raised by the last crisis, whereas the next crisis is likely to pose a novel set of problems. Some argue that large firms are "too complex to regulate," meaning regulators are incapable of identifying or understanding the risks inherent in complicated transactions and corporate structures. This has implications for whether simple or complex rules would be more effective. One response to addressing this complexity is to make the regulatory regime more sophisticated, but some critics argue that this approach is likely to backfire and simple regulations are more likely to be robust. Others have argued that large firms are "too big to jail," meaning regulators cannot take effective supervisory actions against firms if those actions would undermine the firm's financial health, and thus its financial stability. Furthermore, critics argue that creating a special prudential regulatory regime is counterproductive. They contend that placing a bank in the regime is signaling to market participants that the bank has a protected status and would not be allowed to fail. Thus, the government is in effect making TBTF status explicit, which potentially exacerbates the moral hazard problem. Instead of increasing the cost of being TBTF, firms in the special regulatory regime could end up borrowing at a lower cost than other firms (because, in effect, these firms would enjoy a lower risk of default). Even if an enhanced prudential regime worked at reducing large bank risk-taking as planned, from a systemic risk perspective it could partly backfire in other ways. If financial intermediation and risky financial activities are pushed out of banks that are regulated for safety and soundness, the activity may simply migrate to more lightly regulated institutions and markets. The result could be a less regulated, less systemically stable financial system. This issue is discussed in more detail in the " Potential Migration to Shadow Banking " section. Enhanced prudential regulation of large banks may face similar questions concerning cost and benefit trade-offs covered in the " Regulatory Ratio Requirements " section: the benefits of safer banks and a more stable system may come at the cost of credit availability and economic growth. The issue is further complicated in relation to TBTF banks because if their funding costs are too low in the absence of enhanced regulation, then increasing costs for these institutions may correct a TBTF market distortion. Finally, observers debate what the appropriate thresholds that trigger enhanced regulation should be. Critics of the $50 billion asset threshold argue that many banks above that range are not systemically important. In particular, critics distinguish between regional banks (which tend to be at the lower end of the asset range and, it is claimed, have a traditional banking business model comparable to community banks) and Wall Street banks (a term applied to the largest, most complex organizations that tend to have significant nonbank financial activities). Others dispute this characterization, arguing that some regional banks are involved in sophisticated activities, such as being swap dealers, and have large off-balance-sheet exposures. If critics are correct that some banks that are currently subject to enhanced prudential regulation are not systemically important, then there may be little societal benefit from subjecting them to enhanced regulation, making that regulation unduly burdensome to them. Opponents of enhanced prudential regulation for large banks offer a variety of alternative policy approaches. Congress could create exemptions from certain enhanced prudential regulations to reduce regulatory burden and increase reliance on market discipline. Some have proposed breaking up big banks, either by establishing asset limits or imposing capital requirements so stringent on banks that reach a certain size that they would have a strong incentive to break up into separate businesses. Another proposed alternative is to impose restrictions on mixing commercial banking and certain investment activities—perhaps similar to those previously required under the Glass-Steagall Act—and so limit how complex an institution can become. Other proposals are based on the assessment that the enhanced regulation is not problematic per se; rather, that it has been applied too broadly and includes institutions that are not large or complex enough to be considered TBTF. If so, Congress could raise the threshold above $50 billion or switch to a designation process in which banks of a certain size had an opportunity to be assessed more on a case-by-case basis. In addition, some think the regulations as currently formulated are more burdensome than is necessary, in which case Congress could alter certain regulations to provide regulatory relief, such as by reducing the frequency with which banks are subject to stress tests or must submit living wills—plans to resolve the bank—to the Federal Reserve. The TBTF problem can also be addressed by credibly reducing or eliminating the possibility that government will save a failing institution, and ensuring that losses resulting from a failure would be borne by shareholders and creditors. Other industries generally resolve failing firms through bankruptcy. However, some observers assert that part of what makes some financial firms too big to fail is that the bankruptcy process is not amenable to resolving a large financial institution without disrupting the financial system. They argue a firm that dominates important financial market segments cannot be liquidated without disrupting the availability of credit, and the deliberate pace of the bankruptcy process is not equipped to avoid the runs and contagion inherent in the failure of a financial firm. Also, the effects on systemic risk are not taken into account when decisions are made in the bankruptcy process. Government commitments to let financial firms fail may not be credible if that failure is likely to be disruptive and destabilizing to the financial system and the economy. Another Dodd-Frank reform was the creation of an alternative resolution regime for certain financial firms outside of bankruptcy. An example of such a regime existed prior to the crisis in which the FDIC had the authority to resolve deposit-taking institutions that failed. However, the pre-Dodd-Frank Act authority may not be sufficient to resolve very large banking organizations due to their complex nature. Many of the largest financial institutions are organized as bank-holding companies (BHCs)—parent companies that own many (sometimes thousands) of subsidiary companies that include at least one deposit-taking commercial bank as well as other subsidiaries, such as broker-dealers, asset managers, and investment advisors. A BHC could possibly become distressed at the holding-company level, or distress at a nondeposit-taking subsidiary could spread to the holding-company level. In these cases, it is not clear if the authority to resolve deposit-taking subsidiaries could prevent a chaotic, disruptive failure with systemic implications. The Orderly Liquidation Authority (OLA) created by the Dodd-Frank Act gives the FDIC authority to resolve large BHCs, as well as certain nonbank financial institutions. Proponents argue that such a resolution regime offers an alternative to propping up a failing BHC with government assistance or suffering the systemic consequences of a protracted and messy bankruptcy. They point to the similarities between the OLA and the FDIC's resolution regime, and note the successes of the FDIC's resolution process of large depositories—such as Wachovia and Washington Mutual—during the crisis. Those failures arguably were less disruptive to the financial system than the failure of Lehman Brothers—a nondepository that went through the bankruptcy process—even though Wachovia and Lehman Brothers were similar in size. Neither FDIC resolution involved government assistance. Losses were imposed on stockholders and unsecured creditors in the resolution of Washington Mutual. In the case of Wachovia, the FDIC arranged for Wells Fargo to acquire the failing bank. Critics argue that the resolution of a depository—even a large one—is substantially different from the resolution of a very large, very complex BHC and its affiliated subsidiaries, and voice doubts that the OLA could be used to smoothly resolve such an institution. In addition, critics assert that the OLA gives policymakers too much discretionary power, which could result in higher costs to the government and preferential treatment of favored creditors during the resolution. In other words, it could enable "backdoor bailouts" that could allow government assistance to be funneled to the firm or its creditors beyond what would be available in bankruptcy, perpetuating the moral hazard problem. The normal FDIC resolution regime minimizes the potential for these problems through statutory requirements of least-cost resolution and prompt corrective action, but some expect that a resolution regime for TBTF firms would at times be required to subordinate a least-cost principle to systemic risk considerations. Therefore, a resolution could be more beneficial to creditors than the bankruptcy process. As an alternative to a special resolution regime, some observers call for amending the bankruptcy code to create a special chapter for complex financial firms to address problems that have been identified, such as a speedier process and the ability to reorganize. To some extent, these concerns are addressed in the bankruptcy code. But unlike Title II, the bankruptcy process cannot—for better or worse—base decisions on financial stability concerns or ensure that a financial firm has access to the significant sources of liquidity it needs. Until a TBTF firm fails, it is an open question as to whether a special resolution regime could successfully achieve what it is intended to do—shut down a failing firm without triggering systemic disruption or exposing taxpayers to losses. Given the size of the firms involved and the unanticipated transmission of systemic risk, it is not clear if the government could impose losses on creditors via OLA without triggering contagion. Acting as receiver in a future failure, the FDIC could face the same short-term incentives to limit creditor losses in order to contain systemic risk that caused policymakers to rescue firms in the recent crisis. If those short-term incentives spur the receiver to avoid creditor losses, the only difference between a resolution regime and a "bailout" might be that shareholder equity is wiped out, which may not generate enough savings to avoid costs to the government. The Federal Reserve imposes a "total loss absorbing capacity" (TLAC) requirement—a minimum level of capital and long-term debt—on certain large banks in part to create the expectation that shareholders and creditors will bear the losses in a failure. In addition, a mandatory funding mechanism exists in Title II to recoup losses to taxpayers. However, because that mechanism is not "prefunded," there could be at least temporary taxpayer losses. Opponents to the OLA assert that large BHCs should be resolved through bankruptcies to instill market discipline in TBTF banks and protect the taxpayers from potential losses, especially if weaknesses related to large BHCs in the bankruptcy process are addressed. If Congress decides to take this approach, it could repeal the FDIC's OLA authorities and amend the Bankruptcy Code. While some banks hold a very large amount of assets, are complex, and operate on a national or international scale, the vast majority of U.S. banks are relatively small, have simple business models, and operate within a local area. This section provides background on these smaller, simpler banks—often called community bank s —and analyzes issues related to them, including regulatory relief for community banks, and the long-term decline in the number of community banks. Banks are often classified as community banks based on their total asset size—the value of the loans, securities, and other assets they hold. However, many have observed that most small banks are generally different from large banks in a variety of ways besides asset size. Smaller institutions often are more concentrated in core bank businesses of making loans and taking deposits and less involved in other, more complex activities and products more typically performed by large banks. Small banks also tend to operate within a smaller geographic area. In addition, small banks are generally more likely to practice relationship lending wherein loan officers and other bank employees have a longer-standing and perhaps more personal relationship with borrowers. Due in part to these characteristics, proponents of community banks assert that these banks are particularly important credit sources to local communities and otherwise underserved groups, as big banks may be unwilling to fulfill the credit needs of a small market of which they have little knowledge. Finally, relative to large banks, small banks are likely to have fewer employees, to have less resources to dedicate to regulatory compliance, and to individually pose less of a systemic risk to the broader financial system. There is no standard, commonly accepted definition or asset size threshold of what constitutes a small bank or a community bank. Statutes and regulations identify exempted banks by various asset size thresholds, such as those with under $10 billion or $50 billion in assets. The Federal Reserve defines community banks as those banks with less than $10 billion in assets. The Office of the Comptroller of the Currency (OCC) defines community banks as generally having $1 billion or less in assets. Others define community banks by combining size with a focus on relationship-based services, such as lending, with the local community. The FDIC has a research definition of community banking organizations, which it defines as (1) banks with less than $1 billion in assets as long as the bank makes loans and takes deposits, does not hold a large share of foreign assets, and is not a specialty bank; or (2) banks with more than $1 billion in assets that meet certain criteria, such as having more than one-third of their assets in loans, core deposits equal to at least half of their assets, and a limited geographic presence. By this definition, not all community banks are small banks, although the two are closely related. Because there is no widely accepted definition, this report uses the terms "small bank" and "community bank" interchangeably, generally referring to relatively small banks focused on serving the credit needs of people and businesses within a particular area using simple financial products. A central question about the regulation of banks in general is whether an appropriate trade-off has been struck between the benefits and costs of regulation. The costs associated with government regulation and its implementation are referred to as regulatory burden . A regulation could be a net positive for society if the benefits of the regulation exceed the cost. In contrast, regulation could be a net negative if costs exceed benefits—sometimes referred to as unduly burdensome regulation. Critics of recent regulation assert that when applied to community banks, certain realized benefits (such as increased systemic stability) are likely to be relatively small, whereas certain realized costs (such as compliance expenses for banks with limited resources and reduced credit for certain communities) are likely to be relatively large. Other observers assert that the regulatory burden facing small banks is appropriate, and note that small banks are given special regulatory consideration to minimize their regulatory burden. Many regulations, including some regulations resulting from Dodd-Frank, include an exemption for small banks or are tailored to reduce the cost for small banks to comply. In addition, during the rulemaking process, bank regulators are required to consider the effect of rules on small banks under the Regulatory Flexibility Act (RFA) of 1980 ( P.L. 96-354 ) and the Riegle Community Development and Regulatory Improvement Act ( P.L. 103-325 ). Supervision is also structured to pose less of a burden on small banks than larger banks, such as by requiring less-frequent bank examinations for certain small banks. One argument for easing the regulatory burden for community banks is that regulation intended to increase systemic stability need not be applied to community banks. Due to the role of large institutions in the crisis, policymakers have been particularly focused on the systemic risk posed by large banks and ensuring that they are not "too big to fail." As previously noted, the Dodd-Frank Act attempted to address this problem by imposing heightened prudential regulatory standards on the largest banks relative to small and medium-sized banks. Sometimes the argument is extended to assert that because small banks did not cause the crisis and pose less systemic risk, they need not be subject to new regulations. Opponents of these arguments note that systemic risk is only one of the goals of regulation, along with prudential regulation and consumer protection. They contend that precrisis prudential regulation for small banks was not stringent enough, as hundreds of small banks failed during and after the crisis. Another potential rationale for easing regulations on small banks would be if there are economies of scale to regulatory compliance costs. While regulatory compliance costs are likely to rise with size, those costs as a percentage of overall costs or revenues are likely to fall. In particular, as regulatory complexity increases, compliance may become relatively more costly for small firms. To give a simplified example, imagine a bank with $100 million in assets and 25 employees and a bank with $10 billion in assets and 1,250 employees each determine they must hire an extra employee to ensure compliance with new regulations. The relative burden is larger on the small institution that expands its workforce by 4% than on the large bank that expands by less than 0.1%. From a cost-benefit perspective, if regulatory compliance costs are subject to economies of scale, then the balance of costs and benefits of a particular regulation will differ depending on the size of the bank. For the same regulatory proposal, economies of scale could potentially result in costs outweighing benefits for smaller banks. Empirical evidence on whether compliance costs are subject to economies of scale is mixed. Some argue for reducing the regulatory burden on small banks on the grounds that they provide greater access to credit or offer credit at lower prices than large banks for certain groups of borrowers. These arguments tend to emphasize potential market niches small banks occupy that larger banks may be unwilling to fill, such as low-income or rural communities and other underserved markets. Empirical evidence is also mixed. Data that support these arguments include the fact that community banks held 71% of total deposits in rural counties in 2011, compared with 19% of overall deposits nationwide. Similarly, it is argued that small banks are better situated to engage in types of transactions that depend on "relationship banking" (i.e., personalized knowledge of risks), and that rigid regulations with standardized criteria are not well suited for the relationship banking model. Due to a lack of a clear, consensus definition, setting exemption thresholds and criteria is an issue of calibration. Should they be set so that regulations apply only to the very largest, most complex banks, as well as internationally active banks with substantial nonbank subsidiaries? Should the thresholds be set relatively low, so that only very small banks are exempt? Often at issue in this debate are the so-called regional banks —banks that are larger and operate across a greater geographic market than the community banks that have less than $10 billion or $1 billion in assets, but also smaller and less complex than the largest, most complex organizations with hundreds of billions or trillions of dollars in assets. If Congress decides that additional regulatory relief should be provided for small banks, it could continue to be provided under the current system of ad hoc exemptions. As new laws and regulations are adopted, policymakers can decide to use size-based exemptions or tailoring more often and at higher size thresholds. In addition, exemptions can be retroactively added, or thresholds of existing exemptions could be raised. An alternative to the current system would be a single, consistent exemption based on size or other criteria set by statute. Another would be setting criteria that automatically exempt certain institutions, and granting regulators discretion to exempt any other institutions they deem appropriate. Small banks, under almost any common definition, have seen their numbers decline and their collective share of banking industry assets fall in the United States in recent decades. Overall, the number of FDIC-insured institutions fell from a peak of 18,083 in the first quarter of 1986 to 5,913 in 2016. The number of institutions with less than $1 billion in assets fell from 18,045 to 5,799 in that time period, and the share of industry assets held by those banks fell from 72% to 18%. Meanwhile, the number of banks with more than $10 billion in assets rose from 36 to 114 from 1986 to 2016, and the share of total banking industry assets held by those banks increased from 28% to 82%. The decrease in the number of banks occurred through three main methods. Most of the decline in the number of institutions in the last 30 years was due to mergers, which averaged over 400 a year from 1990 to 2016. Failures were minimal from 1999 to 2007, but played a larger role in the decline during the financial crisis and recession. As economic conditions have improved more recently, failures have declined, but the number of n ew r eporters —new chartered institutions providing information to the FDIC for the first time—has been extraordinarily small in recent years and was zero in 2016. Observers have cited several possible causes for this industry consolidation. As covered in more detail in the previous section, " Regulatory Burden on Community Banks ," some argue it indicates that the regulatory burden on small banks is too onerous, driving smaller banks to merge to create or join larger institutions. However, mergers—the largest factor in consolidation—could occur for a variety of reasons. For example, a bank that is struggling financially may look to merge with a stronger bank in order to stay in business. Alternatively, a small bank that has been outperforming its peers may be bought by a larger bank that wants to benefit from its success. In addition, other fundamental changes besides regulatory burden in the banking system could be driving consolidation, making it difficult to isolate the effects of regulation. Through much of the 20 th century, federal and state laws restricted banks' ability to open new branches and banking across state lines was restricted; branching and banking across state lines was not substantially deregulated at the federal level until 1997 through the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ( P.L. 103-328 ). These restrictions meant many individual, small banks were needed to serve every community. When these restrictions were relaxed, it became easier for small banks to consolidate or for mid-size and large banks to spread operations to other markets. In addition, there may be economies of scale (cost advantages due to size or volume of output) to banking, and they may be growing over time, which would also drive industry consolidation. For example, information technology has become more important in banking (e.g., cybersecurity and mobile banking), and certain information technology systems may be subject to economies of scale. Finally, the slow growth coming out of the most recent recession, and macroeconomic conditions more generally (such as low interest rates), may make it less appealing for new firms to enter the banking market. To the degree that regulatory burden is causing consolidation in the bank industry, regulatory relief for community bank policies such as those discussed in " Legislative Alternatives " found in the section above could potentially address the decline in the number of community banks. Financial regulatory agencies are invested with the authority to regulate, and most of them are referred to as independent regulatory agencies , allowing them to operate with a relatively high degree of independence from the President and Congress. This raises the issue of how they should be held accountable for the regulations they implement and the actions they take. This section provides background on the issue of agency independence and issues related to creating an appropriate degree of accountability, including whether the agency is self-funding or funded through appropriations; whether the agency is led by an individual or a bipartisan commission; what regulatory analysis requirements the agency faces in the rulemaking process; and to what extent agency rulemaking is subject to congressional review. Financial regulators conduct rulemaking, supervision, and enforcement to implement law and supervise financial institutions. A list of federal financial regulators is provided in Table 1 . These agencies—along with certain other regulatory agencies—have been given certain characteristics that generally make them more independent from the President and Congress than most executive agencies. Their independence results from characteristics including their leadership structure, ability to self-fund outside the appropriations process, and rulemaking requirements. While this independence allows technical rules to be designed by experts who are to some degree insulated from political considerations, it also results in rules being implemented by individuals who arguably are not directly accountable to the electorate. Whether an appropriate balance between independence and accountability of these agencies has been achieved is a matter of debate. Some observers argue that better regulatory outcomes would be achieved if agencies were more accountable. Others feel that independence is necessary for agencies to effectively regulate and should not be reduced. Self-funding is one characteristic that provides certain financial regulators with a relatively high degree of independence. The annual appropriations process and periodic reauthorization legislation provide Congress with opportunities to influence the size, scope, priorities, and activities of an agency. However, most federal bank regulators generate income from other sources, such as the collection of fees or assessments from the entities that they oversee, and are not subject to the appropriations process. Those who believe financial regulator independence has become excessive often assert that ending self-funding and bringing financial regulators into the appropriations and authorization processes would result in a more appropriate level of accountability. Doing so would provide Congress with regular opportunities to evaluate an agency's performance. During these processes, Congress also might influence the activities of these agencies by legislating provisions that reallocate resources or place limitations on the use of appropriated funds to better reflect congressional priorities. Through line-item funding, bill text, or accompanying committee report text, Congress could encourage, discourage, require, or forbid specific activities at the agency, including rulemaking. Alternatively, Congress could adjust an agency's overall funding level if Congress is supportive or unsupportive of the agency's mission or conduct. Thus, congressional control over an agency's funding reduces its independence from (and increases its accountability to) Congress. However, opponents argue that reduced independence would produce worse regulatory outcomes, because—as mentioned previously—it may politicize regulators' policymaking at the expense of allowing experts to write technical rules. Congress could end financial regulatory agency self-funding or bring the regulators into the appropriations and authorization processes if it seeks to reduce agency independence and increase accountability to Congress. Each bank regulatory agency was created at a different time and in a different policy context, and so each agency's leadership has different structural features, as shown in Table 2 . Currently, some regulatory agencies are led by a single leader and some are led by multimember boards. In each case where there is a board structure, the board has a chairman, whose powers vis-à-vis other members vary by agency. Different arguments are made in favor of which leadership structure would be most appropriate for the various agencies. Vesting power in a board arguably encourages a diversity of views to be represented, which may lead to more durable policy decisions. On the other hand, vesting power in one individual arguably could create stronger, more unified leadership and a single point of accountability, perhaps leading to faster and more numerous decisions. Different leadership structures also raise issues related to the independence versus accountability trade-off. Where an agency is headed by a single individual, the appointee's views are more likely to reflect the views of the appointing President and his or her party; the leadership is unitary and no consensus is necessary. In contrast, the collegial structure is thought to increase the independence of an agency from the President. Therefore, observers who believe agencies should have more independence from the President are often proponents of replacing the leadership structure at agencies headed by a director with multimember commissions. Other characteristics of leadership positions may enhance independence from Congress and the President. For example, independence is thought to increase when leadership term length exceeds the length of a presidential term and is staggered and nonrenewable; when nominees are required to have issue expertise; and when agency heads can be removed only "for cause." The leadership of financial regulatory agencies generally has such features, although notably the Comptroller of the Currency does not have "for cause" removal protections. Congress could change financial regulatory agencies' structures in various ways to alter the balance between agency independence and accountability. For example, Congress could make agencies headed by a director more accountable by eliminating "for cause" removal protections or replacing the director with a multimember board or commission. One method of maintaining accountability is statutorily requiring agencies to perform a cost-benefit analysis (CBA) —a systematic examination, estimation, and comparison of the economic costs and benefits potentially resulting from the implementation of a proposed new rule—as part of the rulemaking process. In this way, the agency demonstrates that it has given reasoned consideration to the necessity and efficacy of a rule and the effects it will have on society. However, a fully quantified and monetized analysis with results that have a high degree of precision is not always feasible. Predicting future outcomes requires making assumptions that are subject to a degree of uncertainty. Accounting for human behavioral responses to a regulation poses challenges. Some effects are difficult to quantify and monetize. Relevant data are not always available and accurate. This raises questions about the appropriate scope, level of detail, and degree of quantification that should be required of analyses performed in the rulemaking process. Overly lenient requirements could risk overly burdensome regulation with limited benefit being implemented by an unaccountable agency without due consideration of consequences. On the other hand, overly onerous analytic requirements could risk impeding the implementation of necessary, beneficial regulation because performing the analysis would be too time-consuming, too costly, or simply not possible. Debate over appropriate CBA requirements for financial regulators involves an additional complication. Currently, most financial regulators, as independent regulatory agencies, are not subject to certain executive orders, such as E.O. 12866, which directs the CBA performed by most executive departments and agencies. This exemption generally gives financial regulators a relatively high degree of discretion in the parameters of the CBAs they perform. However, experts disagree over whether greater discretion for financial regulators is appropriate. Some observers assert financial regulators should not be subject to a rigid legal structure when performing CBA. They claim that attempts to quantify the effects of financial regulation are imprecise and unreliable. These attempts entail making causal assumptions that are contestable and uncertain, and often face issues concerning data availability and accuracy. Also, financial regulation intends to induce behavioral, microeconomic, and macroeconomic responses, and these effects may be harder to quantify than regulations in other industries that lead to more measurable effects. Others assert that financial regulators should be subject to stricter CBA requirements than they are now. They argue that requisite, quantitative CBA—when it might yield a wide range of estimates or disagreements over accuracy between technical experts—is necessary because it disciplines agencies in regard to what rules they implement, and allows for an objective assessment of whether a regulation is likely to achieve its goals and at what cost. Some claim that the challenges of performing CBA for financial regulations are not greater than for regulations for other industries, arguing that estimations of benefits and costs—although challenging—are possible. Congress has several alternatives available if it decided to change CBA requirements for financial regulators. Congress could require that certain effects—such as those on financial product cost or national employment—be examined as part of the analyses. Similarly, Congress could require a certain degree of quantification be part of the analysis. In addition, certain findings in these CBAs could trigger a requirement to get a waiver from Congress before the rule can go forward. Another alternative would be to authorize the President to extend executive orders related to CBA to independent regulatory agencies, including subjecting the CBAs to review by the Office of Information and Regulatory Affairs. The Congressional Review Act (CRA) provides a mechanism to increase banking regulatory agencies' accountability. CRA is an oversight tool that Congress can use to invalidate a final rule issued by a federal agency. It was enacted in response to concerns expressed by Members of both parties about Congress's ability to control what many viewed as a rapidly growing body of administrative rules. Many felt that as Congress delegated more power to agencies to implement law, the traditional oversight tools Congress possessed were not adequate. The CRA requires agencies to report to Congress on their rulemaking activities and provides Congress with a special set of expedited parliamentary procedures that can be used to consider legislation striking down agency rules it opposes. These "fast track" parliamentary procedures, which are available primarily in the Senate, limit debate and amendment on a joint resolution disapproving a rule and ensure that a simple majority can reach a final up-or-down vote on the measure. Members of Congress have specified time periods in which to submit and act on a joint resolution of disapproval invalidating the rule. If both houses agree to such a joint resolution, it is sent to the President for his signature or veto. If a CRA joint resolution of disapproval is enacted, either by being signed by the President or by being enacted over his veto, the agency final rule in question "shall not take effect (or continue)." The act also provides that if a joint resolution of disapproval is enacted, a new rule may not be issued in "substantially the same form" as the disapproved rule unless the rule is specifically authorized by a subsequent law. The CRA prohibits judicial review of any "determination, finding, action, or omission under" the act. Observers have argued that the structure of the CRA disapproval process often renders the CRA largely unworkable as an oversight mechanism. A President is most likely to veto a joint resolution that attempts to strike down a final rule proposed by his or her own Administration or by a like-minded independent agency, and a supermajority is necessary to override a presidential veto—something that has been historically rare. Therefor e, Congress typically has the opportunity to successfully block rules from taking effect only in period s between the start of a new Admin i stration —and only when the new Administration's regulatory policy positions are more aligned with those of the sitting Congress than those of the previous A dministration—and the expiration of the specified time period Congress has to act on a CRA resolution. The beginning of the 115 th Congress generally meets those criteria, and 14 disapproval resolutions had been enacted as of May 18th, 2017, but only one disapproval resolution had been enacted in the preceding 20 years. If Congress decided to alter the CRA disapproval mechanism, it could change it from a resolution of disapproval to a resolution of approval . Such a change would mean that instead of rules automatically going into force unless Congress enacted a measure stopping them, some or all rules would become effective only upon the enactment of a law approving them. This mechanism would increase congressional oversight of which regulations would go into effect, but may politicize or unduly slow the promulgation of technical rules that would, on net, benefit society. In addition to issues related to regulation, banking is also continually affected by market and economic conditions and trends. This section analyzes certain issues related to trends that may concern banks, including migration of financial activity from banks into nonbanks or the "shadow banking" system; increasing capabilities and market presence of financial technology ("fintech"); increasing interest rates in the future; and competitive and regulatory issues related to institutions with different charters but similar business models—such as banks, thrifts, and credit unions. Because these issues involve the interactions between several broad market forces, specific legislative alternatives will not be examined in this section. Credit intermediation is a core banking activity and involves transforming short-term, liquid, safe liabilities into relatively long-term, illiquid, higher-risk assets. In the context of traditional banking, credit intermediation is done by taking deposits from savers and using them to fund loans to borrowers. Because bank assets are illiquid, an otherwise-solvent bank might experience difficulty meeting short-term obligations without having to sell assets, possibly at "fire sale" prices. Also, if depositors begin to feel their deposits are not safe, many of them may choose to withdraw their funds at the same time. Such a "run" on a bank could cause it to fail. Long-established government programs mitigate liquidity- and run-risk. The Federal Reserve is authorized to act as a "lender of last resort" for a bank experiencing liquidity problems, and the FDIC insures depositors against losses. Banks are also subject to prudential regulation—as discussed in the " Prudential Regulation " section—to ensure that risks are well managed and kept at reasonable levels. However, certain financial markets and instruments allow nonbank institutions to also perform similar credit intermediation to banks. Some observers are concerned that this nonbank credit intermediation—sometimes called shadow banking —poses significant risks, because it can be performed without the government "safety nets" available to banks or the prudential regulation required of them. The lack of an explicit government safety net in shadow banking means that taxpayers are less explicitly or directly exposed to risk, but also means that shadow banking may be more vulnerable to a panic that could trigger a financial crisis. Furthermore, some argue that the increased regulatory burden placed on banks in response to the financial crisis—such as the changes in bank regulation mandated by Dodd-Frank or agreed to in Basel III—could result in a decreasing role for banks in credit intermediation and an increased role for relatively lightly regulated nonbanks. Many contend the financial crisis demonstrated how these risks in the shadow banking sector can create or exacerbate systemic distress. Money market mutual funds are deposit-like instruments that are managed with the goal of never losing principal and that investors can convert to cash on demand. Institutions can also access deposit-like funding by borrowing through short-term funding markets—such as by issuing commercial paper and entering repurchase agreements. These instruments can be continually rolled over as long as funding providers have confidence in the solvency of the borrowers. During the crisis, all these instruments—which investors had previously viewed as safe and unlikely to suffer losses—experienced run-like events as funding providers withdrew from markets. Also, nonbanks can take on exposure to long-term loans through investing in mortgage-backed securities (MBS) or other asset-backed securities (ABS). During the crisis as firms faced liquidity problems, the value of these assets decreased quickly, possibly in part as a result of fire sales. Since the crisis, many regulatory changes have been made related to certain money market, commercial paper, and repurchase agreement markets and practices. However, some observers are still concerned that shadow banking poses risks. Furthermore, because banks now face more stringent prudential regulation, certain credit intermediation activities may "migrate" to nonbanks and the shadow banking system, where institutions are less burdened by regulation. Fintech usually refers to technologies with the potential to alter the way certain financial services are performed. Banks are affected by technological developments in two ways: (1) they face choices over how much to invest in emerging technologies and to what extent they want to alter their business models in adopting technologies, and (2) they potentially face new competition from new technology-focused companies. Such technologies include online marketplace lending, crowdfunding, blockchain and distributed ledgers, and robo-advising, among many others. Certain financial innovations may create opportunities to improve social and economic outcomes, but there is also potential to create risks or unexpected financial losses. Potential benefits from fintech are greater efficiency in financial markets that creates lower prices and increased customer and small business access to financial services. These can be achieved as innovative technology replaces traditional processes that have become outdated. For example, automation may be able to replace employees, and digital technology can replace physical systems and infrastructure. Cost savings from removing inefficiencies may lead to reduced prices, making certain services affordable to new customers. Some customers that previously did not have access to services—due to such things as lack of information about creditworthiness, or geographic remoteness—could also potentially gain access. Increased accessibility may be especially beneficial to traditionally underserved groups, such as low-income, minority, and rural populations. Fintech could also create or increase risks. Many fintech products have only a brief history of operation, so it can be difficult to predict outcomes and assess risk. It is possible certain technologies may not in the end function as efficiently and accurately as intended. Also, the stated aim of a new technology is often to bring a product directly to consumers and eliminate a "middle-man." However, that middle-man could be an experienced financial institution or professional that can advise consumers on financial products and their risks. In these ways, fintech could increase the likelihood that consumers engage in a financial activity and take on risks that they do not fully understand. Certain innovations can likely be integrated into the financial system with little regulatory or policy action. Technology in finance largely involves reducing the cost of producing existing products and services, and the existing regulatory structure was developed to address risks from these financial activities. Existing regulation may be able to accommodate new technologies while adequately protecting against risks. However, there are two other possibilities. One is that some regulations may be stifling beneficial innovation. Another is that existing regulation does not adequately address risks created by new technologies. Some observers argue that regulation could potentially impede the development and introduction of beneficial innovation. Companies incur costs to comply with regulations. In addition, companies are sometimes unsure how regulators will treat the innovation once it is brought to market. A potential solution being used in other countries is to establish a regulatory "sandbox" or "greenhouse" wherein companies that meet certain requirements work with regulators as products are brought to market. Some are concerned that existing regulations may not adequately address certain risks posed by new technologies. Regulatory arbitrage—conducting business in a way that circumvents unfavorable regulations—may be a concern in this area. Fintech potentially could provide an opportunity for companies to claim they are not subject to certain regulations because of a superficial difference between how they operate compared to traditional companies. Another group of issues posed by fintech relates to cybersecurity. As activity increasingly utilizes digital technology, sensitive data are generated. Data can be used to accurately assess risks and ensure customers receive the best products and services. However, data can be stolen and used inappropriately, and there are concerns over privacy issues. This raises questions over ownership and control of the data—including the rights of consumers and the responsibilities of companies in accessing and using data—and whether companies that use and collect data face appropriate cybersecurity requirements. The Federal Reserve's monetary policy response to the financial crisis, the ensuing recession, and subsequent slow economic growth was to keep interest rates unusually low for an extraordinarily long time. It accomplished this in part using unprecedented monetary policy tools such as quantitative easing —large-scale asset purchases that significantly increased the size of the Federal Reserve's balance sheet. Recently, as economic conditions have improved, the Federal Reserve has begun to raise its target rate, and increased attention has been given to how and when the Federal Reserve will normalize monetary policy. A rising interest rate environment—especially following an extended period of unusually low rates achieved with unprecedented monetary policy tools—is an issue for banks because they are exposed to interest rate risk . A portion of bank assets have fixed interest rates with long terms until maturity, such as mortgages, and the rates of return on these assets do not increase as current market rates do. However, many bank liabilities are short-term, such as deposits, and can be repriced quickly. So although certain interest revenue being collected by banks is slow to rise, the interest costs paid out by banks can rise quickly. In addition to putting stress on net income, rising interest rates can cause the market value of fixed-rate assets to fall. Finally, banks incur an opportunity cost when resources are tied up in long-term assets with low interest rates rather than being used to make new loans at higher interest rates. The magnitude of interest rate risks should not be overstated, as rising rates can increase bank profitability if they result in a greater difference between long-term rates banks receive and short-term rates they pay—referred to as net interest margin . Nonetheless, banks and regulators recognize the importance of managing interest rate risk, carefully examine the composition of bank balance sheets, and plan for different interest rate change scenarios. While banks are well practiced at interest rate risk management through normal economic and monetary policy cycles, managing bank risk through the next period of interest rate growth could be more challenging because rates have been so low for so long and achieved through unprecedented monetary policy tools. Because rates have been low for so long, many loans made in different interest rate environments that preceded the crisis have matured. Meanwhile, all new loans made in the last eight years have been made in a low interest rate environment. This presents challenges to getting a mix of loans with different rates. In addition, because the Federal Reserve has used new monetary policy tools and grown its balance sheet to unprecedented levels, accurately controlling the pace of interest rate growth may be challenging. An institution that makes loans and takes deposits—the core activities of traditional commercial banking—can have one of several types of charters, including a national bank charter, a state bank charter, a federal savings association (also called a "thrift") charter, or a credit union charter. Each charter type determines what activities are permissible for the institution, what activities are restricted, and which agency will be the institution's primary regulator (see Table 3 ). A rationale for this system is that it gives institutions with different business models and ownership arrangements the ability to choose a regulatory regime appropriately suited to the institution's business needs and risks. The differences between institution business models and the attendant regulations are numerous, varied, and beyond the scope of this report. This examination of the issue only requires noting that (1) under each charter, an institution is subject to regulatory treatment and restrictions that differ from other charter types in certain ways and (2) these various institutions are to some degree in competition with each other for business, because although the business models may vary, all involve taking deposits and making loans. As a result, each type of institution has a stake in proposed changes to regulation related to all charter types. Institutions may assert some regulation that they are subject to puts them at a competitive disadvantage, whereas the other types of institutions oppose these assertions. Often, an effort by institutions of one type to relax their regulations will be resisted by institutions of other types. The friction between credit unions and community banks is an illustrative example. The two types of institutions are similar in certain ways—notably, they typically serve a small group of customers and engage in relationship banking, which involves familiarity with customers and local market conditions. However, there are key differences. For example, credit unions are not-for-profit cooperatives with the purpose of serving the financial needs of members. Banks provide services to the general public for profit. On the basis of the differences, regulation of credit unions and banks differs. For example, credit unions face limits on the amount of member business lending they can do, whereas banks have no equivalent limitation. Meanwhile, banks are subject to regulatory evaluation under the Community Reinvestment Act ( P.L. 95-128 ) to determine how well they are meeting the credit needs of the community in which they operate. When credit unions advocate for easing business lending restrictions, banks object, arguing that it would allow credit unions to engage in activity beyond their mandate and expand into a business line more appropriate to banks. When banks argue that the Community Reinvestment Act should be extended to other types of institutions, credit unions object, arguing they already serve the credit needs of the community. These regulatory differences between these institutions are just two of many examples of institutions with different charter types disagreeing on what appropriate regulation should be. A broader and long-standing issue underlying these debates is to what degree the government should offer different charters—with different benefits and responsibilities—for businesses that engage in similar activities and whether the difference between the charters should be narrowed. The banking regulators try to minimize their regulatory differences through joint rulemaking and coordination through the Federal Financial Institutions Examinations Council—an interagency body that prescribes uniform principles, standards, and report forms—and commercial banks and thrifts no longer have separate regulators. However, differences remain between their regulations that Congress has considered addressing. A comprehensive listing and analysis of all proposed legislation related to bank issues is beyond the scope of this report. However, such information can be found in other CRS products, including the following: CRS Report R44839, The Financial CHOICE Act in the 115th Congress: Selected Policy Issues , by [author name scrubbed] et al. This report examines H.R. 10 introduced in the 115 th Congress. H.R. 10 proposes wide-ranging changes to the financial regulatory system, and it contains provisions related to banking issues, including provisions found in Titles I, III, V, VI, VII, and IX. Many of these provisions are similar to those found in other bills. CRS Report R45073, Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) and Selected Policy Issues , coordinated by [author name scrubbed]. This report examines S. 2155 , which was reported by the Committee on Banking, Housing, and Urban Affairs on December 18, 2017. S. 2155 proposes wide-ranging changes to the financial regulatory system, and it contains provisions related to banking issues, including provisions found in Titles I, II, and IV. Many of these provisions are similar to those found in other bills. CRS Report R44035, "Regulatory Relief" for Banking: Selected Legislation in the 114th Congress , coordinated by [author name scrubbed]. This report examines numerous bills related to regulatory relief for banks introduced in the 114 th Congress. CRS Report R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary , coordinated by [author name scrubbed]. This report examines provisions enacted into law in the Dodd-Frank Act, and it provides background and analysis of these reforms to the financial regulatory system that are in place today. Provisions related to banking are found in Title I, II, III, VI, X, and XIV.

The financial crisis and the ensuing legislative and regulatory responses greatly affected the banking industry. Many new regulations—mandated or authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) or promulgated under the authority of bank regulators—have been implemented in recent years. In addition, economic and technological trends continue to affect banks. As a result, Congress is faced with many issues related to the bank industry, including issues concerning prudential regulation, consumer protection, "too big to fail" (TBTF) banks, community banks, regulatory agency design and independence, and market and economic trends. For example, the Financial CHOICE Act (H.R. 10) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) propose wide-ranging changes to the financial regulatory system, and include provisions related to many of these banking issues. Prudential Regulation. This type of regulation is designed to ensure banks are safely profitable and unlikely to fail. Regulatory ratio requirements agreed to in the international agreement known as the Basel III Accords and the Volcker Rule are examples. Ratio requirements require banks to hold a certain amount of capital on their balance sheets to better enable them to avoid failure. The Volcker Rule prohibits certain trading activities and affiliations at banks. Proponents argue the rules appropriately balance the need for safety and soundness with regulatory burden. Opponents argue that current rules are overly complex, unduly burdensome, and difficult to enforce. Consumer Protection. Certain laws and regulations protect consumers from unfair, deceptive, or abusive acts and practices. Regulations promulgated by the Consumer Financial Protection Bureau (CFPB) and certain mortgage lending rules are contentious issues in this area. Observers disagree over whether CFPB authorities, structure, regulations, and enforcement actions appropriately balance the benefit of protecting consumers and the potential costs of unnecessarily burdening banks and restricting credit availability. A similar debate is about whether mortgage rules appropriately protect consumers and effectively align certain market incentives or unnecessarily reduce the availability of mortgages. "Too Big To Fail" Banks. Regulators also regulate for systemic risks, such as those associated with TBTF financial institutions that may contribute to systemic instability. Dodd-Frank Act provisions include enhanced prudential regulation for TBTF banks and changes to resolution processes in the event one failed. Proponents of these changes assert they will eliminate or reduce excessive risk-taking at, and bailouts for, these large banks. Opponents assert that market forces and bankruptcy law are more effective and less distortionary than the new regulations and resolution authorities. Community Banks. The number of relatively small banks has declined substantially in recent decades. Some analysts assert market forces and removal of regulatory barriers to interstate branching and banking are having a large effect, given that small banks are exempt from many recent regulations and have been consolidating for decades. Others assert small institutions have limited resources and are being unnecessarily burdened by regulation, especially because such banks are unlikely to contribute to systemic risk. Regulatory Agency Design and Independence. How regulatory agencies are structured and promulgate rules are also issues. Some assert that financial agencies' relatively high degree of independence from the President and Congress results in too little accountability in rulemaking; thus, their leadership structures, funding, and rulemaking procedures should be altered. Opponents of such measures maintain that financial regulator independence should be maintained because it allows regulations to be promulgated by technical experts with some insulation from political considerations. Recent Market and Economic Trends. Changing economic forces may also pose issues to the banking industry. Increases in regulation could drive certain financial activities into a relatively lightly regulated "shadow banking" sector. Innovative financial technology may alter the way certain financial services are delivered. Interest rates are likely to begin rising soon after a long period of low rates, which could present risks to banks. Competition and regulatory differences between banks and nonbanks with different charter types is an ongoing issue.

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On December 29, 2007, the President signed S. 2499 , the Medicare, Medicaid, and SCHIP Extension Act of 2007 ( P.L. 110-173 ). This Act was passed by the House on December 19, 2007, and by a voice vote in the Senate on December 18, 2007. The Act makes changes to the nation's three major health programs, Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP), as well as other federally funded programs. Perhaps the most prominent provisions of the Act were to (1) suspend the Medicare physician payment cut scheduled to take effect and (2) provide SCHIP funding through March 2009. The update formula for Medicare physician payment would have required a reduction in the fee schedule for physician reimbursement of 10.1% as of January 1, 2008, and by roughly 5% annually thereafter. SCHIP needed to be reauthorized because Title XXI of the Social Security Act, as established by the Balanced Budget Act of 1997 (BBA 97, P.L. 105-33 ), specified national appropriation amounts only from FY1998 to FY2007. The President vetoed two bills prior to P.L. 110-173 ( H.R. 976 , H.R. 3963 ) that would have provided federal funding for SCHIP in FY2008 through FY2012. In response to these vetoes, four continuing resolutions ( P.L. 110-92 , P.L. 110-116 , P.L. 110-137 , and P.L. 110-149 ) appropriated $5 billion for federal SCHIP allotments in FY2008 through December 31, 2007. P.L. 110-173 mandates a 0.5% increase in the Medicare physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008, and provides FY2008 and FY2009 SCHIP allotments through March 31, 2009. It also redistributes any FY2006 funds that are unspent by FY2008 to states that are projected to experience shortfalls. For 2008, the Act provides up to $1.6 billion to shortfall states and additional sums to territories. For the first two quarters of FY2009, up to $275 million is appropriated for the same purpose. The Act also extends a number of expiring provisions and programs. These extensions affect Medicare plans and providers and Medicaid payments and programs. The Act also includes funding for some miscellaneous activities. Regarding Medicare Advantage plans, the Act allows Medicare Special Needs Plans to continue to restrict their enrollment to Medicaid-entitled institutionalized beneficiaries and other specified individuals until January 1, 2010. Also, cost-based plans under Medicare may continue to operate in an area with two local or two regional Medicare Advantage plans until January 1, 2009. Extensions that affect Medicare payments for certain providers and services include, among others, extending the secretarial authority to reclassify certain hospitals to areas with higher wage index values. The Act allows qualified rural hospitals that provide clinical diagnostic laboratory services to continue to be reimbursed under a reasonable cost system rather than a fee schedule. The Act also extends exceptions to annual per beneficiary payment limits on outpatient physical therapy services and speech language pathology services for the next six months. Certain pathology laboratories are allowed to continue billing hospitals directly for their services. The Act extends the Medicare incentive payment program for certain physicians providing services in scarcity areas and Medicare payments for the accommodation of physicians ordered to active duty in the Armed Services. The Act also extends cost reimbursement for brachytherapy services and cost reimbursement to therapeutic radiopharmaceuticals. Many extensions also affect certain Medicaid payments and programs. The Act extends increased payments for Medicaid disproportionate hospital share (DSH) allotments for Tennessee and Hawaii to provide additional assistance to certain hospitals that provide a disproportionate share of care to low-income patients with special needs. It also continues Medicaid benefits through June 30, 2008, for certain low-income families that would otherwise lose coverage because of changes in their income under the Transitional Medical Assistance (TMA) program. Medicaid's coverage of Medicare part B premiums under the Qualifying Individual (QI) program is extended through June 2008, including an allocation of $200 million for this program. S. 2499 also prohibits the Secretary from taking action to restrict Medicaid coverage of school-based, health-related services, including transportation and administrative activities for the next six months. Miscellaneous activities include providing additional funds under the State Health Insurance Assistance Programs to assist Medicare-eligible individuals in obtaining information and counseling on enrollment in health insurance. Medicare funds are also used to make grants for Area Agencies on Aging and Aging and Disability Resource Centers for FY2008 and FY2009. The Act also includes provisions that extend the Title V Abstinence Education block grant through June 30, 2008, and amend the Public Health Service Act to provide for research into the prevention of Type I diabetes. Grants for the prevention and treatment of diabetes among American Indians and Alaskan Natives are also provided. In addition, the Medicare Payment Advisory Commission (MedPAC) will become a congressional agency. Finally, additional funds are provided to the Current Population Survey to improve the collection of data on state populations of low-income children Because the pay-go rule as reestablished by the 110 th Congress requires all considered bills to neither have the net effect of increasing the deficit nor reducing the surplus, the Act includes a number of offsets to pay for the aforementioned provisions. These offsets include a reduction in federal payments for the Medicare Advantage stabilization fund in 2012. The Act also strengthened procedures and additional funding for the determination of Medicare's responsibility as a secondary rather than a primary payer for covered services. The market basket update for certain discharges is eliminated, and the compliance requirements for payment are modified for Inpatient Rehabilitation Facilities (IRFs) for FY2008 and FY2009. Another offset requires the Secretary of Health and Human Services (HHS) to use constant volume weighting in the computation of the average sales price (ASP) for the payments for most Medicare part B drugs. Payment rates for certain diagnostic laboratory tests are also changed. Finally, the Act modifies the statutory definition of and requirements for Long-Term Care Hospitals that participate in Medicare and authorizes a study on the establishment of a national long-term care hospital facility and patient criteria, among other purposes. The Congressional Budget Office (CBO) estimated that S. 2499 would result in a net savings to the federal government of $100 million between FY2008 and FY2012. Included in this calculation is an estimate of a spending increase for certain SCHIP, Medicaid, and miscellaneous provisions that would total approximately $1.8 billion. It also includes an estimate of approximately $1.8 billion in savings as a result of the direct effects of the Medicare provisions (saving approximately $1.6 billion) and the interactions between provisions (saving approximately $200 million). This report provides short descriptions of the provisions contained in S. 2499 . For additional assistance, please contact a CRS specialist or analyst. Contact information for these individuals is included in the table. The Medicare, Medicaid, and SCHIP programs are briefly described below. More complete and detailed descriptions of the programs are available from CRS. Medicare is the nation's health insurance program for persons aged 65 and over and certain disabled persons. In FY2008, the program will cover an estimated 44.6 million persons (37.3 million aged and 7.3 million disabled) at a total cost of $456.3 billion. Federal costs (after deduction of beneficiary premiums and other offsetting receipts) will total $389.7 billion. In FY2007, federal Medicare spending will represent approximately 13% of the total federal budget and 3% of GDP. Medicare is an entitlement program, which means that it is required to pay for all covered services provided to eligible persons, so long as specific criteria are met. Medicare consists of four distinct parts: Part A (Hospital Insurance, or HI); Part B (Supplementary Medical Insurance, or SMI); Part C (Medicare Advantage, or MA); and Part D (the new prescription drug benefit added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, P.L. 108-173 ). The program is administered by the Centers for Medicare and Medicaid Services (CMS) in the Department of HHS. Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term care, to more than 63 million people at an estimated cost to the federal and state governments of roughly $317 billion. Each state designs and administers its own version of Medicaid under broad federal rules. State variability in eligibility and covered services, and how those services are reimbursed and delivered, is the rule rather than the exception. In the federal budget, Medicaid is an entitlement program that constitutes a large share of mandatory spending. Federal Medicaid spending is open-ended, with total outlays dependent on the spending levels of state Medicaid programs. SCHIP is authorized under Title XXI of the Social Security Act. In general, this program allows states to cover targeted low-income children with no health insurance in families with income that is above Medicaid eligibility levels. As of July 2006, the highest upper-income eligibility limit under SCHIP had reached 350% of the federal poverty level (FPL) in one state. States may enroll targeted low-income children in an SCHIP-financed expansion of Medicaid, create a new separate state SCHIP program, or devise a combination of both approaches. States choosing the Medicaid option must provide all mandatory benefits and all optional services covered under the state plan, and must follow the nominal Medicaid cost-sharing rules (with some exceptions). In general, separate state programs must follow certain coverage and benefit options outlined in SCHIP law. While some cost-sharing provisions vary by family income, the total annual aggregate cost-sharing (including premiums, copayments, and other similar charges) for a family may not exceed 5% of total income in a year. Preventive services are exempt from cost-sharing. In the Balanced Budget Act of 1997, nearly $40 billion was appropriated for SCHIP for FY1998 to FY2007. Appropriations for FY2007 equaled about $5.7 billion. Annual allotments among the states are determined by a formula that is based on a combination of the number of low-income children and low-income uninsured children in the state, and includes a cost factor that represents the average health service industry wages in the state compared with the national average. Like Medicaid, SCHIP is a federal-state matching program. While the Medicaid federal medical assistance percentage (FMAP) ranged from 50% to 75.89% in FY2007, the enhanced SCHIP FMAP ranged from 65% to 83.12% across states. All states, the District of Columbia, and five territories have SCHIP programs. As of November 2006, 17 use Medicaid expansions, 18 use separate state programs, and 21 use a combination approach. Approximately 6.7 million children were enrolled in SCHIP during FY2006. In addition, 12 states reported enrolling about 700,000 adults in SCHIP through program waivers. This provision increases the physician payment update factor, modifies the amounts available in the Physician Assistance and Quality Initiative (PAQI) Fund, and extends the Physician Quality Reporting System. The current update formula for Medicare physician payment would have required a reduction in the fee schedule for physician reimbursement of 10.1% in 2008 and by roughly 5% annually for at least several years thereafter. This provision averts this reduction and mandates a 0.5% increase in the physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008. The conversion factor for the remaining six months of 2008 and afterwards will be computed as if the modification to the conversion factor for the first six months of 2008 had never applied. The Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432 ) authorized $1.35 billion for FY2008 for the PAQI Fund, which is to be available to the Secretary of HHS for physician payment and quality improvement initiatives. This provision modifies the amounts that will be available in the PAQI Fund and the years in which the monies can be spent. However, there are provisions in the Department of Labor, Health and Human Services, and Education and Related Agencies Appropriations Act of 2008 (division G of the Consolidated Appropriations Act of 2008) that also affect the PAQI Fund. The net effect of these two laws is that no funds remain available in the PAQI Fund for the years 2008 through 2012, and $4.96 billion are available in 2013. This provision requires that the amount available for expenditures during 2013 be available only for an adjustment to the update of the conversion factor for that year. The amount of money that would have been available in the PAQI Fund for payment with respect to physicians' services furnished prior to January 1, 2013, is to be deposited into the Federal Supplementary Medical Insurance Trust Fund, and these funds are to be made available for expenditures. The provision also extends and modifies the existing Physician Quality Reporting System for physicians and other health care professionals under Medicare for FY2008 and FY2009. The CMS Program Management Account is authorized to be appropriated $25 million for FY2008 and FY2009 to carry out the Physician Quality Reporting System. Current law provides a 5% bonus payment for certain physicians providing services in scarcity areas for the period January 1, 2005, through December 31, 2007. The provision extends the add-on payments through June 30, 2008. During the extension period, the Secretary is required to use the primary care scarcity counties and specialty care scarcity counties that the Secretary was using on December 31, 2007. Medicare makes payment for physician services under the fee schedule. Three factors enter into the calculation of the fee schedule payment amount: the relative value for the service, a geographic adjustment, and a national dollar conversion factor. The geographic adjustments are indexes that reflect cost differences among areas compared with the national average in a "market basket" of goods. These geographic adjustments are made in 89 distinct payment localities; 34 are statewide and include urban and rural areas. A value of 1.00 represents expenses equal to the average across all areas. A value less than 1.00 represents expenses below the national average. Current law includes a temporary provision under which the value of any work geographic index under the physician fee schedule that is below 1.00 is increased to 1.00 for services furnished on or after January 1, 2004, and before January 1, 2008. The provision extends the floor through June 30, 2008. The provision extends through June 30, 2008, the temporary provision that allows independent laboratories providing services to hospitals to continue to bill directly for such services. The provision is limited to laboratories that had agreements with hospitals on July 22, 1999, to bill directly for the technical component of pathology services. The Balanced Budget Act of 1997 established annual per beneficiary payment limits for all outpatient therapy services provided by non-hospital providers. The limits applied to services provided by independent therapists, as well as to those provided by comprehensive outpatient rehabilitation facilities (CORFs) and other rehabilitation agencies. The limits did not apply to outpatient therapy services provided by hospitals. The Deficit Reduction Act of 2005 required the Secretary to implement an exceptions process for 2006 for cases in which the provision of additional therapy services was determined to be medically necessary. The exceptions process was slated to end December 31, 2007. The provision extends the exceptions process through the first six months of 2008. MMA required Medicare's outpatient prospective payment system to make separate payments for specified brachytherapy sources. As mandated by the TRHCA, until January 1, 2008, this separate payment will be made using hospitals' charges adjusted to their costs. The provision extends cost reimbursement for brachytherapy services until July 1, 2008. Therapeutic radiopharmaceuticals will be paid using this methodology for services provided on or after January 1, 2008, and before July 1, 2008. Generally, hospitals that provide clinical diagnostic laboratory services under Part B are reimbursed using a fee schedule. Hospitals with under 50 beds in qualified rural areas (certain rural areas with low population densities) receive 100% of reasonable cost reimbursement for the clinical diagnostic laboratories covered under Part B that are provided as outpatient hospital services. This provision extends reasonable cost reimbursement for clinical laboratory services provided by qualified rural hospitals through June 30, 2008. Special Needs Plans (SNPs) are Medicare Advantage (MA) plans that exclusively serve special needs beneficiaries. Special needs beneficiaries are defined as eligible enrollees who are institutionalized, are entitled to Medicaid, or would benefit from enrollment in a SNP (as determined by the Secretary of HHS). This provision allows SNPs to restrict enrollment to one or more class of special needs beneficiaries until January 1, 2010. The provision also restricts the Secretary from designating other MA plans as SNPs and imposes a moratorium on new SNP plans until January 1, 2010. Cost-based Medicare plans are those managed care plans that are reimbursed by Medicare for the actual cost of furnishing covered services to Medicare beneficiaries. After January 1, 2008, any cost-based plan operating within the service area of either two local or two regional MA plans would not have its contract with Medicare renewed. This provision extends for one year—from January 1, 2008, to January 1, 2009—the length of time a cost-based plan can continue operating in an area with two local or two regional MA plans. The Secretary is required to establish an MA Regional Plan stabilization fund to provide incentives for plan entry and plan retention in MA regions. Funding for the stabilization fund was to be $1.6 billion in 2012 and $1.79 billion in 2013, with additional funds available in an amount equal to 12.5% of the average per capita monthly savings from regional plans. This provision eliminates the $1.6 billion in funds available for the stabilization fund in 2012. Generally, Medicare is the "primary payer"—that is, it pays health claims first, and if a beneficiary has other insurance, that insurance may fill in all or some of Medicare's gaps. However, in some situations, the Medicare Secondary Payer (MSP) rules prohibit Medicare from making payments for any item or service when payment has been made or can reasonably be expected to be made by a third-party payer. The law authorizes several methods to identify cases when an insurer other than Medicare is the primary payer and to facilitate recoveries when incorrect Medicare payments have been made. This provision requires an insurer or third-party administrator for a group health plan (and in the case of a group health plan that is self-insured and self-administered, a plan administrator or fiduciary) to (1) secure from the plan sponsor and participants information required by the Secretary for the purpose of identifying situations where the group health plan is or has been a primary plan to Medicare, and (2) submit information specified by the Secretary. If an insurer or third-party administrator for a group health plan fails to comply, then a $1,000 per day civil monetary penalty will be imposed for each individual for which information should have been submitted. The provision requires the Secretary to share information on Medicare Part A entitlement and Part B enrollment with entities, plan administrators, and fiduciaries. The Secretary may share this information with other entities and may share information as necessary for the proper coordination of benefits. An applicable plan (defined as laws, plans, or other arrangements, including the fiduciary or administrator for liability insurance, no fault insurance, and worker's compensation law or plans) is required to determine whether a claimant is entitled to benefits under Medicare on any basis, and if so, to submit required information to the Secretary, including (1) the claimant's identity and (2) other information specified by the Secretary to enable an appropriate determination concerning coordination of benefits and any applicable recovery claims. Failure to comply will result in a $1,000 per day civil monetary penalty for each claimant. The Secretary can share this information as necessary for proper coordination of benefits. For purposes of using this new information to ensure appropriate Medicare payments, the Secretary will transfer, in appropriate parts, from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund $35 million to the CMS Program Management Account for fiscal years 2008, 2009, and 2010. MMA revised the way Part B pays for covered drugs. Payments for most Part B drugs are based on an average sales price (ASP) payment methodology; the Secretary has the authority to reduce the ASP payment amount if the widely available market price is significantly below the ASP. Alternatively, beginning in 2006, drugs can be provided through the competitive acquisition program (CAP). Each year, each physician is given the opportunity either to receive payment using the ASP methodology or to obtain drugs and biologicals through the CAP. Under the ASP methodology, Medicare's payment for Part B equals 106% of the applicable price for a multiple source drug or single source drug, subject to the beneficiary deductible and coinsurance. Applicable prices are derived from data reported by manufacturers under the Medicaid program. The applicable price for multiple source drugs is the volume-weighted average of the ASPs calculated by National Drug Code (NDC) for each calendar quarter. The applicable price for single source drugs is the lesser of the volume-weighted ASP or the wholesale acquisition cost. MMA included language specifying how to calculate a volume-weighted ASP based on information reported by manufacturers. The reporting unit was the lowest identifiable quantity of the drug (e.g., one milliliter, one tablet). However, the MMA allowed the Secretary, beginning in 2004, to use a different reporting unit. The Secretary used his discretion and changed to the amount of the drug represented by the NDC. The amount of the drug represented by one NDC may differ from the amount represented by another NDC. In February 2006, the Office of the Inspector General (OIG) of the Department of HHS issued a report (OEI-03-05-00310) which stated that the method used by CMS was incorrect because it did not use billing units consistently throughout the equation. It stated that although CMS used billing units to standardize ASPs across NDCs for each Healthcare Common Procedure Coding System (HCPCS) code, it did not similarly standardize sales volume across NDCs. The HCPCS, established by the American Medical Association, is the set of health care procedure codes used by Medicare, Medicaid, and other insurers to process insurance claims. The provision requires the Secretary to use constant volume weighting in the computation of the ASP, using the formula recommended by the February 2006 Inspector General's report; this requirement applies with respect to payment for multiple source and single source drugs and biologicals furnished on or after April 1, 2008. For all drug products included within the same multiple source billing and payment code, the provision defines the numerator of the volume-weighted average of the average sales price as the sum of the products (for each NDC assigned to such drug products) of (1) the manufacturer's average sales price, as determined by the Secretary without dividing such price by the total number of billing units for the NDC for the billing and payment code, and (2) the total number of units sold. The numerator is then divided by the denominator, which is defined as the sum of the products (for each NDC assigned to such drug products) of (1) the total number of units sold and (2) the total number of billing units for the NDC for the billing and payment code. The provision defines the "billing unit" as the identifiable quantity associated with a billing and payment code, as established by the Secretary. Beginning on April 1, 2008, for each multiple source drug or biological and for each single source drug or biological that is treated as a multiple source drug because it is pharmaceutically equivalent or bioequivalent to another drug, the payment amount will be the lowest price option available to the Secretary. Glycosylated hemoglobin (HbA1c) is used to monitor how well blood glucose levels are controlled in diabetes patients. The current Medicare payment rate for HbA1c is tied to two HCPCS codes: 83036 and 83037. HCPCS code 83037 was developed in 2006 to cover the testing for HbA1c by a device approved by the Food and Drug Administration (FDA) for home use; 83036 is the default code, used for the majority of glycosylated hemoglobin tests, and not limited to specific methodology. This provision changes the Medicare payment rate for HCPCS code 83037 to the rate established for 83036, for HbA1c tests that are furnished on or after April 1, 2008. A long-term care hospital (LTCH) is an acute care general hospital that has a Medicare inpatient average length of stay greater than 25 days. Since 2002, LTCHs have been paid under their own prospective payment system (LTCH-PPS). Provisions establishing this PPS are contained in Section 123 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA; P.L. 106-113 ) and Section 307 of the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA; P.L. 106-554 ). These LTCH-PPS provisions have not been incorporated into the Social Security Act (SSA). Each year, the LTCH base rate (per discharge payment amount) is updated. Presently, LTCHs are not explicitly permitted in statute to be units of other facilities. CMS established a new LTCH policy for cost reporting periods beginning on or after July 1, 2007, for determining whether a freestanding LTCH was acting as a unit of independent host hospitals. The regulation had originally been applied only to those LTCHs established as hospitals-within-hospitals (HwHs) or satellite hospitals. The policy (referred to as the "25% rule") limits the proportion of patients who can be admitted from a co-located or host hospital during a cost reporting period and be paid under the LTCH-PPS. After the threshold is reached, the LTCH is paid the lesser of the LTCH PPS rate or the acute hospital PPS rate. The HwH threshold for most admissions from its host hospital for rate year (RY) 2008 is 25%. The expansion of the policy to freestanding LTCHs will occur on a phased-in basis over a three-year transition period. There are some exceptions to the 25% rule. Generally, for rural HwHs, the applicable percentage is 50%. Urban single HwHs or those located in metropolitan statistical areas (MSAs) with dominant hospitals—those with one-fourth or more of acute care cases for the MSA—also have a threshold of 50%. A short-stay outlier under the LTCH-PPS is a discharge for stays that are considerably shorter than the average length of stay for a long-term care DRG (five-sixths of the geometric average length of stay for each DRG). These short-stay outliers have an adjustment made to their payment that allows Medicare to pay less than cases that receive a full episode of care. Recent policy changes added a new class of short-stay outliers. Under CMS policy, the Secretary reviews the payment system and may make a one-time prospective adjustment to the long-term care hospital prospective payment system rates on or before July 1, 2008, so that the effect of any significant difference between actual payments and estimated payments for the first year of the long-term care hospital prospective payment system is not perpetuated in the prospective payment rates for future years. This provision establishes section 1861(ccc) in the SSA that would define an LTCH as an institution that (1) is primarily engaged in providing inpatient services by or under the supervision of a physician to Medicare beneficiaries whose medically complex conditions require a long hospital stay and programs of care provided by a LTCH; (2) has a Medicare inpatient average length of stay greater than 25 days; (3) satisfies Medicare's hospital definition; and (4) meets certain facility criteria, including a patient review process with patient validation within 48 hours of admission. Also, the institution will have active physician involvement with patients, an organized medical staff, on-site physician availability on a daily basis, and consulting physicians on call and accessible. The institution is required to have interdisciplinary teams, including physicians, to prepare and treat patients using individualized patient treatment plans. The Secretary is required to conduct a study on the establishment of national long-term care hospital facility and patient criteria. Not later than 18 months from enactment, the Secretary will submit a report to Congress including recommendations for legislation and administrative actions. During a three-year moratorium period beginning with the enactment of this provision, the Secretary will not apply the 25% rule or a similar policy to freestanding LTCHs or certain LTCH HwHs (referred to as "grandfathered LTCHs") that have been considered to be freestanding. The admission threshold for HwHs or satellite facilities in rural areas or LTCHs that are co-located with an urban single or MSA dominant hospital will increase from 50% to 75%. For other HwHs or satellite facilities, the admission threshold from a co-located hospital will be set at 50%. The Secretary is not able to apply the new short-stay outlier policy during a three-year moratorium period that begins on the date of enactment. The Secretary is not able to make the one-time prospective adjustment to LTCH prospective payments during a three-year moratorium period that begins on the date of enactment. The Secretary will impose a temporary moratorium on the certification of new LTCHs, satellite facilities, long-term care hospital, and satellite facility beds for a three-year period beginning at the enactment date. The moratorium does not apply to an LTCH hospital, satellite facility, or additional beds that are under development as of the enactment date. The moratorium does not apply to an existing LTCH bed increase request where there is closure of an LTCH or a significant decrease in the number of LTCHS beds in a state where there is only one other LTCH. There is no administrative or judicial review of a Secretary's decision on these exceptions. This provision establishes 1886(m) of the SSA entitled "Prospective Payment for Long Term Care Hospitals," which would provide specific references to the sections of BBRA and BIPA that contain the LTCH-PPS provisions. The base rate for LTCH's rate year (RY) 2008 (from July 1, 2007, through June 30, 2008) is the same as that used for discharges in RY2007 (from July 1, 2006, through June 30, 2007). The provision does not apply to discharges starting July 1, 2007, and before April 1, 2008. Starting for discharges on October 1, 2007, the Secretary will contract with fiscal intermediaries or Medicare administrative contractors to review the medical necessity of LTCH admissions and continued stays. These reviews will be conducted annually and will provide a statistically valid sample (at a 95% confidence interval) and guarantee that at least 75% of the overpayments are identified and recovered. The Secretary will establish an error rate that would require further review. These medical necessity reviews will stop for discharges after October 1, 2010, unless otherwise determined by the Secretary. To carry out these activities, $35 million will be appropriated from the Treasury into the Program Management Account of CMS in FY2008 and FY2009. The costs of the medical necessity reviews will be funded from the aggregate overpayments recouped from the LTCHs; such amounts will not exceed 40% of such recovered overpayments. Starting January 1, 2002, payments to inpatient rehabilitation facilities (IRFs) are made under a discharge-based prospective payment system where one payment covers capital and operating costs. Each year, the per discharge payment amount is increased by an update factor based on the increase in the market basket index. The provision establishes the IRF update factor at 0% in FY2008 and FY2009, starting for discharges on April 1, 2008. Starting for cost reporting periods on or after July 1, 2007, the IRF compliance threshold (which determines whether a facility is an IRF or an acute care hospital) is established as no greater than the 60% compliance rate that became effective for cost reporting periods beginning July 1, 2006; comorbidities are included as qualifying conditions. No later than 18 months from enactment, the Secretary will consult with certain parties and submit a report to the committees with jurisdiction over Medicare. The study will analyze access to medically necessary rehabilitation services and alternatives to the IRF compliance thresholds. Medicare payment may be made to a physician for services furnished by a second physician to patients of the first physician provided certain conditions are met. In general, the services cannot be provided by the second physician for more than 60 days. P.L. 110-54 (enacted August 3, 2007) permitted, for services provided prior to January 1, 2008, reciprocal billing over a longer period in cases where the first physician was called or ordered to active duty as a member of a reserve component of the Armed Forces. The provision extends this accommodation through June 30, 2008. Under IPPS, a hospital (or group of hospitals) can increase its Medicare payments though administrative reclassification (by the Medicare Geographic Classification Review Board or MGCRB) to a different area with a higher wage index value. These reclassifications are budget-neutral. Other hospitals have been reclassified by legislation. Section 508 of MMA provided $900 million for a one-time, three-year geographic reclassification of certain hospitals that were otherwise unable to qualify for administrative reclassification to areas with higher wage index values. These reclassifications were extended from March 31, 2006, to September 30, 2007, by TRHCA. This extension was exempt from any budget neutrality requirements. Under this legislation, Section 508 reclassifications are extended until September 30, 2008. Hospitals that were reclassified through the Secretary's authority to make exceptions and adjustments during the FY2005 rulemaking process will have their reclassification extended until September 30, 2008. A hospital that has been reclassified under Section 508 (as extended) will not prevent the group reclassification of otherwise eligible hospitals during FY2008. Those Section 508 reclassifications, which were extended until September 30, 2007, where the applicable wage index was lower during the six-month extension (from April 1 2007 until September 30, 2007) than the wage index applied to the hospital from October 1, 2006, through March 31, 2007, will have the higher wage index used for the entire FY2007 period. Any additional Medicare payments will be paid to the hospitals within 90 days after settlement of the applicable cost report. State Health Insurance Assistance Programs (SHIPs) provide information, counseling, and assistance to Medicare-eligible individuals on obtaining adequate and appropriate health insurance. State Area Agencies on Aging and State Aging and Disability Resource Centers also conduct health insurance outreach to Medicare-eligible individuals, in addition to administering elder rights programs, providing legal services to the elderly, and coordinating information about long-term care services. This provision requires the Secretary to transfer $15,000,000 from the Medicare Part A and B Trust Funds to the CMS program management account to provide grants to state SHIP programs for FY2008. The provision also requires the Secretary to transfer $5,000,000 from the CMS program management account to provide grants to Area Agencies on Aging and Aging and Disability Resource Centers for FY2008 and FY2009. Title XXI of the Social Security Act specifies national appropriation amounts from FY1998 to FY2007 for SCHIP. Continuing Resolutions ( P.L. 110-92 , P.L. 110-116 , P.L. 110-137 ) have provided through December 21, 2007, the same level of SCHIP appropriations for FY2008 as was appropriated initially for FY2007 ($5.0 billion for the states and territories, plus an additional $40 million for the territories). The national appropriation available to states is allotted using a formula based on the estimated number of low-income children and low-income uninsured children in each state, adjusted slightly by a geographic cost factor. Allotments are available for three years, after which any unspent funds are redistributed to other states. Under S. 2499 , $5.04 billion is appropriated in FY2008 and in FY2009 for SCHIP allotments, as in FY2007. The formula for allotting the funds among the states and territories is unchanged. The FY2009 allotments are available only through March 31, 2009 (or the date of enactment of legislation to reauthorize SCHIP, whichever comes first). Allotments unspent after three years are redistributed to other states. Under the Continuing Resolutions, FY2005 allotments unspent at the end of FY2007 were to be redistributed to states projected to exhaust all of their SCHIP funds in FY2008. The redistributed FY2005 funds would be provided, until exhausted, to states in the order in which their shortfalls occur. This methodology for redistribution was to be in effect until December 21, 2007, unless legislation was enacted beforehand to reauthorize SCHIP. Under S. 2499 , the methodology specified in the Continuing Resolutions for redistributing unspent FY2005 federal SCHIP funds is made permanent. In addition, under S. 2499 , FY2006 allotments unspent at the end of FY2008 will be redistributed to states projected to exhaust all of their SCHIP funds in FY2009 before March 31, 2009. The redistributed FY2006 funds will be provided, until exhausted, to states in the order in which those shortfalls occur. In early FY2006, several states were projected to exhaust their federal SCHIP funds during the year, with a shortfall projected at $283 million. Congress appropriated $283 million in the Deficit Reduction Act of 2005 ( P.L. 109-171 ) for the purpose of eliminating states' shortfalls in FY2006, with 1.05% of the appropriation provided to the territories. To eliminate shortfalls of some states' federal SCHIP funds in FY2007, Congress appropriated such sums as necessary, not to exceed $650 million, in the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 ( P.L. 110-28 ). The territories received no portion of this appropriation. Under S. 2499 , such sums as necessary, not to exceed $1.6 billion, are appropriated in FY2008: (1) to eliminate states' shortfalls of federal SCHIP funds and (2) to provide 1.05% of states' projected shortfall amounts to the territories. These funds are available only for FY2008, and unspent funds are not available for redistribution. If the $1.6 billion appropriation is insufficient to cover states' shortfalls and the associated payments to the territories, then the payments to the states and territories would be reduced proportionally. Based on states' latest projections, the total FY2008 shortfalls are projected at less than $1.2 billion. Under S. 2499 , such sums as necessary, not to exceed $275 million, are appropriated in FY2009: (1) to eliminate states' shortfalls of federal SCHIP funds in the first two quarters of FY2009 and (2) to provide 1.05% of states' projected shortfall amounts to the territories. These funds are available only for the first two quarters of FY2009, and unspent funds are not available for redistribution. If the $275 million appropriation is insufficient to cover states' shortfalls and the associated payments to the territories, then the payments to the states and territories would be reduced proportionally. Based on states' latest projections, the total FY2009 shortfalls through March 31, 2009, are projected at approximately $200 million. Eleven states (Connecticut, Hawaii, Maryland, Minnesota, New Hampshire, New Mexico, Rhode Island, Tennessee, Vermont, Washington, and Wisconsin) are considered "qualifying states" for purposes of using SCHIP funds under §2105(g) for some children enrolled in Medicaid. For qualifying states, federal SCHIP funds may be used to pay the difference between SCHIP's enhanced FMAP and the Medicaid FMAP that the state is already receiving for children above 150% of poverty who are enrolled in Medicaid. Qualifying states are limited in the amount they can claim for this purpose to the lesser of (1) 20% of the state's original SCHIP allotment amounts (if available) from FY1998-FY2001 and FY2004-FY2008, with the ability to use the FY2008 allotment linked to the December 21, 2007, termination date in the latest Continuing Resolution, and (2) the state's available balances of those allotments. The statutory definitions for qualifying states capture most states that had expanded their upper-income eligibility levels for children in their Medicaid programs to 185% of poverty prior to the enactment of SCHIP. Under S. 2499 , the ability of qualifying states to use their FY2008 allotments for expenditures under §2105(g) is made permanent; their ability to use FY2009 allotments under §2105(g) is permitted through March 31, 2009. States are required to continue Medicaid benefits for certain low-income families that would otherwise lose coverage because of changes in their income. This continuation is called transitional medical assistance (TMA). Federal law permanently requires four months of TMA for families that lose medicaid eligibility because of increased child or spousal support collections, as well as those that lose eligibility because of an increase in earned income or hours of employment. Congress expanded work-related TMA under Section 1925 of the Social Security Act in 1988, requiring states to provide TMA to families that lose medicaid for work-related reasons for at least six and up to 12 months. Since 2001, work-related TMA requirements under Section 1925 have been funded by a series of short-term extensions, most recently through December 31, 2007. P.L. 104-193 , the 1996 welfare reform law, provided $250 million in federal funds specifically for an abstinence education program ($50 million per year for each of five years, FY1998 through FY2002). This program is referred to as the Title V Abstinence Education block grant. Funds must be requested by states when they solicit Title V Maternal and Child Health (MCH) block grant funds and must be used exclusively for teaching abstinence. To receive federal funds, a state must match every $4 in federal funds with $3 in state funds. This means that if maximum federal funding is provided, funding for Title V Abstinence Education must total at least $87.5 million annually. Although the Title V Abstinence Education block grant has not yet been reauthorized, the latest temporary extension continues funding through December 31, 2007. This provision extends both TMA and the Title V Abstinence Education block grant through June 30, 2008. Certain low-income individuals are eligible to have their Medicare part B premiums paid for by Medicaid under the Medicare Savings Program (MSP). One eligible group is Qualifying Individuals (QIs). These persons have incomes between 120% and 135% of poverty. Federal spending under the QI program is subject to annual limits. The program was slated to terminate December 31, 2007. The provision extends the program through June 2008 and specifies that the amount available for allocation for the six-month period beginning January 1, 2008, is $200 million. When establishing hospital payment rates, state Medicaid programs are required to recognize the situation of hospitals that provide a disproportionate share of care to low-income patients with special needs. Total federal reimbursement for each state's DSH payments, however, are capped at a statewide ceiling, referred to as the state's DSH allotment. Those amounts are specified in statute. As part of TRHCA, allotments for only one year, 2007, for the states of Tennessee and Hawaii were raised. Tennessee's DSH allotment for the year was to be based on a formula, and Hawaii's was set at $10 million. After that, allotments for those states would have reverted to former, lower amounts. S. 2499 extends those special allotment provisions, so that for the portion of FY2008 that ends on June 30, 2008, Tennessee's DSH allotment is set at three-quarters of the 2007 level, and the allotment for Hawaii is equal to $7.5 million. Because of concerns about inadequate sample sizes in the Current Population Survey (CPS) for making estimates of states' number of low-income children, for purposes of determining states' federal SCHIP allotments, $10 million was appropriated in SCHIP statute annually beginning in FY2000. S. 2499 provides $20 million, instead of $10 million, in SCHIP statute for the CPS in FY2008. Medicaid can cover school-based, health-related services required under the Individuals with Disabilities Education Act (IDEA), including transportation, as well as related administrative activities (e.g., outreach for Medicaid enrollment purposes, medical care coordination/monitoring). Medicaid also covers rehabilitation services for eligible beneficiaries in a wide variety of settings. The Bush Administrative issued proposed rules affecting rehabilitation and school-based services in August and September 2007, respectively. Relative to policies in place on July 1, 2007, S. 2499 prohibits the Secretary of HHS from taking any action to further restrict Medicaid coverage or payments for rehabilitation services and for school-based transportation and administrative activities. This moratorium would be in effect until June 30, 2008. The Medicare Payment Advisory Commission (MedPAC) is an independent federal body established by the Balanced Budget Act of 1997 to advise the U.S. Congress on issues affecting the Medicare program. The commission's statutory mandate is (1) to advise Congress on payments to private health plans participating in Medicare and providers in Medicare's traditional fee-for-service program and (2) to analyze access to care, quality of care, and other issues affecting Medicare. This provision would establish MedPAC as an agency of Congress. As specified in Section 330B of the Public Health Service Act, the Secretary, directly or through grants, must provide for research into the prevention and cure of Type I diabetes. Appropriations are set at $150 million per year during the period FY2004 through FY2008. As specified in Section 330C of the Public Health Service Act, the Secretary must make grants for providing services for the prevention and treatment of diabetes among American Indians and Alaskan Natives. Appropriations are set at $150 million per year during the period FY2004 through FY2008. For each of these two grant programs, S. 2499 provides $150 million for FY2009.

On December 29, 2007, the President signed S. 2499, the Medicare, Medicaid, and SCHIP Extension Act of 2007 (P.L. 110-173). This Act was passed by the House on December 19, 2007, and by a voice vote in the Senate on December 18, 2007. The Act makes changes to the nation's three major health programs, Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP), as well as other federally funded programs. The most prominent provisions in the Act were to (1) suspend the Medicare physician payment cut scheduled to take effect and (2) provide SCHIP funding through March 2009. P.L. 110-173 mandates a 0.5% increase in the Medicare physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008, and provides FY2008 and FY2009 SCHIP funding allotments through March 31, 2009. The Act also extends a number of expiring provisions and programs. These extensions affect Medicare plans and providers and Medicaid payments and programs. The Act also includes funding for some miscellaneous activities. The Act's Medicare extensions include incentive payments for certain physicians, and extensions of current law provisions for Medicare Special Needs Plans and cost-based plans. A variety of extensions also affect how long-term care, rural, and acute care hospitals are paid or classified. Other extensions affect Medicare payments for certain services and providers, outpatient physical therapy services, speech language pathology services, certain pathology laboratories, brachytherapy services, and therapeutic radiopharmaceuticals. The Act also includes Medicaid provisions designed to extend certain payments and programs, such as Medicaid disproportionate hospital share (DSH) allotments for Tennessee and Hawaii, the Transitional Medical Assistance (TMA) program, and the Qualifying Individual (QI) program, among other provisions. Miscellaneous provisions include using Medicare funds to make grants to State Health Insurance Assistance Programs, Area Agencies on Aging, and Aging and Disability Resource Centers. The Act also establishes the Medicare Payment Advisory Commission (MedPAC) as a congressional agency. The Act provides a number of offsets to pay for the spending increases, including a reduction in the Medicare Advantage stabilization fund in 2012. The Act also includes provisions affecting Medicare's responsibility as a secondary payer for covered services, Medicare payments for Inpatient Rehabilitation Facilities (IRFs), payments for most Medicare part B drugs, payments for certain diagnostic laboratory tests, and Medicare Long-Term Care Hospitals. This report provides short descriptions of the provisions contained in P.L. 110-173.

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At the beginning of each Congress, the House adopts its rules of procedure for that Congress. Although it usually readopts most provisions of its rules from the previous Congress, the House also changes some aspects of its procedures for each new Congress. Rules X-XIII are the primary House rules that govern the authority and operations of House committees and subcommittees. Because the committees are the agents of the House, they are obligated to comply with all House directives that apply to them. However, in some respects the House allows each of its committees to decide for itself how to conduct its business. For this purpose, each committee is required to adopt written rules of procedure within the limitations of House rules. This report identifies and summarizes the provisions of the House's standing rules and certain other directives that affect committee powers, authority, activities, and operations. It does not address party conference rules, the rules adopted by individual committees that supplement House rules, or committee practices on matters not covered by House rules. The report is organized under seven headings: (1) general, (2) establishment and assignments, (3) hearings, markups, and other meetings, (4) reporting, (5) oversight and investigations, (6) funding, staff, and travel, and (7) other duties. This report primarily covers requirements and prohibitions contained in the Rules of the House of Representatives that are of direct and general applicability to most or all House committees. The report does not encompass most other provisions of law or the House's rules that apply only to one committee, such as the Intelligence or Standards of Official Conduct Committee, or House rules governing certain appropriations hearings and the content of appropriations measures. The summaries presented here are not intended to capture every nuance and detail of the rules themselves. Members and staff are advised to consult the text of the appropriate standing rule or provision of law. Rule XI, clause 1(a)(1)(A) Rule XI provides that, in general, the rules of the House "are the rules of its committees and subcommittees so far as applicable." In addition to this general principle; see " Motions to Recess " and " Reading Measures During Markups . " Although this provision is clear in principle, it is not always obvious how it is to be applied in practice. There are various rules, for example, that govern how the House may consider measures on the floor, but this clause does not specify which of these rules is to be applicable to committees and subcommittees. In the commentary accompanying Rule XI, the House Parliamentarian observes that: [t]he procedures applicable in the House as in the Committee of the Whole generally apply to proceedings in committees of the House of Representatives, except that since a measure considered in committee must be read for amendment, a motion to limit debate under the five-minute rule in committee must be confined to the portion of the bill then pending. The previous question may only be moved on the measure in committee if the entire measure has been read, or considered as read, for amendment. The Parliamentarian continues: "Committees generally conduct their business under the five-minute rule, but may employ the ordinary motions which are in order in the House...and may also employ the motion to limit debate under the five-minute rule on a proposition which has been read." Rule XI, clause 1(a)(2) The rules of a committee apply to its subcommittees, "so far as applicable." Furthermore, subcommittees are subject to the authority and direction of the committee of which they are a part. Rule XI, clause 2(a)(1) Each committee is required to adopt written rules that "may not be inconsistent" with House rules and applicable rule-making provisions of law. For convenience, the committee's rules are to incorporate applicable provisions of clause 2 of Rule XI. The meeting at which the committee adopts its rules is to be open to the public unless in open session the committee votes, by roll call and with a quorum present, to close part or all of the meeting. Rule XI, clause 2(a)(2) The rules that a committee adopts are to be published in the Congressional Record not later than thirty days after the committee members are elected at the beginning of a Congress. Rule XI, clause 1(d) At the end of the Congress, each committee is to submit to the House a report on its activities during the preceding two years. The activities report is to differentiate between the committee's legislative and oversight activities. A committee chair may file an activities report after the adjournment of Congress sine die and without formal approval by the committee, provided the report has been available to committee members for at least seven calendar days for inclusion of supplemental, minority, and additional views. Rule XI, clause 2(e)(2) The records of a committee must be kept separate from the personal office records of the chair of the committee. Committee records are the property of the House and all its Members shall have access to them; however, certain records of the Committee on Standards of Official Conduct are not available to non-committee Members without the prior approval of the committee. Rule VII, clauses 1, 2, and 6 The noncurrent records of each committee are to be preserved at the National Archives and Records Administration. At the end of each Congress, the chair of each committee is to transfer the noncurrent records of the committee to the Clerk of the House. The Clerk then delivers these records to the Archivist of the United States for preservation at the Archives, but the records continue to be the property of the House. A committee "record" is defined as "an official, permanent record of the committee (including any record of a legislative, oversight, or other activity of such committee or subcommittee thereof)." Rule VII, clauses 3 and 5(a)-(b) In general, the Archivist makes archived records publicly available under the following rules (and any orders of the House). First, any record that a committee makes publicly available before its delivery to the Archivist is to be available immediately. Second, the following records will be available after 50 years: (1) investigative records containing personal data on living individuals, (2) personnel records, and (3) records of closed hearings. Third, a committee order that specifies the time, schedule, or condition for availability of committee records shall govern, except as otherwise provided by order of the House. Finally, records other than those covered above are to be available after 30 years. The Committee on House Administration may establish guidelines and regulations governing the applicability and implementation of House Rule VII on noncurrent records, and this rule does not supersede other House rules or authorize disclosure if prohibited by law or executive order. Rule VII, clause 4 An archived record of a committee is not to be available to the public if the Clerk of the House determines that availability would be "detrimental to the public interest or inconsistent with the rights and privileges of the House." The Clerk is to notify in writing the chairman and ranking minority member of the Committee on House Administration of such determination. A committee may change any such determination by a later order. Rule VII, clause 5(c) For official use, a committee may temporarily withdraw a record from the Archives. Rule XI, clause 2(e)(3) As part of its written rules, each committee is to include standards for availability of archived records. The standards are to specify the committee's procedures for adopting orders (under House Rule VII) relating to the time, schedule, or condition for availability of its records, including those the Clerk of the House initially determines shall not be available to the public. The rules also should contain a requirement that nonavailability of a committee's record for a period longer than required by House rules requires committee approval. Rule XI, clause 2(e)(4) "To the maximum extent feasible," committees are to make their publications available to the public in electronic form (i.e., on the Internet). Rule X, clause 1 Nineteen standing committees are established, and the subjects within the jurisdiction of each committee are listed. Measures and matters are to be referred to committees based on these jurisdictions. Rule X, clause 5(d); H.Res. 5 , 109 th Congress In general, a House committee may not create more than five subcommittees, or six subcommittees if one of the six is an oversight subcommittee, except that Appropriations may have not more than 13 subcommittees and the Committee on Government Reform may not have more than seven subcommittees. In addition, H. Res. 5, adopted by the House of Representatives on January 4, 2005, waived Rule X, clause 5(d) to allow up to six subcommittees each on the Transportation and Infrastructure and Armed Services Committees and up to seven subcommittees on the Committee on International Relations in the 109 th Congress. Rule XII, clause 2 The Speaker is to refer a measure or other matter to each standing committee that has jurisdiction over the subject matter of any provision(s), to the maximum extent feasible. The Speaker has authority to refer a matter to more than one committee. In such cases, he is to designate a primary committee and also may refer a measure sequentially to other committees, with time limitations for consideration of provisions within their jurisdiction, or refer portions of the measure to one or more additional committees. Rule XII, clause 2 (c)(1) permits the Speaker, under "extraordinary circumstances" to designate more than one committee as primary when making referrals if he believes review by more than one committee as though primary is justified. He also may create a special ad hoc committee to consider a matter, appointing Members with House approval and with Members from the committees of jurisdiction. The Speaker also may make other referral arrangements he deems appropriate. Rule X, clause 5(a)(1) and 5(e) Members are elected to standing committees by the House based on nominations by the party caucuses as contained in resolutions. The resolutions are privileged for floor consideration, and Members must be elected to committees within seven calendar days after the beginning of a Congress. Vacancies in standing committees also are filled by election of the House on the basis of nominations by the party conferences. Rule X, clause 5(b)(2) No Member may serve on more than six standing panels: two standing committees and four of their subcommittees. However, the chair or ranking member of a full committee may serve ex officio on all its subcommittees. Any other exceptions (waivers of the rule) must be recommended by the pertinent party conference and approved by the House. Rule X, clause (5)(c)(1) The House elects the chair of each standing committee on the basis of a nomination submitted by the majority party conference. In case of the temporary absence of the chairman, the next ranking majority party member acts as chairman. In case of a permanent vacancy, the House elects a new committee chairman. In general, a Member may not chair the same standing committee or subcommittee for more than three consecutive Congresses. This limitation does not apply to the chair of the House Committee on Rules. Rule I, clause 11, and Rule III, clause 3(b) The Speaker is authorized to appoint members of select and conference committees, and may remove members or appoint additional members at any time. He may appoint the Resident Commissioner from Puerto Rico and the Delegates to any select or conference committee. To the maximum extent feasible in naming conferees, the Speaker is to (1) appoint no less than a majority of Members who generally supported the House position, (2) name the Members who were primarily responsible for the legislation, and (3) include the principal proponents of the major provisions of the measure as passed by the House. Rule X, clause 5(b)(1) Membership on standing committees during a Congress is contingent upon continued membership in the party conference to which the Member belonged when assigned to committees. If a Member ceases to be a member of a particular party, the Member automatically loses his or her committee assignments. Rule III, clause 3(a) The Delegates and the Resident Commissioner from Puerto Rico are elected to standing committees by the same procedures, and have the same "powers and privileges" in committees, as other members of the committee. Rule XI, clause 2(m)(1)(A) To carry out its authorized functions and duties, each committee and subcommittee is empowered "to sit and act at such times and places within the United States, whether the House is in session, has recessed, or has adjourned, and to hold such hearings as it considers necessary. . . ." Rule XI, clause 2(I) No committee of the House may meet during a joint session of the House and Senate or during a recess when a joint meeting of the House and Senate is in progress. Rule XI, clause 2(d) The committee chairman may designate a member of the majority party to be the vice chairman of the committee or one of its subcommittees. The vice chairman shall preside over the committee or subcommittee in the temporary absence of its chairman. In the absence of the chairman and the vice chairman, the most senior member of the majority party shall preside. Rule XI, clause 1(a)(1)(B) In committee and subcommittee, a motion to recess from day to day or to recess subject to the call of the chair within 24 hours is privileged and nondebatable. Rule XI, clause 4 Any committee or subcommittee meeting or hearing that is open to the public also is open to still photography and to radio and television coverage. A committee may adopt, as part of its written rules, procedures regulating photography and broadcasts of its meetings and hearings, but these committee rules must conform with the requirements and stipulations laid out in this clause of House Rule XI. Among other issues, these requirements pertain to coverage of sessions without commercial sponsorship; positions and placement of television cameras and location of photographers; installation and removal of media equipment; lighting; allocation of the number of still photographers; accreditation by the press galleries; and conduct of media personnel. Rule XI, clause 2(e)(1)(A) Hearing and markup transcripts kept by a committee must be substantially verbatim. A person may make only technical, typographical, and grammatical corrections in his or her remarks. Rule XI, clause 2(g)(3) A committee is to give at least one week's public notice of the date, place, and subject of any hearing. If the committee, or the chair with the concurrence of the ranking minority member, decides that there is "good cause" to begin the hearing in less than a week, the public announcement should be made as soon as possible. The announcement is to appear in the "Daily Digest" section of the Congressional Record and is to be "made available in electronic form." These requirements do not apply to the House Committee on Rules. Rule XI, clause 2(k)(1) In an opening statement, the chair is to announce the subject of the hearing. Rule XI, clause 2(h)(2) Each committee may set its own quorum for taking testimony and receiving evidence, so long as that quorum is at least two members. Rule XI, clause 2(m) A committee or subcommittee may subpoena witnesses or any materials necessary to carry out its authorized responsibilities. A subpoena may be authorized and issued by a committee or subcommittee with a majority quorum present, but this authority may be delegated to the committee chair in accordance with any limitations or rules the committee may establish. The chair, or any Member designated by the committee, signs authorized subpoenas. Compliance with a subpoena may be enforced only by the House. Rule XI, clause 2(j)(1) The minority party members of a committee are entitled to call witnesses of their choice "during at least one day of hearing" on a measure or matter, but only if a majority of the committee's minority party members make such a request of the chairman "before the completion of the hearing." Rule XI, clause 2(m)(2) "The chairman of the committee, or a member designated by the chairman, may administer oaths to witnesses." Rule XI, clause 2(g)(4) To the extent practicable, each witness is to submit a written statement before he or she testifies, and to present only a summary as his or her oral testimony. As part of the written statement, a non-governmental witness is required to include a curriculum vitae and information on federal grants and contracts received by the witness or the organization being represented during the current and previous 2 fiscal years. Rule XI, clause 2(j)(2) In general, each committee member shall have five minutes to question each witness until all committee members have had that opportunity. However, a committee may extend the time for questioning witnesses by adopting a rule or motion to allow a specified number of its majority and minority party members to question a witness for no more than a total of one hour, with the time to be equally divided between the parties. Similarly, a committee may adopt a rule or motion allowing its majority and minority staff to question a witness for equal periods of time, not to exceed one hour in total. Rule XI, clause 2(k) Upon request, witnesses are entitled to receive a copy of the committee's rules and clause 2 of House Rule XI. Witnesses also may be accompanied by counsel "for the purpose of advising them concerning their constitutional rights." The chair may punish "breaches of order and decorum, and of professional ethics" by counsel, and a committee may cite an offender to the House for contempt. At the discretion of the committee, a witness may submit a sworn, written statement for inclusion in the hearing record. A witness may obtain a transcript of testimony given in open session, but needs the authorization of the committee for a copy of testimony presented in closed session. Rule XI, clauses 2(g)(2) and 2(k)(5) Each committee and subcommittee hearing is to be open to the public unless the committee or subcommittee votes in open session, by roll call and with a majority present , to close part or all of the hearing on that day. A committee or subcommittee may vote to close part or all of a hearing if disclosure of the matters to be considered at the session "would endanger national security, would compromise sensitive law enforcement information, or would violate a law or rule of the House." A majority of whatever quorum a committee requires to conduct a hearing may vote to close a hearing (1) whenever a member of the committee has asserted that the anticipated testimony "may tend to defame, degrade, or incriminate any person," or (2) whenever a witness has asserted that his or her testimony "may tend to defame, degrade, or incriminate" that witness, or (3) solely to discuss whether there is a cause, pursuant to clause 2 of Rule XI, to resume the hearing in closed session. If a committee member asserts that testimony may tend to defame, degrade or incriminate a person who is not a witness, that person shall have the opportunity to appear as a witness and to request that the committee subpoena additional witnesses. In other cases, the chair receives and the committee disposes of requests to subpoena witnesses. Evidence or testimony taken in closed session may not be made public without the approval of the committee. By these procedures, most committees or subcommittees may vote to close a particular day of hearing and one subsequent day of hearing. The Appropriations and Armed Services Committees and the Permanent Select Committee on Intelligence, and their subcommittees, may vote to close up to 5 additional consecutive days of hearings. Members of the House may attend, but not participate in, hearings of committees or subcommittees (except the Committee on Standards of Official Conduct) on which they do not serve, unless the House votes to authorize a committee or subcommittee to use the procedures for closing hearings to the public (clause 2(g)(2)) to close one or more hearings on a particular measure or subject to non-committee members. See also " Broadcasting Sessions " and " Open Meetings . " Rule XI, clause 1(c) Each committee is authorized to have its hearings printed and bound. Rule XIII, clause 4(b) "A committee that reports a measure or matter shall make every reasonable effort to have its hearings thereon (if any) printed and available for distribution to Members, Delegates and the Resident Commissioner before the consideration of the measure or matter in the House." Sec. 141 of the Legislative Reorganization Act of 1946, codified as amended at 2 U.S.C. 145a At the end of each session of Congress, each committee's printed hearings are to be bound by the Library of Congress. Rule XI, clause 2(g)(5) A point of order cannot be made on the House floor on the grounds that the committee reporting the measure in question had not complied with all the requirements concerning hearings in clause 2 of Rule XI unless (1) the point of order is made on the floor by a member of the reporting committee, and (2) the point of order had been properly made in committee but had been "improperly disposed of in the committee." Rule XI, clause 2(b) As part of its written rules, each standing committee is to adopt a regular meeting day, which is to be at least once each month. The committee is to meet on each of its regular meeting days "unless otherwise provided by written rule adopted by the committee." The latter provision allows the committee to dispense with meetings when there is no business that is ready to be transacted. Committee rules can authorize the chairman to dispense with such a meeting or fix some other procedure for the same purpose. Rule XI, clause 2(c) The chairman of a committee is authorized to convene additional meetings to consider legislation or to transact other committee business. In addition, three members of a committee may make a written request that the chairman call a special meeting only for a specified purpose. If, within three days of receiving the request, the chairman does not schedule the requested meeting to take place within seven days after the request was made, a majority of the committee can call the special meeting by submitting to the committee office a written notice giving the date and time of the meeting and the measure or matter to be considered. Rule XI, clause 2(g)(1) The requirement that hearings be open to the public, unless closed under specified procedures, applies to meetings as well. A committee or subcommittee may vote in open session, by roll call and with a majority present, to close part or all of the day's meeting, but only for certain reasons. A committee or subcommittee may vote to close part or all of a meeting only if disclosure of the matters to be considered at the meeting "would endanger national security, would compromise sensitive law enforcement information, would tend to defame, degrade or incriminate any person, or otherwise would violate a law or rule of the House." If the committee or subcommittee votes to close part or all of a meeting, it may be attended only by committee members and by such non-members, committee staff, and "departmental representatives as the committee may authorize. See also " Open Hearings " and " Broadcasting Sessions . " Rule XI, clause 2(h)(3) A committee may set its own quorum requirement for transacting most kinds of business, so long as that quorum is not less than one-third of the committee's members. (Other provisions of House rules require a majority quorum to order a measure or matter to be reported, to authorize a subpoena, or to close a session to the public.) This provision does not apply to the Appropriations, Budget, and Ways and Means Committees. See also " Quorum at Hearing . " Rule XI, clause 1(a)(1)(B) In committee and subcommittee, a motion to dispense with the first reading of a measure is privileged and nondebatable, but only if "printed copies" of the measure are available. When a committee or subcommittee begins to mark up a measure, it is to be read in full unless the reading is dispensed with by unanimous consent or by use of this motion. Rule XI, clause 2(f) Proxy voting is prohibited in House committees and subcommittees. Rule XI, clause 2(e)(1) As part of its records, the committee shall maintain a record of all rollcall votes. The committee shall make this information available for public inspection in its offices. The information on each rollcall vote shall include a description of the question as well as the names of members voting for and against it and those present but not voting. Rule XI, clause 2(h)(4) Committees may adopt a rule which allows the chairman of a committee or subcommittee to postpone votes on approving a measure or on adopting an amendment and to resume proceedings on a postponed question at any time after reasonable notice. An underlying proposition shall remain subject to further debate or amendment to the same extent as when the question was postponed. Rule XI, clause 2(a) Committees may adopt a rule directing the chairman of the committee to offer a privileged motion to go to conference at any time the chairman deems it appropriate during a Congress. Rule XI, clause 2(h)(l) "A measure or recommendation may not be reported by a committee unless a majority of the committee is actually present." This provision also applies to subcommittees, and requires that the majority be present during the vote to order the measure or matter reported. Rule XIII, clause 2(b) After a committee has ordered a measure reported, the chair is required to ensure that it is reported "promptly" to the House, and "to take or cause to be taken steps necessary to bring the measure or matter to a vote." If a majority of a committee's members so request in writing, the report on a measure the committee has approved must be filed within 7 more calendar days (excluding days when the House is not in session). The latter procedure does not apply to reports of the Rules Committee on the House's rules or its order of business on the floor (i.e., "special rules") or to reports on resolutions of inquiry. Rule XXI, clause 4 and clause 5(a) "A bill or joint resolution carrying an appropriation may not be reported by a committee not having jurisdiction to report appropriations...." "A bill or joint resolution carrying a tax or tariff measure may not be reported by a committee not having jurisdiction to report tax or tariff measures...." Sec. 306 of the Congressional Budget Act, codified as amended at 2 U.S.C. 637 Measures (and in general amendments, motions, or conference reports) dealing with matter within the jurisdiction of the Budget Committee will be considered in the House only if reported by (or discharged from) the Budget Committee. Sec. 425 of the Congressional Budget Act, as amended by P.L. 104-4 , the Unfunded Mandates Reform Act of 1995, 109 Stat 50 The House is not to consider a bill or joint resolution that would increase "the direct costs of Federal intergovernmental mandates" by certain amounts unless the measure also satisfies certain qualifications specified in the same section of the law. Rule XIII, clause 4(a) With several exceptions, it is not in order for the House to consider a measure or matter until at least the third calendar day (excluding weekends and legal holidays) on which the committee report on it has been available to Members. This "three-day rule" does not apply to (1) resolutions reported by the Rules Committee, which are subject to a one-day layover requirement (clause 6(a) of Rule XIII), (2) concurrent budget resolutions reported by the Budget Committee, for which there is a three-day layover requirement (Section 305(a)(1) of the Congressional Budget Act, as amended), (3) resolutions presenting questions of the privileges of the House, (4) measures declaring war or a national emergency, and (5) resolutions of disapproval (legislative veto resolution). It always is in order for the House to consider a resolution, reported by the Rules Committee, that specifically waives the three-day rule. Such a resolution is not subject to the one-day layover rule of Rule XIII, clause 6(a). Rule XIII, clause 7 If a committee fails to report a resolution of inquiry addressed to the head of an executive department within 14 legislative days after it is introduced, a privileged motion is in order to discharge a committee from further consideration of the resolution. Rule XI, clause 2(l); Rule XIII, clause 2(c) At the time a committee votes to approve any measure or matter, any committee member may give notice of his or her intention to file "supplemental, minority, or additional views." If such notice is given, the member then has at least 2 calendar days after the day of the notice (excluding weekends and legal holidays) to submit those views in writing to the committee. A committee may arrange to file its report up to one hour after the two days permitted for filing views, or sooner if the committee has received all views. If any views are submitted within the deadline, they are to be printed as part of the committee's report on the measure or matter. Rule XIII, clause 3(b) The committee report on any public "measure or matter" shall include the names and numbers of committee members voting for and against, as well as the total number of votes cast, during any rollcall votes that took place in committee on reporting the measure or matter or on adopting amendments to it. This requirement does not apply to votes taken in executive session by the Committee on Standards of Official Conduct. Rule XIII, clauses 3(c)(3) and 3(d)(2)-(3); Sec. 403 of the Congressional Budget Act, codified as amended at 2 U.S.C. 653 Under Sec. 403 of the Congressional Budget Act, as amended, the Congressional Budget Office (CBO) is to prepare, "to the extent practicable," a cost estimate for any public bill or resolution reported by any House or Senate committee except the Appropriations Committees. The estimate is to project the cost of implementing the measure during the fiscal year in which it would take effect and each of the next 4 fiscal years. CBO also is to estimate, for the same fiscal years, the costs that State and local governments would incur in implementing or complying with a "significant" public bill or resolution. ("Significant" is defined in Section 403©.) Finally, CBO is to compare its cost estimates with other estimates made by the reporting committee or by "any Federal agency." Sec. 403 and clause 3(c) of Rule XIII require a committee to include such a CBO cost estimate in the committee's report on a measure if CBO submits its estimate in time for the committee to include it. Under clause 3(d)(2) of Rule XIII, in the absence of a CBO cost estimate, the committee is to prepare and include in its report its own estimate of how much it will cost to implement a public bill or joint resolution during the fiscal year in which it is reported and in each of the 5 following fiscal years. If a committee is required to prepare its own estimate, it shall include a comparison of (1) the committee's cost estimate with any other estimate that the committee receives from "a Government agency" (defined in clause 3(d)(3)(A)), and (2) the funding levels proposed by the measure with any corresponding levels under current law. This clause does not apply to the Committees on Appropriations, House Administration, Rules, and Standards of Official Conduct. Rule XIII, clause 3(c)(2); Sec. 308(a)(1) of the Congressional Budget Act, codified as amended at 2 U.S.C. 639 In addition to estimating the cost of legislation (described above), CBO is to furnish information on providing for the cost of the legislation. Specifically, Section 308(a) directs CBO to prepare a statement on the budgetary and fiscal impact of any reported measure or committee amendment, if it provides new budget authority, new spending authority (under Section 401(c)(2) of the act), new credit authority, or an increase or decrease in revenues or tax expenditures. The statement shall: (1) show the impact of the measure on the applicable sub-allocations under Section 302(b) of the act; (2) identify any new spending authority under Section 401(c)(2), which defines entitlements, and explain why the committee chose that funding mechanism in preference to annual appropriations; (3) project the measure's impact on new budget authority, outlays, spending authority, revenues, tax expenditures, direct loan obligations, or primary loan guarantee commitments under existing law for the fiscal year in which the measure would become effective and each of the 4 following fiscal years; and (4) estimate the level of new budget authority the measure provides for assistance to State and local governments. The committee is to include this statement in its report on the measure (or make it available to the House in the case of a committee amendment that is not reported to the House). The latter two components of the statement are to be included in the committee's report only if either or both are "timely submitted before such report is filed." These requirements do not apply to continuing resolutions. Clause 3(c)(2) of Rule XIII reiterates the requirement for these CBO statements to be included in committee reports, and adds that, with respect to new budget authority, they "shall include, when practicable, a comparison of the total estimated funding level for the relevant programs to the appropriate levels under current law." Rule XIII, clause 3(e) When a committee reports a bill or joint resolution that would repeal or change all or part of some existing law, the accompanying committee report shall reprint the portion of existing law that would be repealed and show, by using different typographical devices, how existing law would be amended to read if the measure were to be enacted. However, if the committee reports the measure with one or more amendments, this requirement applies to the committee amendment(s), not to the measure as introduced. This requirement is popularly known as the "Ramseyer Rule" in honor of former Representative Ramseyer of Iowa, who served in the House from 1915-1933. The comparative print sometimes is simply known as "the Ramseyer." Rule XIII, clause 3(c)(1) The committee report on any measure is to include any pertinent oversight findings and recommendations by the committee, pursuant to clause 2(b)(1) of Rule X. This requirement does not apply to the Appropriations Committee. Rule XIII, clause 3(c)(4) The committee report on any measure also is to include "[a] statement of general performance goals and objectives, including outcome-related goals and objectives, for which the measure authorizes funding." Rule XIII, clause 3(d)(1) The committee report on a public bill or joint resolution shall include a statement citing the specific powers granted to Congress by the Constitution to enact the proposed law. Section 102(b)(3) of P.L. 104-1 , the Congressional Accountability Act of 1995; 109 Stat 6 The committee report accompanying a bill or joint resolution "relating to terms and conditions of employment or access to public services or accommodations" is to describe how the provisions of the measure apply to Congress or why they do not. A point of order can be made against House consideration of a bill if the accompanying report does not comply with this requirement, but the requirement may be waived by majority vote. Sections 423-426 of the Congressional Budget Act, as amended by P.L. 104-4 , the Unfunded Mandates Reform Act of 1995, 109 Stat 50 The Unfunded Mandates Reform Act of 1995, P.L. 104-4 , added to the Budget Act new Sections 423-426 concerning committee reports on public bills and joint resolutions that may contain Federal mandates. The committee is to prepare and print in its report a statement on the matters required by Section 423, and also to include (or have printed in the Congressional Record ) any statement prepared and submitted by CBO pursuant to Section 424. Under Section 425, it is not in order for the House to consider a measure if the accompanying report fails to include any required CBO statement. Section 426 governs waivers of Section 425. Section 5(b) of the Federal Advisory Committee Act of 1972, codified as amended at 5 U.S.C Appendix In considering legislation to establish or authorize a Federal advisory committee, a House or Senate committee is to determine "and report such determination" as to whether the functions of the proposed committee are or could be performed by an existing agency or advisory committee or by "enlarging the mandate" of an existing advisory committee. Rule XIII, clause 3(a) The cover of the committee report on a measure or matter shall so indicate whenever it includes any supplemental, minority, or additional views, or whenever it contains the CBO cost estimate or oversight findings and recommendations made by the Committee on Government Reform. Rule XIII Clauses (f)(g) and (h) Clauses(f)(g) and (h) of Rule XIII place additional content requirements on the reports of certain House Committees. A report from the Committee on Appropriations on a general appropriations bill must include a concise statement describing the effect of any provision of the bill that directly or indirectly changes existing law. The report must also include a list of all appropriations contained in the bill for expenditures not authorized by law (except classified intelligence or national security programs) along with a statement of the last year such expenditures were authorized, the level of authorization, and actual expenditure for that year. A separate section of the report must also be included listing any rescissions or transfers included in the bill. Whenever the Committee on Rules reports a resolution proposing to repeal or amend a standing rule of the House, it must include in its report: (1) the text of the rule or part of the rule that is proposed to be repealed, and (2) a comparative print that shows, by using different typographical devices, how that rule would be amended to read if the measure were to be enacted. Finally, it is not in order to consider a bill or joint resolution reported by the Committee on Ways and Means that amends the Internal Revenue Code of 1986 unless the report includes a macroeconomic impact analysis, and a statement from the Joint Committee on Internal Revenue Taxation explaining why a macroeconomic impact analysis can not be calculated. These provisions do not apply if the chairman of the Committee on Ways and Means causes a macroeconomic analysis to be printed in the Congressional Record prior to consideration of the legislation. Rule X, clause 2(b) Standing committees are charged with continually overseeing the "application, administration, execution, and effectiveness" of laws and programs within their jurisdictions, as well as the agencies responsible for administering or executing these laws and programs. Committees also must review the need for new legislation, and conduct future research and forecasting within their jurisdictions. This clause does not apply to the Committee on Appropriations. Rule X, clause 3 Several committees, including the Committees on Appropriations, Budget, Energy and Commerce, Education and the Workforce, Government Reform, Homeland Security, have special specified oversight duties, primarily to oversee issues that fall within the purview of multiple standing committees. Rule X, clause 2(c) Standing committees are to review and study the impact or the probable impact of tax policies affecting subjects within their jurisdictions. Rule X, clause 2(d)(1) Each standing committee is required to adopt an oversight plan for each Congress. In developing the plan, to the maximum extent feasible each committee must consult and coordinate with other committees; give priority of review to permanent laws, programs, or agencies; and look to review significant laws, programs, or agencies at least every 10 years. In developing its plan, each committee is to "review specific problems with federal rules, regulations, statutes, and court decisions that are ambiguous, arbitrary, or nonsensical, or that impose severe financial burdens on individuals...." The oversight plan must be adopted in open session by February 15 of the first session of a Congress, and must be submitted to both the Committee on Government Reform and the Committee on House Administration. After consultation with the leadership, the Committee on Government Reform must report these plans to the House by March 31 together with any recommendations to promote effective and coordinated oversight. Rule X, clauses 2(b) and 5(d) Most standing committees with more than 20 members must either create separate oversight subcommittees or require their subcommittees (if any) to conduct oversight within their respective jurisdictions. An oversight subcommittee does not count against the limit of five subcommittees that most committees may establish pursuant to Rule X, clause 5(d). Rule X, clause 2(e) With the approval of the House, the Speaker may appoint ad hoc oversight committees to review matters that fall within the jurisdiction of two or more standing committees. Rule XI, clause 1(b)(1) Each committee is authorized to conduct studies and investigations at any time, and to incur related expenses. Rule XI, clause 1(b)(2) An oversight or investigative report will be considered as read in committee if it has been available to the members for at least 24 hours prior to its consideration. Weekends and legal holidays are excluded, unless the House is in session. Rule XI, clause 1(b)(3) A report on an investigation or study conducted by two or more committees can be filed jointly. Each committee must independently comply with all requirements for approving and filing the report. Rule XI, clause 1(b)(4) An oversight or investigative report may be filed after the adjournment of Congress sine die , provided that members who make timely requests have at least seven calendar days for inclusion of supplemental, minority, and additional views. Rule X, clause 6(a) and 5(c) Committees are to be authorized funds for each Congress through a "primary expense resolution" reported by the Committee on House Administration. The resolution may be considered in the House only if the report thereon has been available for one calendar day. The report must contain the total level of funds to be provided to the committee, and to the extent practicable should contain statements on expenses for the committee's anticipated activities and programs. The Committee on Appropriations is exempt from this process. Further, the provision does not apply to (1) any interim resolution providing funds from the beginning of a first session of Congress until the adoption of the primary expense resolution, and (2) any resolution providing additional equipment, stamps, supplies, or staff for all standing committees that contains an authorization for these items subject to enactment of the resolution as permanent law. Rule X, clause 6(a) A primary expense resolution may contain a reserve fund for unanticipated needs of committees. Funds from the reserve may be allocated to a committee only with the approval of the Committee on House Administration. Rule X, clause 7 Committees are provided automatic interim funding until the adoption of a primary funding resolution. From January 3 until March 31 of each new Congress, committees are authorized funds from the salary and expenses account of the House at a monthly rate of 9% of the last session's level or at a lower level set by the Committee on House Oversight. Interim funds shall be spent in accordance with regulations prescribed by the Committee on House Administration. Payment of expenses is to be made on vouchers authorized by the committee, signed by the chair, and approved by the Committee on House Administration. However, until the election of committee members at the beginning of a Congress, a committee's vouchers are to be signed by the chair in the last Congress or, if that individual is no longer a Member, the ranking majority party member returning to Congress. These provisions apply to select committees established by resolution in the preceding Congress if (1) no resolution terminating the funding of the select committee was agreed to during the previous Congress, and (2) a resolution to reestablish the select committee has been introduced. Further, they apply to all committees only insofar as they are "not inconsistent with" any resolution reported by the Committee on House Administration and agreed to after the adoption of House rules. Rule X, clauses 6(b) and 6(c) After its initial authorization of funds, a committee may receive supplemental funds through a resolution reported by the Committee on House Administration. This resolution may be considered in the House only if the report thereon has been available for one calendar day. The report must contain the amount of additional funds to be provided, the purpose(s) of those funds, and the reason(s) the funds were not provided in the primary expense resolution. As with the provision on biennial funds, this provision does not apply to any interim funding resolution at the outset of a Congress, and any resolution providing specified items and funds for the same to all committees, subject to enactment as permanent law. Rule X, clause 9(a)(1) and 9(d) By majority vote, each standing committee may appoint not more than 30 professional staff. These staff are assigned to the chair and the ranking minority member "as the committee deems advisable." This provision does not apply to the Committee on Appropriations, which sets its own staff level subject to appropriations of funds (under clause 9(d)). Rule X, clause 9(a)(2), 9(f), and 9(h) By majority vote, the minority party members on a standing committee may select one-third (up to ten) of the professional staff, unless ten individuals satisfactory to them have already been assigned. When staff are chosen by the minority, they will be appointed if acceptable to a majority of the committee. If any is deemed unacceptable, the minority party members make another selection. If the minority party requests the appointment of a staff member and none of the 30 professional slots is vacant, the individual will serve as an additional professional staff member until an appropriate vacancy arises. Minority staff are assigned to committee work by the minority party members. These provisions do not apply to the Committee on Standards of Official Conduct and the Permanent Select Committee on Intelligence. Rule X, clause 9(g) Minority staff are to be given "equitable treatment" with respect to pay, assignment of work facilities, and accessibility of committee records. Rule X, clause 9(I) By vote of a majority of each party, a committee may employ non-partisan staff in lieu of or in addition to staff designated exclusively for the majority or the minority party. Rule X, clauses 9(b)(1) and 9(b)(2) Professional staff may work only on committee business. This requirement does not apply to "associate" staff or "shared" staff not paid exclusively by the committee, so long as the chair certifies that the salary paid by the committee is commensurate with work performed for the committee. Rule X, clause 9(b)(3) A committee's use of "associate" or "shared" staff is subject to the review of the Committee on House Administration, and to any terms, conditions, or limitations established by this Committee in connection with its report of a funding resolution. This provision does not apply to the Committee on Appropriations. Rule X, clause 9(c) The chair of a standing committee sets the annual salary of each staff member of the committee; such salary may not exceed the maximum set in law. Rule X, clause 9(e) Staff may not be detailed to a committee from any Government agency or department without the written permission of the Committee on House Administration. Rule X, clause 6(d) From the funds available for staff, the chair of each committee is to "ensure that sufficient staff is made available to each subcommittee" and that the committee's minority party members are "treated fairly in the appointment of such staff." Sections 303-304 of the Legislative Reorganization Act of 1970, codified as amended at 2 U.S.C. 72(a) (I) and (j) With the approval of the Committee on House Administration, standing committees may hire consultants and obtain specialized training for professional staff. Rule XXIII, clause 13 Before a Member, Delegate, Resident Commissioner, officer, or employee of the House may have access to classified information, they must first execute an oath swearing (or affirming) not to disclose it in violation of House rules. Copies of the executed oaths are retained by the Clerk of the House and a list of those Members who signed the oath during a week shall be published in the Congressional Record on the last legislative day of that week. Rule XXIV, clause 10 Committee funding resolutions may not pay for the travel expenses of committee members (1) after the date of the general election, if they are defeated, or (2) after the earlier of the date of the general election or the date of sine die adjournment, if they are not seeking re-election. Local currencies owned by the United States may not be used to pay foreign travel expenses of committee members under the same circumstances. Rule X, clause 8(a) Committees may use local currencies owned by the United States when carrying out official duties outside the United States, its territories, or possessions. A committee may not use appropriated funds for expenses in any country if local currencies are available for this purpose. Rule X, clause 8(b) On any day of foreign travel, committee Members and staff may not receive or spend more local currency than the maximum per diem in law. Similarly, where local currencies are unavailable, committee Members and staff may not receive reimbursement for expenses (other than transportation) in excess of the maximum per diem contained in law. In addition, any reimbursement for foreign travel expenses will be at the lesser of the per diem rate or the level of actual expenses (other than transportation). Rule X, clause 8(c)(3) Committee Members and staff may be reimbursed for the cost of transportation related to foreign travel only if they have "actually paid for the transportation." Rule X, clause 8(b)(3) Within 60 days of completing travel to a foreign country, each committee Member or staffer must file a report listing the dates of travel, the amount of per diem and transportation furnished and spent, and funds expended for any other official purpose. The reports are to be filed with the committee chair and to be open for public inspection. Rule X, clause 4(e) In general each standing committee is to ensure that continuing programs and activities are appropriated annually, and must review programs that are not appropriated annually to determine whether changes would allow them to be. Rule X, clause 4(f)(1) Each standing committee must submit to the Committee on the Budget its views and estimates on spending within its jurisdiction. These statements are to be submitted no later than six weeks after the President submits his budget or at such time as the Budget Committee requests. Rule X, clause 4(a)-4(e) The clause assigns particular functions and duties to the Committees on Appropriations, Budget, Government Reform, and House Administration.

The rules of the House of Representatives, especially Rules X-XIII, govern the authority and operations of its committees and subcommittees. In many respects, the House allows each of its committees to decide for itself how to conduct its business. However, the House does impose various requirements and prohibitions on its committees; and because the committees are the agents of the House, they are obligated to comply with all House directives that apply to them. This report identifies and summarizes the provisions of the House's standing rules and certain other directives that affect committee powers, authority, activities, and operations. It is organized under seven headings: (1) general, (2) establishment and assignments, (3) hearings, markups, and other meetings, (4) reporting, (5) oversight and investigations, (6) funding, staff, and travel, and (7) other duties.

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The Association of Southeast Asian Nations (ASEAN) is Southeast Asia's primary multilateral organization, a 10-member grouping of nations with a combined population of 580 million and an annual gross domestic product (GDP) of around $1.5 trillion. Established in 1967 to foster regional dialogue during the turbulent post-colonial, Cold War period, it has grown into one of the world's largest regional fora, representing a strategically and economically important region that spans some of the world's most critical sea lanes and accounted for around 5% of the United States' total trade in 2008. The Obama Administration is pursuing a policy of expanding and upgrading U.S. relations with Southeast Asia, and with ASEAN itself. Although the Bush Administration took steps to develop ties with the region, it was widely perceived among members of ASEAN as narrowly focused on terrorism, neglectful of other issues, and not sufficiently committed to multilateral dialogue. By contrast, the Obama Administration has explicitly expressed an intent to pay greater attention to Southeast Asia, listen more carefully to regional concerns, and work with multilateral organizations, particularly ASEAN, to cooperate on issues of mutual interest. The United States has deep-seated interests in Southeast Asia, such as maritime security, the promotion of democracy and human rights, the encouragement of liberal trade and investment regimes, counterterrorism, the combating of illegal trafficking of narcotics and human trafficking, and many others. As China has deepened its economic and cultural ties in Southeast Asia, and even taken some steps to build security ties, some analysts believe the region has also become an important site of "soft power" rivalry, in which the long-standing leadership role of the United States could be challenged by a rising China. Other external powers also have shown renewed or greater interest in the region, including Japan, the EU, and India. Engagement with ASEAN has presented the United States with an important foreign policy dilemma. Despite considerable U.S. security, economic, and foreign assistance initiatives in the region, particularly at the bilateral level, in recent years a perception has developed among Southeast Asian elites that the United States has placed relatively little priority on ASEAN itself and has, thereby, demonstrated a lack of commitment to Southeast Asia as a whole. Southeast Asian diplomats frequently note that other nations, including China and Japan, have given ASEAN meetings a considerably higher diplomatic commitment than has the United States. Indeed, in some ASEAN countries, one of the largest irritants to bilateral relations with the United States is the fact that it is perceived as insufficiently engaged with the multilateral body of ASEAN. The United States has long had close bilateral relations with many of Southeast Asia's nations. Two ASEAN members, Thailand and the Philippines, are U.S. treaty allies, and a third, Singapore, is a close security partner. Indonesia and Malaysia have long had strong ties with Washington, and both are seen as important models of progressive governance and economic development in majority Muslim nations. In recent years, Vietnam has also become an increasingly important voice in regional affairs, and the United States has moved to normalize and deepen ties with its one-time adversary. Some feel that these strong sets of bilateral ties are sufficient to anchor the U.S. role in the region, arguing moreover that ASEAN's consensus-based decision-making makes it difficult for the organization to accomplish much, given its broad membership, which includes highly developed financial centers, vibrant developing-nation democracies, and impoverished military dictatorships. Still, symbolic commitment is particularly important in a region that places a heavy emphasis on process and informal networking. Many observers argue that the United States needs to "show up" more frequently and at higher official levels, lest it lose influence in the region and risk being cut out of emerging Asian diplomatic and economic architectures. Recent actions by the Obama Administration suggest that it accepts this argument, at least on a symbolic level. The United States has been steadily expanding and deepening its relations with ASEAN since the middle of the decade. A common goal of both the Bush and the Obama Administrations appears to be to increase the multilateral dimension of U.S. policy in Southeast Asia, which traditionally has been organized along bilateral lines. However, many of the Bush Administration's initiatives—which included becoming the first country to appoint an ambassador to ASEAN, providing assistance to the ASEAN Secretariat to upgrade its capabilities, and launching the US-ASEAN Trade and Investment Framework Agreement (TIFA)—were undermined by a belief among Southeast Asian elites that the United States lacked a strong commitment to ASEAN and Southeast Asia. The piece of evidence cited most often by critics was former Secretary of State Condoleezza Rice's decision to not attend two of the four ASEAN Regional Forum (ARF) Foreign Ministerial meetings during her tenure. Considerable attention was focused on President Bush's decision to cancel the scheduled US-ASEAN Summit in September 2007 to focus on the security situation in Iraq. A number of countries have regular summits with ASEAN leaders, including China, Japan, South Korea, and India. The Obama Administration has taken steps with ASEAN that some see as explicitly designed with symbolic diplomacy in mind. In February 2009, Secretary of State Hillary Clinton visited the ASEAN Secretariat in Jakarta, a first for a U.S. Secretary of State. In July 2009, during Clinton's second visit to Southeast Asia to participate in the ARF Foreign Ministerial in Thailand, the United States acceded to ASEAN's Treaty of Amity and Cooperation (TAC), which promotes the settlement of regional differences or disputes by peaceful means and is one of the organization's core documents. President Obama attended a first-ever U.S.-ASEAN leaders meeting on the sidelines of the November 2009 Asia-Pacific Economic Cooperation (APEC) forum summit in Singapore. In a joint statement, the leaders pledged continued or enhanced dialogue and cooperation in many areas, including engagement with the government of Burma (Myanmar), human rights, trade, regional security, nuclear non-proliferation and disarmament, counterterrorism, energy, climate change, educational exchanges, and support for the Lower Mekong Basin countries (Cambodia, Laos, and Vietnam). They agreed to hold a second meeting in 2010. The Obama Administration has taken other potentially noteworthy steps. Divergent U.S. and ASEAN approaches to Burma have also been an irritant to U.S.-ASEAN relations since Burma became a member of the organization in 1997. The United States has pursued a policy of diplomatically shunning the Burmese military regime and imposing stringent economic sanctions against the country—creating difficulties in engaging both politically and economically with a grouping that includes it. In the fall of 2009, the State Department announced a new Burma policy, in which the United States would hold dialogues with the Burmese leadership while still maintaining U.S. sanctions. This move, which brings Washington closer to ASEAN policy, could help to improve U.S.-ASEAN ties. Additionally, on the sidelines of the July 2009 ARF meeting, Secretary Clinton met with the foreign ministers of the lower Mekong countries, excluding Burma (i.e., Vietnam, Cambodia, Laos, and Thailand), in the first-ever U.S.-Lower Mekong Ministerial Meeting. The ministers issued a joint statement outlining the wide-ranging areas of discussion, which included responses to climate change, fighting infectious disease, and education policy. President Obama plans to visit Indonesia and Australia in March 2010. His talks with Indonesian President Yudhoyono will likely focus on trade and security ties as well as raise the profile of the region's largest and arguably most democratic nation. Taken together, the message of the Administration's symbolic and substantive moves appears to be that the United States intends to engage with ASEAN and Southeast Asian countries at a higher level, and do so more persistently. There remain questions about how far this change in approach will persist, particularly as it raises expectations in Southeast Asia. For instance, will the U.S.-ASEAN leaders' meeting be regularized, as many Southeast Asian leaders hope? On the other hand, by raising the profile of U.S.-ASEAN ties, the United States likely will place new pressures on ASEAN to increase its own utility in resolving regional crises and addressing security and economic issues in a more concerted manner, lest a more activist United States eventually bypass it. The Association of Southeast Asian Nations was founded on August 8, 1967, with the adoption of the ASEAN Declaration in Bangkok, Thailand. Originally, the association had five members—Indonesia, Malaysia, Philippines, Singapore, and Thailand—and expanded to its current 10 members during the 1980s and 1990s with the addition of Brunei Darussalam, Vietnam, Laos, Burma, and Cambodia. Colonial experiences led to a strong desire by the original members to prevent the domination of the region by any single power. Furthermore, the formation of the organization reflected an attempt to forge independent foreign policies in the context of Cold War pressures. As stated in the ASEAN Declaration, the association was created to achieve joint goals including those related to economic growth; regional peace and security; collaboration and mutual assistance in a number of development areas; trade promotion; and linkages with other regional organizations. On February 24, 1976, ASEAN created the ASEAN Secretariat, located in Jakarta, Indonesia, an administrative body consisting of representatives of each ASEAN member nation. The Secretariat is headed by a secretary-general, who serves a term of five years. Since its creation, the structure and the duties of the Secretariat have been changed on several occasions. As of 2009, the secretary-general's main responsibilities are to organize the annual foreign ministers' meeting; initiate, advise, coordinate, and implement ASEAN activities; serve as spokesman and representative of ASEAN on all matters; and oversee the operations of the ASEAN Secretariat. ASEAN remains, to a large degree, an informal organization. The ASEAN Secretariat is lightly staffed, without the deep administrative resources and responsibilities of some multilateral organizations such as the European Union. Its current secretary-general is Surin Pitsuwan, a former Thai foreign minister, who has sought to institutionalize many of ASEAN's practices and has pushed the introduction of the ASEAN Charter. Still, much of the diplomatic activity that occurs at meetings of ASEAN leaders and senior officials occurs on the sidelines rather than at the formal level. ASEAN has traditionally operated on principles of consensus and non-interference in the internal affairs of members, which has led to considerable difficulty in the group operating in formal concert. Many analysts note that ASEAN's expansion to include underdeveloped nations such as Laos, Cambodia, and Burma has created a wide range of interests within the group that make formal security and economic moves difficult to agree upon. Although ASEAN is starting to play a more active role in dealing with its members' differences—most notably over Burma's human rights record—much of what the group does is still done through informal channels. A new ASEAN Charter went into effect on December 15, 2007, superseding the ASEAN Declaration as the organizing document for the organization. The charter is effectively a constitution for ASEAN, committing the member nations to the formation of an "ASEAN Community in furtherance of peace, progress and prosperity of its peoples." Some aspects of the charter may signal a greater willingness to discuss and comment on the internal affairs of the organization's members. Such a potential institutional development may help the organization to deal with members such as Burma that have caused troublesome policy issues both within the region and with ASEAN's relations with outside states. The new charter establishes a number of goals for ASEAN, including: Maintenance of peace, stability, and security in the region; Promotion of greater political, security, economic; and socio-cultural cooperation; Preservation of Southeast Asia as an area free of weapons of mass destruction, including nuclear weapons; Creation of a just, democratic, and harmonious environment in the region; Formation of a single market and production base in which there is free flow of goods, services, and investment, as well as facilitated movement of business persons, professionals, talents and labor, and the freer flow of capital; Alleviation of poverty and the narrowing of the development gap in the region; and Promotion of sustainable development so as to ensure the protection of the region's environment. According to the new charter, there are to be two ASEAN summits each year, attended by the members' heads of state or their designated representatives. In addition, the foreign ministers of the ASEAN members are to meet at least twice a year. The ASEAN Charter also creates three Community Councils, dealing with political and security, economic, and socio-cultural issues, respectively, plus preserves the institutions of the ASEAN Secretary-General and the ASEAN Secretariat as the administrative bodies for the association. Article 14 of the charter calls for the establishment of an ASEAN human rights body, a new development for ASEAN, which has traditionally refrained from commenting on the human rights situation in member nations. The first meeting of the ASEAN human rights body—formally called the ASEAN Intergovernmental Commission on Human Rights (AICHR)—took place on October 23, 2009, in Cham-Am, Thailand, following an ASEAN summit. ASEAN is at the center of several other security- and trade-related groupings in the Asia-Pacific region. The ASEAN Regional Forum (ARF), established in 1994 with 26 Asian and Pacific states plus the European Union, was formed to facilitate dialogue on political and security matters in the region. The ASEAN + 3 (China, Japan, and South Korea) was created in 1997, partly as a response to the Asian financial crisis, and partly as a way to balance the northeast Asian powers in the security dialogue process with ASEAN. Created in 2005, the East Asia Summit (EAS) which, in addition to the ASEAN + 3 members, includes Australia, New Zealand, and India, represented an effort by some countries in the region, particularly Japan, to balance China's influence in the region through the inclusion of additional, non-East Asian powers. More recently, the geopolitical discussion in Asia has turned to the issue of the formation of an EU-style association of Asian nations. While this discussion is in its early stages, there are already advocates for the creation of a pan-Asian entity—the East Asian Community (EAC)—that would include closer economic and trade relations among its members, possibly even the creation of a single Asian currency. At the same time, there has been a separate ongoing discussion about greater regional economic and trade integration in Asia taking place in various fora. The Asia-Pacific Economic Cooperation (APEC) forum was formed in 1989 with the express mission of accelerating regional economic integration and fostering greater trade and investment liberalization through a process known as "open regionalism." ASEAN has also formed the core at periodic meetings of ASEAN + 3 and the EAS to consider ways and means of fostering closer economic and trade ties. For its own part, ASEAN has been pursuing ways to expedite closer economic ties amongst its 10 member nations with the goal of creating an ASEAN Economic Community. While security concerns were downplayed in the original ASEAN Declaration, the importance of regional peace and security was a major purpose behind ASEAN's formation. ASEAN has sought to maximize its security interests by developing a set of norms for its members, and beyond that has increasingly relied on consensus building and discussion as the preferred means of conflict resolution. That said, all is not tranquil among ASEAN members or between ASEAN states and external powers. There continue to be bilateral tensions among ASEAN states, as recently demonstrated by the border clashes between Cambodia and Thailand near the 11 th -century Preah Vihear Temple, and maritime disputes between Indonesia and Malaysia over the energy-rich Ambalat sea bloc in the Sulawesi Sea. Nevertheless, it does appear that ASEAN has played a key role in promoting a normative order that has minimized interstate conflict in Southeast Asia since the group's formation during the Cold War. ASEAN's key strategic value emanates from its geographic position as well as its economic development. ASEAN is situated astride the key sea lanes that link the energy-rich Persian Gulf and the economic power centers of East Asia. Maintaining the free flow of goods and energy through the strategically vital Malacca, Sunda, and Lombok Straits is a key geostrategic interest for ASEAN members, as well as the United States, Japan, China, and South Korea. Energy reserves in and around the South China Sea, Indonesia, and Burma also give the region added strategic importance. While ASEAN has been a key player in the creation of emerging economic and strategic architectures in Asia, such as the ASEAN + 3 and the East Asia Summit, it faces the increasingly challenging task of maintaining strategic balance and its pivotal role in this process. The emergence of China and India as great powers in an increasingly multi-polar world, and the continued engagement of the United States, present diplomatic challenges for ASEAN as it seeks to shape an international order that will promote peace and stability for the region. The United States and ASEAN share a mutual interest in preventing conflict and maintaining the independence of regional states. ASEAN as an organization will likely seek to balance external actors in the region while seeking to avoid antagonizing great powers. America's military posture in Asia supports ASEAN's goal of ensuring that no hegemon can arise that could dominate the region. As such, America is generally a valued offshore balancer relative to the perceived rising influence of China, though some ASEAN members—Laos, Cambodia, and Burma, in particular—are relatively closer to China than others. China also acts as a balancer to American presence in the region. While securing sea lanes of communication and trade that transit maritime Southeast Asia is of mutual importance among all interested states, there is the potential that increasingly intense competition for energy resources could lead to increased tensions. This could be the case should Chinese efforts to secure energy resources and routes entangle China and India in a security dilemma where "defensive" moves by one party are viewed as "offensive," or threatening, by the other. This could also be the case should Chinese activity in Burma intensify. China is interested in developing an energy and trade corridor from Sittwe, Burma, to Kunming, China, which could be viewed as a means of lessening China's strategic vulnerability at the Strait of Malacca. Some in India are increasingly concerned that this move by China in Southeast Asia could be part of a larger strategy to encircle India. Territorial disputes in the South China Sea have been at the center of some of ASEAN's most active security-related diplomacy in recent decades—but also serve as an illustration of the difficulty of marshaling the group's diverse membership to act in concert. For decades, the Paracel and Spratly Islands have been the site of regional competition for control of the South China Sea among ASEAN members and China, and between individual ASEAN members themselves. The source of competition over this region is the desire to extend sovereignty over sea beds by establishing claims to the islands and thereby control important fishing areas and what are thought to be rich energy reserves beneath the sea. In the late 1990s and early 2000s, ASEAN's push for a Code of Conduct on the South China Sea to promote the norms of peaceful resolution of conflict—which resulted in the Declaration on the Conduct of Parties in the South China Sea signed by ASEAN's members and China in November 2002—can be viewed as one of the group's successes in acting in concert to promote common security interests of organization members. In 1992, following a series of incidents including China's sinking of three Vietnamese vessels near Fiery Cross Reef in the Paracels in 1988, ASEAN issued a declaration on the South China Sea, calling for a mutual code of conduct for nations navigating in the waters. This led to a decade of active diplomacy in which the organization's members largely held together to promote multilateral security in the area. By acting as a group, ASEAN states arguably have collectively more weight when dealing with any outside actor than they do when acting individually. However, the continuation of flare-ups in these waters is also an illustration of the limits of ASEAN's ability or willingness to act in concert to deal with external powers. In recent years, continued Chinese disputes with Vietnam and the Philippines have been kept largely bilateral, with ASEAN as a grouping opting not to lend formal support to its members in their disputes with China. This has had an effect on U.S. interests. In 2008, for instance, China warned international oil firms, including ExxonMobil, against exploring for energy resources in blocks leased by the Vietnamese government. Of ASEAN states, only Thailand was able to maintain a fair degree of political autonomy throughout the colonial period in Southeast Asia. The later colonial period witnessed the domination of Indo-China by France; Burma, Malaya, and Singapore by the United Kingdom; Indonesia by the Netherlands; and the Philippines by Spain and the United States. During World War II, the region came under the control of imperial Japan. These experiences led to a strong desire of ASEAN members to prevent their newly independent states from being dominated by any single power, as Japan did during WWII, and to preserve and expand their independence of action from external great powers. ASEAN was formed through the Bangkok Declaration of 1967 at the height of the Cold War, when external powers were directly or indirectly militarily engaged in the region. ASEAN was created largely as a reaction to Cold War pressures on the region. At the time, the United States was deeply engaged in the war in Vietnam, and the ongoing global struggle between the West and the Soviet bloc was intense. Small Southeast Asian states also sought in part to bring Indonesia into a regional grouping as a way of curbing its previously demonstrated ability to threaten regional neighbors, as it did with Malaya under its policy of Konfrontasi, which included a guerilla war on Borneo from 1963 to 1966 against British, Australian, New Zealand, and Malay security forces. While the Cold War is now history, ASEAN continues to be faced with the diplomatic, strategic and foreign policy challenges of how to deal with external great power actors in its region. Today, Soviet influence has faded and Chinese influence has expanded while the United States has sought to remain engaged in the region. ASEAN-China relations have become deeper, as China has engaged in a "charm offensive" since the late 1990s, seeking better diplomatic and trade relations with Southeast Asian states. The potential for larger Indian engagement with the region is also developing, as demonstrated by India's inclusion in the East Asia Summit. Some regional states continue to have outside bilateral or multilateral defense ties, some of which can be viewed as legacies of the colonial, post-WWII, and Cold War periods. These security relationships include the Five Power Defense Agreement between the United Kingdom, Malaysia, Singapore, Australia, and New Zealand and the U.S. alliances with the Philippines and Thailand that were originally part of the San Francisco system formed in the early 1950s. In addition, Indonesia has moved on somewhat from its non-aligned position by developing bilateral security ties with Australia. While there are some relatively low-level security concerns either between ASEAN states or at the sub-state level, as is the case with insurgents in Southern Thailand and the Southern Philippines, the largest threats to stability in the region as a whole emanate largely from outside the region and relate to the evolving correlates of power in Asia as a whole. It is for this reason that much of ASEAN's diplomatic activity and initiative has been focused at establishing a new Asian or trans-Pacific economic and strategic group that can seek to prevent or ameliorate conflict between the extra-regional powers that are active in the region, including the United States, China, Japan, South Korea, and India. For example, a conflict between China and the United States over Taiwan would likely have a devastating impact on regional trade and would place unwanted pressure on ASEAN states to pick sides. The general trend in recent decades of re-conceptualizing security as more than simply the realm of cross border conflict between the armed forces of sovereign nation states, or internal counterinsurgency operations, is clearly evident in Southeast Asia. This is evident from the negative impact of terrorist groups active in the region, such as Jemaah Islamiya and Abu Sayyaf, as well as from the relatively high incidence of piracy in maritime Southeast Asia. Jemaah Islamiya in Indonesia and Abu Sayyaf in the Philippines are two key terrorist groups that are a threat to Americans and Western interests in the region. Counterterrorism efforts by ASEAN states working with the United States and Australia have done much to hunt down regionally based terrorists. While the cultural heart of Islam is Mecca, the demographic heart of Islam is closer to Southeast Asia, as Indonesia has the world's largest Muslim population. Indonesia and Malaysia generally recognize a more tolerant and less fundamentalist form of Islam, which some argue could be a good starting point for increased engagement by the United States in the Muslim world. Contemporary security interests also encompass other sub-national and trans-regional levels of conflict in addition to interstate conflict. The conflicts that Indonesia has had in East Timor, Aceh, the Moluccas, and Papua, some of them still festering; ongoing insurgencies in Muslim areas of Thailand and the Philippines; and Burma's restive minority groups can be viewed in this context. ASEAN's reluctance to become involved in the internal affairs of its members has largely kept such issues from becoming the business of the group as a whole. Concepts of human security have also brought many analysts of security dynamics in the region to increasingly focus on the negative impacts of environmental degradation and the impact that climate change may have on the region. The "haze" generated by the burning of forests after logging operations brought this to the attention of regional governments concerned over public health risks in 1997. The damming of the upper reaches of the Mekong in China has also raised concerns over the long-term viability of that river system as a source of food for the region. Increased temperatures associated with climate change may undermine regional food production and cause sea level rise that would negatively impact low-lying coastal areas where many in the region live. Piracy in Southeast Asia has been a relatively large problem as compared with other areas of the world, with the exception of the Gulf of Aden and the Arabian Sea in recent years. Human and narcotics trafficking and the plight of refugees in the region are other human security issues worthy of attention. The ASEAN economies have become a major regional hub for globalized manufacturing. According to official ASEAN statistics, ASEAN's total merchandise trade exceeded $1.7 trillion (see Table 1 ). A little more than one-quarter of its trade was between ASEAN members. Another third was with the European Union (EU-25), Japan, and the United States. Trade with China claimed about one-tenth of the association's merchandise trade. The rest of ASEAN's trade was distributed around the world. In terms of the types of goods and commodities traded by ASEAN in 2008, three different groups far surpassed all other categories—electrical machinery, mineral fuels and oils, and mechanical appliances (see Table 2 ). Taken together, these items account for nearly 60% of ASEAN's exports and almost two-thirds of its imports. This pattern can be partially explained by ASEAN's role in the globalized manufacturing of electrical machinery and mechanical appliances. As described in a number of studies, the production of home appliances, computers, telecommunications equipment and other products that fall into these two categories has become a multi-country process, with components and parts being shipped between nations for final assembly in multiple competing countries. Much of ASEAN's intra-regional trade in intermediate goods ends up as components used in final assembly work done in China. While this multi-country assembly process is comparatively mobile and fluid, in recent years, the ASEAN nations—along with China—have become regionally integrated manufacturing hubs for selected products. According to official U.S. trade statistics, ASEAN's trade with the United States—like with the rest of the world—is dominated by electrical machinery (HTS 85) and mechanical appliances (HTS 84) (see Table 3 ). Over 40% of U.S. imports from ASEAN and nearly half of U.S. exports to ASEAN are in these two categories. Knit and non-knit clothing (HTS 61 and 62), plus rubber and articles made of rubber (HTS 40) are also major products imported from ASEAN. Other top-five U.S. exports to ASEAN are aircraft (HTS 88); optical and scientific equipment (HTS 90); and mineral fuels and oils (HTS 27). U.S. trade statistics show a larger U.S. trade deficit with ASEAN than ASEAN's statistics. Since the early 1990s, the ASEAN members have been gradually moving toward the creation of a free trade area encompassing the 10 members of the association. The ASEAN Free Trade Area (AFTA) is to be fully implemented in 2010 by six ASEAN countries and 2015 for the remaining signatories. Under AFTA's Common Effective Preferential Tariff (CEPT) Scheme, more than 99% of the product categories will have their intra-ASEAN tariff rates reduced to below 5%. In addition, the 10 ASEAN members have agreed to the goal of creating an ASEAN Economic Community (AEC) by 2015. During the ASEAN summit held in Cha-Am, Thailand on October 23-25, 2009, there was a recommitment to the 2015 goal for the creation of the AEC, as well as discussion of alternative ways of forming closer economic and trade ties with several Asian nations, including China, India, Japan, and South Korea. ASEAN's efforts to create the AEC have been complemented by its interest in negotiating trade agreements with key Asian nations. The United States is the only major power in the region that has not agreed to some form of formal free trade agreement (FTA) with ASEAN. As of October 2009, ASEAN had concluded trade agreements with the following countries: Australia and New Zealand —On February 29, 2009, ASEAN, Australia, and New Zealand signed the ASEAN-Australia-New Zealand Free Trade Area (AANZTA) Agreement. The agreement commits the parties to the progressive reduction of tariff and non-tariff trade barriers. China —On November 5, 2002, ASEAN and China set the goal of establishing an ASEAN-China Free Trade Area (ACFTA) within 10 years. The two sides subsequently signed an Agreement on Trade in Goods in 2004, and an Agreement on Trade in Services was entered into force in 2007. Under ACTFA, ASEAN and China began reducing tariff lines on a range of goods on January 1, 2010. On the ASEAN side, Singapore, Malaysia, Indonesia, the Philippines, Thailand, and Brunei agreed to begin reductions in 2010, while Vietnam, Laos, Cambodia and Burma aren't expected to begin reductions until 2015. There has been early resistance within ASEAN to the tariff reductions, most sharply in Indonesia, where the government sought in January 2010 to postpone import tariff reductions on some 228 product lines, arguing that it needs to cushion domestic industries from Chinese competition. India —On August 13, 2009, ASEAN and India concluded an agreement on trade in goods that provides for the gradual reduction of tariff and non-tariff trade barriers, plus commits the parties to the establishment of an ASEAN-India Free Trade Area (AIFTA). Japan —In April 2008, ASEAN and Japan concluded negotiations for the creation of an ASEAN-Japan Free Trade Area (AJFTA). South Korea —On August 24, 2006, ASEAN and the Republic of Korea concluded the ASEAN-Korea Free Trade Agreement (AKFTA). The original document covered trade in goods. Since then ASEAN and South Korea have extended their trade arrangement to cover investment as well. ASEAN has also held talks with the European Union (EU) about a possible free trade agreement, but progress has been slow and prospects are unclear. Beyond its efforts to negotiate bilateral trade agreements with selected countries, ASEAN has also been actively promoting the creation of a larger, Asia-based free trade area. This possible regional economic association has been referred to by different names at different times, including the more recent East Asian Community (EAC). In some cases, the discussants have been limited to ASEAN + 3. In other cases, the group of nations has been expanded include the EAS (ASEAN + 6). During the East Asia Summit held in Hua-Hin, Thailand, on October 25, 2009, there was discussion about the nature of a possible EAC as well as which nations ought to be members. While there appeared to be some consensus to create a regional free trade area by 2020, there was no agreement on which nations should he part of such an arrangement. In particular, there were apparently sharp differences of opinion over the inclusion of the United States in the free trade area. Similarly, although Russia has applied for membership in the East Asia Summit, it is unclear if Russia is being considered for inclusion in the EAC. While some have suggested the possibility of an ASEAN-U.S. Free Trade Agreement, there are several structural problems to negotiating such an agreement. First, the United States would probably require that the trade agreement comply with the U.S. model FTA, a condition that ASEAN may not find acceptable. Second, the United States has a comprehensive ban on direct trade with Burma. Third, the ASEAN economies vary in their level of economic and legal development, which would make the FTA's compliance requirements difficult to specify. The Obama Administration's revision of U.S. policy toward Burma has coincided with a similar review by ASEAN of its stance on relations with the ruling junta, the State Peace and Development Council (SPDC). While the new U.S. policy may be viewed as a tacit admission that sanctions alone were not sufficient to effect change in Burma, recent statements and actions by ASEAN may indicate that their past policy of "constructive engagement" had proven equally ineffective. As a result, there may be an opportunity for ASEAN and the United States to confer and coordinate their policies toward Burma. During the U.S.-ASEAN leaders' meeting in November 2009, in which President Obama sat four chairs away from Burma's representative, Prime Minister Thein Sein, the United States raised the issue of human rights abuses in Burma and the need for democratic reforms and genuine dialogue with opposition leaders, and called upon the military government to release all political prisoners, including Nobel Peace Laureate Aung San Suu Kyi. The joint statement issued at the summit expressed the hope that the renewed dialogue between the United States and Burma, as well as ASEAN's efforts to work with the Burmese government, will "contribute to broad political and economic reforms." There was also a call for the government to conduct the proposed general election in 2010 in "a fair, free, inclusive and transparent manner." However, there was no mention of political prisoners or the release of opposition leaders. Although there was interest in including Burma as an original member of ASEAN in 1967, it did not join the association until 1997. From the start, ASEAN as an organization adopted a policy of "constructive engagement" toward Burma, refraining from public comments in its "internal affairs," while some members sought closer economic, trade, and investment relations with Burma. Some of the strongest supporters of ASEAN's policy of "constructive engagement" toward Burma have been the governments of Thailand, Indonesia, Malaysia, and Singapore, for slightly different reasons. Thailand has had an ambivalent view of Burma. Burmese domestic unrest has adverse direct impacts on Thailand, and Thailand suffers from the flow of both narcotics and refugees out of Burma. However, successive governments in Bangkok have felt an interest in maintaining at least some ability, even if limited, to deal with the Burmese regime, and to foster stability in Burma, with which Thailand shares a long border. Under the Suharto regime, the Indonesian government shared some ideological views with Burma's military government that led to its support of Burma's ASEAN membership and closer relations, although Jakarta has taken a harder line as the country has democratized. Malaysia at the time was concerned about both Chinese and U.S. influence in the region, and found similar views among Burma's military rulers. The Singaporean government saw economic opportunity in closer relations with Burma, and for a time was a major supplier of equipment and arms for the Burmese military, as well as a major investor in the country. The adoption of a new ASEAN Charter in 2007 may signal a greater willingness to address issues such as human rights and democracy. As previously mentioned, the new charter states that among ASEAN's purposes are strengthening democracy and protecting human rights, and mandated the establishment of an "ASEAN human rights body." However, among ASEAN's founding principles is a commitment to "non-interference in the internal affairs of ASEAN Member States." In practice, under the new charter, ASEAN has shown a greater willingness to express its opinion about the situation in Burma. In response to the conviction of Aung San Suu Kyi in August 2009, ASEAN's chairman issued a statement expressing ASEAN's "deep disappointment" at the verdict, calling for the immediate release of Aung San Suu Kyi and other political prisoners, and asserting that "such actions will contribute to national reconciliation among the people of Myanmar, meaningful dialogue and facilitate the democratization of Myanmar." In addition, ASEAN has indicated that the junta's treatment of opposition groups and ethnic minorities will affect how the election results will be perceived by the Association. Although ASEAN appears to be more willing to publicly criticize Burma's military government, it has not shown a greater willingness to impose economic sanctions on the country. Malaysia, Singapore, and Thailand are major trading partners with Burma, and may be reluctant to forswear the economic benefits of bilateral trade and investment. Indonesia's civilian government may be more willing to consider economic pressure on Burma, in part because of its history of military rule and in part because of its concern about Burma's Muslim minority. The conduct and outcome of Burma's 2010 parliamentary elections may prove critical to ASEAN's future relationship with Burma. While few expect a free and fair election, if the results provide some space for opposition views in the government and indicate a possible shift in power to civilian rule, then ASEAN will likely continue its policy of modified "constructive engagement." If, however, the election results provide only a veil of cover to the continuation of military rule, then ASEAN may be willing to consider adopting a tougher policy. In one of the first signs that the elections may lack credibility, in March 2010, the Burmese government enacted rules that require political parties to expel any members who are imprisoned, thus barring Aung San Suu Kyi from participating. U.S. assistance for Southeast Asian multilateral efforts focuses on trade facilitation, counterterrorism, security sector reform, and the environment. Other program areas include good governance, combating transnational crime, and education. U.S. funding for East Asia Pacific regional programs, a large portion of which supports ASEAN, ARF, and APEC objectives, totaled an estimated $20 million in 2009. In the area of security, U.S. foreign assistance supports the Counter-terrorism Regional Strategy Initiative, which focuses on transnational aspects of terrorism and regional responses. U.S. assistance to ARF includes funding for regional programs in counter-terrorism, combating transnational crime, disaster preparedness, and non-proliferation. USAID's Regional Development Mission Asia (RDMA) supports efforts to strengthen the capacity of the ASEAN Secretariat, develop regional economic institutions, and enhance ASEAN's Food Security Information System. RDMA also provides trade-related technical assistance and supports U.S. commitments under the ASEAN-U.S. Enhanced Partnership. In terms of bilateral assistance, the United States provided an estimated $526 million in FY2009 to nine ASEAN countries (Brunei Darussalam does not receive U.S. assistance). Since 2001, the Philippines and Indonesia have received large increases in U.S. assistance, largely for counterterrorism programs. Vietnam also has received large growth in U.S. aid, reflecting significant funding for HIV/AIDS programs. Among providers of bilateral official development assistance (ODA) as measured by the Organization for Economic Cooperation and Development (OECD), Japan is by far the largest donor in the region, followed by the United States, although Japanese ODA includes a relatively large loan component. France, Germany, the United Kingdom, and Australia also provide significant ODA in the region. China has become a key source of financing and assistance for infrastructure, energy, and industrial development in Southeast Asia. ASEAN's most critical external relations continue to be with the United States, the region's primary security guarantor; Japan, the major provider of development assistance; and China, a rising source of aid, trade, and, according to some, strategic influence in the region. Many analysts argue that China's "soft power"—global influence attained through economic, diplomatic, cultural, and other non-coercive means—has grown significantly in the past decade. Furthermore, many observers contend that China's diplomatic outreach, including building links to ASEAN, has surpassed that of the United States during the past several years. Most Southeast Asian leaders and foreign policy experts have welcomed engagement from both the United States and China because of the benefits that strong relations bring; they do not want a single foreign influence to dominate the region, and excluding either power is "not an option." Although Japan is a close development partner in the region, some Southeast Asians would welcome a more robust Japanese diplomatic and security presence. Many analysts view India as an ascendant but still nascent regional power that has an interest in balancing China's rise in the region. The United States exerts the most established and forceful military presence in the region, including alliances with the Philippines and Thailand (Major Non-NATO Allies), strong security cooperation with Singapore, counterterrorism cooperation with Indonesia and Malaysia, and military education programs in Vietnam, Cambodia, and Laos. The United States is also engaged economically. It is ASEAN's fourth-largest trading partner, having been surpassed by China in recent years. The United States is a larger export market than China and the third-largest source of FDI from outside the region after the EU and Japan, followed by China (including Hong Kong) and South Korea. In terms of diplomacy and trade, many in ASEAN considered Washington neglectful of the organization under the Bush Administration, although some foundations were established upon which the Obama Administration has developed its policy of engagement. The United States was the first country to nominate an ambassador to ASEAN (2008). In 2009, the United States acceded to the Treaty of Amity and Cooperation (TAC), which was seen by many as a symbolic recognition of the value of a multilateral approach to regional security issues. The United States was the last major power in the region to sign the treaty. Although the United States has met the requirements for joining the EAS through its accession to the TAC, the Obama Administration remains undecided about its intent to do so. In 2005, the United States created a framework for U.S. assistance to ASEAN—the ASEAN-U.S. Enhanced Partnership—encompassing cooperation on political, security, economic, and development issues. This initiative was followed in 2007 by the ASEAN Development Mission Vision to Advance National Cooperation and Economic Integration (ADVANCE). Among the goals of the mission are to help ASEAN and its members work toward an ASEAN community, support the Enhanced Partnership, and promote the U.S.-ASEAN Trade and Investment Framework Agreement (TIFA), signed in 2006, which could be a precursor to a possible FTA with ASEAN. China's ties with ASEAN have reflected attempts to defuse security tensions in the South China Sea, promote economic integration, support infrastructure development, and cultivate diplomatic influence. Some experts argue that China's power projection in the region amounts to a coordinated attempt to dominate the region economically and ultimately militarily. Others contend that although China's influence is growing, in part due to declining American engagement, Beijing has neither the will nor the capacity to aggressively pursue such a strategy, and is content with the U.S. security role in the region, at least in the medium term. Moreover, many Southeast Asian countries remain wary of China's power and intentions and may seek ways to engage China while hedging against its rise. In 2002, China and ASEAN agreed to the Declaration on Conduct of Parties in the South China Sea as well as several other agreements on economic and agricultural cooperation and non-traditional security threats. China reportedly has favored the ASEAN + 3 (ASEAN, Japan, China, and South Korea) summit process, inaugurated in 1997, over other forums such as the ASEAN Regional Forum and the East Asia Summit. Nonetheless, China has become more active in ARF, which focuses on security issues and dialogue, exceeding U.S. involvement in recent years, according to some analysts. The formation of the EAS in 2005 represented an effort by some countries in the region, including Japan, to balance China's influence by including powers that generally are more aligned with the United States than China on security matters. However, some analysts perceive the U.S. absence in the grouping as working to China's advantage. In 2003, the PRC became the first country to accede to ASEAN's Treaty of Amity and Cooperation. China committed relatively early to a free trade agreement with ASEAN, signing a framework agreement in 2002 that set a 10-year deadline for an FTA, and then negotiating an actual trade pact that came into force in January 2010. In August 2009, China and ASEAN signed a new Investment Agreement to accompany the FTA. A major provider of bilateral development financing in the region and economic assistance to Laos, Cambodia, and Burma, in particular, Chinese leaders announced in April 2009 a plan to set up a $10 billion China-ASEAN Fund on Investment Cooperation to support new infrastructure. Other assistance promised at the time included $15 billion in loans to ASEAN countries to be allocated over three to five years, nearly $40 million to Cambodia, Laos, and Burma "to meet urgent needs," $5 million for the China-ASEAN Cooperation Fund, and rice for a regional emergency rice reserve. Japan has been a close partner to ASEAN and the principal provider of development assistance to Southeast Asia, but its role has been relatively low-profile. In the past few years, Japanese governments have pledged to strengthen ties to the organization and to Indonesia, in part to balance China's rising influence. In November 2009, Japanese Prime Minister Yukio Hatoyama pledged $5.5 billion in assistance to the Mekong Delta region, in large part to bolster Japan's role in a part of Southeast Asia that is becoming economically integrated with China. Tokyo has long been actively involved in the three major satellite groupings—ASEAN + 3, ARF, and the EAS. While stressing the importance of Japanese ties with the United States, Japanese governments have supported the formation of an East Asian Community, which may include members of the EAS (ASEAN + 6) as its core (excluding the United States). ASEAN reportedly is divided over whether to include the United States in such a grouping. Japan acceded to the TAC in 2004 and appointed an ambassador to ASEAN in 2008. In 2005, the Japanese government reportedly pledged $70 million for ASEAN regional integration projects. Cooperation and aid activities with ASEAN have included counterterrorism, environmental protection, and preventing the spread of infectious diseases. In addition to the Japan-ASEAN FTA, Tokyo has signed Economic Partnership Agreements with Singapore, Thailand, Indonesia, Malaysia, and the Philippines, which involve not only trade liberalization but also the areas of labor movement, investment, intellectual property rights, and cultural and educational cooperation. Much of the congressional activity concerning Southeast Asia deals with bilateral relations and issues with individual Southeast Asian nations. In recent years, however, Congress has also sometimes played a leadership role in initiatives toward ASEAN. In 2006, Senator Richard Lugar introduced the U.S. Ambassador for ASEAN Affairs Act ( S. 2697 ), urging the Bush Administration to name an ambassador to the grouping. Its passage helped lead to the naming of Scot Marciel as the first U.S. Ambassador to ASEAN and the first ambassador to the organization from outside the region. There are several ways in which shifts in the U.S. approach toward ASEAN could be of importance to Congress. Congress may also seek to provide further assistance to support ASEAN's Secretariat and organizational capacity building. In trade policy, Congress may consider, on the one hand, pushing for further economic engagement and the passage of FTAs or other agreements with ASEAN and/or its member countries. In October 2009, Senator Richard Lugar introduced S.Res. 311 , calling for the start of discussions on a free trade agreement with ASEAN. Stalled FTA discussions with Malaysia and Thailand could potentially be considered by Congress, although this does not appear to be on the near-term agenda. On the other hand, Congress could prevent further FTA negotiations with Southeast Asian countries or ensure that labor and environmental concerns are addressed in such negotiations. Shifts in U.S. policy toward Burma and the implications for relations with ASEAN have been a major focus in 2009 and will likely continue to be of congressional interest. Senator Jim Webb, chair of the Senate East Asia and Pacific Affairs Subcommittee, in August 2009 became the first Member of Congress in 10 years to visit Burma. Senator Webb also traveled to Thailand, Cambodia, Laos and Vietnam, where he reportedly told leaders that ASEAN should call for the release of Aung San Suu Kyi. Over recent years, Congress has been a leader of the U.S. sanctions policy toward the Burmese regime through legislation such as the Burmese Freedom and Democracy Act of 2003 and the Tom Lantos Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2008. The conduct and outcome of parliamentary elections set to be held in Burma in 2010 may play a significant role in how the Obama Administration implements its new Burma policy, and in its relations with ASEAN vis-à-vis Burma. Congress may seek to play an active role in the development of U.S. policy toward Burma and ASEAN, both before and after Burma's elections. The development of ASEAN's human rights body may also merit attention. Congress has frequently considered legislation and resolutions concerning human rights conditions in Southeast Asia, and ASEAN's emerging human rights approaches may be of interest in future consideration of how to promote human rights in the region.

The Association of Southeast Asian Nations (ASEAN) is Southeast Asia's primary multilateral organization. Established in 1967, it has grown into one of the world's largest regional fora, representing a strategically important group of 10 nations that spans critical sea lanes and accounts for 5% of U.S. trade. This report discusses U.S. diplomatic, security, trade, and aid ties with ASEAN, analyzes major issues affecting Southeast Asian countries and U.S.-ASEAN relations, and examines ASEAN's relations with other regional powers. Much U.S. engagement with the region occurs at the bilateral level, but this report focuses on multilateral diplomacy. The United States has deep-seated ties in Southeast Asia, and it has viewed ASEAN as a useful organization since its inception during the Cold War. Today, U.S. policy toward ASEAN and Southeast Asia is cast against the backdrop of great power rivalry in East Asia, and particularly China's emergence as an active diplomatic actor in its geographic backyard. Some worry that the United States, preoccupied with other priorities, has been neglectful of ASEAN and of Asian multilateral diplomacy in recent years. The Obama Administration has expressed an intent to work more closely with multilateral organizations, particularly ASEAN. A number of steps in this direction include Secretary of State Hillary Clinton's visit to the ASEAN Secretariat in Jakarta in February 2009, the U.S. accession to ASEAN's Treaty of Amity and Cooperation (TAC) in July 2009, and President Obama's attendance at the ASEAN leaders meeting in November 2009. Congress has frequently played an important role in shaping U.S. diplomatic, security, and economic relations with Southeast Asia and ASEAN. Major U.S. and congressional interests in Southeast Asia include maritime security, the promotion of democracy and human rights, the encouragement of liberal trade and investment regimes, counterterrorism, combating narcotics trafficking, environmental preservation, and many others. In October 2009, Senator Richard Lugar introduced S.Res. 311, calling for the start of discussions on a free trade agreement with ASEAN. In August 2009, Senator Jim Webb visited five countries in mainland Southeast Asia and was the first Member of Congress in 10 years to visit Burma. The United States exerts a strong military and economic presence in Southeast Asia, and through diplomacy it seeks to remain a major power—perhaps the major power—in the region. ASEAN, however, has been active in recent years in exploring a variety of diplomatic architectures for East Asia and the Pacific. ASEAN is at the center of several broader security- and trade-related groupings in the Asia-Pacific region, through which it has aimed to maintain regional multi-polarity or a balance of powers among itself and other states including the United States, China, and Japan. ASEAN is also the nexus for discussion of regional economic integration. ASEAN has launched an internal free trade accord, the ASEAN Free Trade Agreement (AFTA), which will go into full effect in 2015. ASEAN has also concluded FTAs with many external trade partners, though not with the United States. ASEAN has also been exploring ways to advance the ultimate creation of a broader European Union-like East Asia Community. Some within the group—but not all—support the inclusion of the United States in such a community. Human rights conditions, particularly in some ASEAN members such as Burma, have long been a source of friction between the organization and the United States. ASEAN's new Charter, enacted in 2007, attempts to bring more pressure to bear upon recalcitrant member states. However, ASEAN still operates on principles of consensus and non-interference in the internal affairs of its members, so it remains unclear how active an actor it will be in this area.

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The "state sponsors of terrorism list" is mandated under Section 6(j) of the Export Administration Act of 1979, as amended ( P.L. 96-72 ; 50 U.S.C. app. 2405(j)), under which the Secretary of State makes a determination when a country "has repeatedly provided support for acts of international terrorism." Cuba has remained on the list since 1982, and at present there are four other countries on the list—Iran, North Korea, Sudan, and Syria. Under various provisions of law, certain trade benefits, most foreign aid, support in the international financial institutions, and other benefits are restricted or denied to countries named as state sponsors of international terrorism. Under the authority of Section 6(j) of the Export Administration Act, validated licenses are required for exports of virtually all items to countries on the terrorism list, except items specially allowed by public law, such as informational materials, humanitarian assistance, and food and medicine. Being listed as a sponsor of international terrorism also restricts bilateral assistance in annual foreign assistance appropriations acts, as required most recently in Section 527 of the Foreign Operations, Export Financing and Related Programs Appropriations Act, 2006 ( P.L. 109-102 ). Section 502 of the Trade Act of 1974 ( P.L. 93-618 ; 19 U.S.C. 2462) makes a country ineligible for the Generalized System of Preferences (GSP) if it is on the Section 6(j) terrorism list. Section 620A of the Foreign Assistance Act of 1961 (P.L. 87-195; 22 U.S.C. 2371) also prohibits assistance authorized under the act to the government of a country that "has repeatedly provided support for acts of international terrorism." Likewise, Section 40 of the Arms Export Control Act (P.L. 90-629; 22 U.S.C. 2780) prohibits the export or other provision of munitions to a country if the government "has repeatedly provided support for acts of international terrorism." Cuba's retention on the terrorism list has received more attention in recent years in light of increased support for legislative initiatives to lift some U.S. economic sanctions under the current embargo. Should U.S. sanctions be removed, a variety of trade and aid restrictions would nonetheless remain in place because of Cuba's retention on the terrorism list. At this juncture, however, sanctions have not been removed and Cuba remains subject to a comprehensive U.S. trade and financial embargo (pursuant to the Trading with the Enemy Act and the Foreign Assistance Act of 1961). In addition to the terrorism list sanctions imposed by the Export Administration Act, Section 40A of the Arms Export Control Act (P.L. 90-629; 22 U.S.C. 2781) prohibits the sale or export of defense articles and defense services if the President determines and certifies to Congress, by May 15 of each year, that the country "is not cooperating fully with United States antiterrorism efforts." This list has been issued annually since 1997, and currently includes Cuba, as well as Iran, North Korea, Syria, and Venezuela. Under Section 6(j) of the Export Administration Act, a country's retention on the terrorism list may be rescinded in two ways. The first option is for the President to submit a report to Congress certifying that 1) there has been a fundamental change in the leadership and policies of the government of the country concerned; 2) the government is not supporting acts of international terrorism; and 3) the government has provided assurances that it will not support acts of international terrorism in the future. The second option is for the President to submit a report to Congress, at least 45 days before the proposed recision will take effect, justifying the recision and certifying that 1) the government concerned has not provided any support for international terrorism during the preceding six-month period; and 2) the government has provided assurances that it will not support acts of international terrorism in the future. Over the years, three countries have been removed from the terrorism list. South Yemen was removed in 1990 when it ceased to exist upon merging with North Yemen. Iraq was removed from the list in 1982 and again in 2004 (after having been added back in 1990). Libya was removed in May 2006. Although Section 6(j) does not set forth a procedure for Congress to block the President's removal of a country from the terrorism list, Congress could pass legislation on its own to block the removal. In contrast, Section 40 of the Arms Export Control Act, which prohibits the export of munitions to governments repeatedly providing support for international terrorism, sets forth a specific procedure for Congress to consider a joint resolution to block the President's removal of a country from the terrorism list. In addition, both Section 40 of the Arms Export Control Act and Section 620A of the Foreign Assistance Act of 1961 (which prohibits most assistance to countries supporting international terrorism) provide presidential waiver authority for national security interests or humanitarian reasons. Effective March 1, 1982, the Reagan Administration added Cuba to the list of state sponsors of terrorism pursuant to Section 6(j) of the Export Administration Act of 1979. Press reports at the time indicated that the Commerce Department notified Congress on February 26, 1982, that Cuba was being added to the list of countries that sponsor international terrorism, but that no explanation for the addition was given. The Commerce Department published an interim rule in the Federal Register on April 19, 1982, stating that it was amending the export control regulations, with an effective date of March 1, 1982, to add a statement that "Cuba has been designated by the Secretary of State as a country that has repeatedly provided support for acts of international terrorism." The addition of Cuba was not considered significant at the time since the United States already had comprehensive economic sanctions on Cuba dating back to the early 1960s; as a result, the economic sanctions associated with being added to the terrorism list would have had no practical significance. Although the Administration provided no explanation in the Federal Register notice as to why Cuba was added to the terrorism list, various U.S. government reports and statements under the Reagan Administration in 1981 and 1982 alleged Cuba's ties to international terrorism. In addition, a 1998 State Department chronology on U.S.-Cuban relations and a 2003 State Department document provide further explanation of why Cuba originally was designated a state sponsor of terrorism. The Central Intelligence Agency's Patterns of International Terrorism 1980 , published in June 1981, stated: "Havana openly advocates armed revolution as the only means for leftist forces to gain power in Latin America, and the Cubans have played an important role in facilitating the movement of men and weapons into the region. Havana provides direct support in the form of training, arms, safe havens, and advice to a wide variety of guerrilla groups. Many of these groups engage in terrorist operations." In January 1982, President Reagan stated in his State of the Union address: "Toward those who would export terrorism and subversion in the Caribbean and elsewhere, especially Cuba and Libya, we will act with firmness." In February 1982, the Department of State published a research paper on "Cuba's Renewed Support for Violence in Latin America," originally presented in December 1981 to the Subcommittee on Western Hemisphere Affairs of the Senate Foreign Relations Committee, which detailed Cuba's support for armed insurgencies and terrorist activities in Latin America and the Caribbean. The State Department asserted in the paper that Cuba has "encouraged terrorism in the hope of provoking indiscriminate violence and repression, in order to weaken government legitimacy and attract new converts to armed struggle." The paper maintained that Cuba was most active in Central America, especially Nicaragua, where it wanted to exploit and control the revolution, and El Salvador and Guatemala, where it wanted to overthrow the governments. Cuba also was reported "to provide advice, safe haven, communications, training, and some financial support to several violent South American organizations." This included training Colombian M-19 guerrillas, with the objective of establishing a "people's army." The State Department's Patterns of International Terrorism: 1982 stated that "both Cuba and the Soviet Union continue to provide financial and logistical support and training to leftist forces in the area [Central America] that conduct terrorist activity." The report further stated: "In its efforts to promote armed revolution by leftist forces in Latin America, Cuba supports organizations and groups that use terrorism to undermine existing regimes. In cooperation with the Soviets, the Cubans have facilitated the movement of people and weapons into Central and South America and have directly provided funding, training, arms, safe haven, and advice to a wide variety of guerrilla groups, and individual terrorists." A 1998 State Department chronology of U.S.-Cuban relations from 1958 to 1998 notes that the United States added Cuba to the terrorist list in 1982 because of its support for the M-19 guerrilla group in Colombia. In January 1982, State Department officials asserted that Cuba was involved in providing arms to the M-19 in exchange for facilitating U.S.-bound drug smuggling. M-19 was responsible for hijacking a plane from Colombia in January 1982; the incident ended when the hijackers were given safe passage to Cuba. A 2003 State Department document broadened the explanation of why Cuba was designated a state sponsor of terrorism in 1982. Reflecting the rationale set forth in the documents from 1981 and 1982 described above, the State Department maintains that Cuba was added to the list because of its support for terrorist groups in Latin America. It contends that Cuba was providing support for terrorist organizations at the time, including the Puerto Rican nationalist group known as the Armed Forces of National Liberation (FALN), the Farabundo Marti National Liberation Front (FMLN) in El Salvador, and the Sandinista National Liberation Front (FSLN) in Nicaragua. It also asserts that "Cuba helped transship Soviet arms to Nicaragua and El Salvador for use by terrorist organizations, trained anti-American insurgents elsewhere in Latin America, and supported insurgencies or war efforts in Angola and Ethiopia." According to the State Department's Country Reports on Terrorism 2005 report (issued in April 2006), Cuba has "actively continued to oppose the U.S.-led Coalition prosecuting the global war on terror and has publicly condemned various U.S. polices and actions." The report also asserted that "Cuba did not undertake any counterterrorism efforts in international and regional fora." The State Department report also noted that Cuba maintains close relationships with other state sponsors of terrorism such as Iran and North Korea and asserted that it has provided safe haven for members of several Foreign Terrorist Organizations. The report maintained that Cuba provides safe haven to various Basque ETA members from Spain and to members of two Colombian insurgent groups, the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN), although the report also maintained that there is no information concerning terrorist activities of these or other organizations in Cuba. The State Department's 2002 and 2003 terrorism reports acknowledged that Colombia acquiesced to this arrangement and that Colombia publicly said that it wanted Cuba's continued mediation with the ELN in Cuba. The 2005 report also maintained that Cuba continues to permit U.S. fugitives from justice to live legally in Cuba but noted that "Cuba has stated that it will no longer provide safe haven to new U.S. fugitives who may enter Cuba." The report asserted that the U.S. government periodically requested Cuba to return wanted fugitives to the United States but that Cuba continues to be non-responsive. (The 2004 terrorism report contended that more than 70 fugitives from U.S. justice were in Cuba.) Many of the fugitives are accused of hijacking or committing violent actions in the United States, including Joanne Chesimard, who is wanted for the murder of a New Jersey State Trooper in 1973. Most of the of the fugitives entered Cuba in the 1970s. The report also noted that Cuba publicly demanded return of five of its agents convicted of espionage in the United States, the so-called "Cuban Five." The 2005 reported noted that Cuba demanded that the United States surrender to Cuba Luis Posada Carriles, alleged to be responsible for a plot to assassinate Fidel Castro in 2000 and for the 1976 bombing of a Cubana Airlines plane in 1976. In May 2005, Posada was arrested by the U.S. Immigration and Customs Enforcement (ICE) and charged with entering the United States illegally. He remains at a federal immigration facility in El Paso, Texas. A Department of Homeland Security press release indicated that ICE does not generally deport people to Cuba or countries believed to be acting on Cuba's behalf. Posada had been imprisoned in Venezuela for the bombing of the Cuban airliner but reportedly was allowed to "escape" from prison in 1985 after his supporters paid a bribe to the prison warden. In November 2000, Posada had been imprisoned and ultimately convicted in Panama, along with three Cuban Americans, for weapons charges in the plot to kill Fidel Castro. In August 2004, however, then Panamanian President Mireya Moscoso pardoned Posada along with the three U.S. citizens. (For more on the Posada case, see CRS Report RL32488, Venezuela: Political Conditions and U.S. Policy , by [author name scrubbed].) Until the 2005 terrorism report, past State Department annual reports on global terrorism did not mention controversial allegations first made by some State Department officials in 2002 that Cuba has been involved in developing biological weapons. The 2005 report, however, asserted that while Cuba invests heavily in biotechnology, "there is some dispute about the existence and extent of Cuba's offensive biological weapons program." The controversial allegations date back to May 2002, when then Under Secretary of State for Arms Control and International Security John Bolton stated that "the United States believes that Cuba has at least a limited offensive biological warfare research-and-development effort" and "has provided dual-use technology to other rogue states." Bolton called on Cuba "to cease all BW-applicable cooperation with rogue states and to fully comply with all of its obligations under the Biological Weapons Convention." When questioned on the issue, Secretary of State Powell maintained that Under Secretary Bolton's statement was not based on new information. Powell asserted that the United States believes Cuba has the capacity and the capability to conduct research on biological weapons but emphasized that the Administration had not claimed that Cuba had such weapons. Some observers viewed Powell's statement as contradicting that of Under Secretary Bolton. In late June 2003, news reports stated that an employee of the State Department's Bureau of Intelligence and Research maintained that Under Secretary Bolton's assertions about Cuba and biological weapons were not supported by sufficient intelligence. In March 30, 2004, congressional testimony before the House International Relations Committee, Under Secretary of State John Bolton asserted that "Cuba remains a terrorist and BW threat to the United States." According to Bolton: "The Bush Administration has said repeatedly that we are concerned that Cuba is developing a limited biological weapons effort, and called on Fidel Castro to cease his BW aspirations and support of terrorism." Bolton went on to add a caveat, however, that "existing intelligence reporting is problematic, and the Intelligence Community's ability to determine the scope, nature, and effectiveness of any Cuban BW program has been hampered by reporting from sources of questionable access, reliability, and motivation." The New York Times reported on September 18, 2004, that the Bush Administration, using more stringent intelligence standards, had "concluded that it is no longer clear that Cuba has an active, offensive bio-weapons program." An August 2005 State Department report to Congress indicated that while observers agree that Cuba has the technical capability to pursue some aspects of offensive biological warfare, there is disagreement over whether Cuba has an active biological warfare effort now or even had one in the past. In general, those who support keeping Cuba on the terrorism list argue that there is ample evidence that Cuba supports terrorism. They point to the government's history of supporting terrorist acts and armed insurgencies in Latin America and Africa. They point to the government's continued hosting of members of foreign terrorist organizations and U.S. fugitives from justice. Critics of retaining Cuba on the terrorism list maintain that it is a holdover of the Cold War. They argue that domestic political considerations keep Cuba on the terrorism list, and maintain that Cuba's presence on the list diverts U.S. attention from struggles against serious terrorist threats. Those who concur with the Administration's current rationale for keeping Cuba on the state sponsor of terrorism list point to strong anti-American statements made by Fidel Castro and other Cuban officials. Fidel Castro stated that the September 11, 2001 terrorist attacks in the United States were in part a consequence of the United States having applied "terrorist methods" for years. Cuba's subsequent statements became increasingly hostile, with Cuba's mission to the United Nations describing the U.S. response to the U.S. attacks as "fascist and terrorist" and asserting that the United States was using the attack as an excuse to establish "unrestricted tyranny over all people on Earth." Castro himself said that the U.S. government was run by "extremists" and "hawks" whose response to the attack could result in an "infinite killing of innocent people." Those who question Cuba's retention on the terrorism list point out that Cuba has ratified all 12 international counterterrorism conventions in. They further point to Cuba's expression of sympathy and offer of support to the United States in the aftermath of the World Trade Center and Pentagon attacks in 2001, including the offer of medical and humanitarian assistance and the use of airspace and airports to receive planes headed to the United States. (Cuba's critics view these offers as gratuitous.) Those questioning Cuba's retention on the terrorism list also contend that Cuba has made repeated offers to the United States since November 2001 for a bilateral agreement to fight terrorism, but that the United States has not responded. Some who question the Administration's rationale for keeping Cuba on the terrorism list, while acknowledging Cuba's history of supporting revolutionary movements and governments in Latin America and Africa point to several versions of the State Department's Patterns of Global Terrorism report in the 1990s that stated that Cuba no longer actively supported armed struggle in Latin America or other parts of the world. In reference to the Administration's allegations that Cuba hosts members of foreign terrorist organizations, some observers maintain that this is line with Cuba's long-time hostility toward the United States and the remnants of its very active involvement in supporting terrorist groups in the past. On the other side, some observers maintain that Cuba has shed its past as a supporter of terrorist and insurgent groups, and members of terrorist organizations who reside in Cuba do so pursuant to agreements or the acquiescence of the home countries of the terrorist organizations. Some observers maintain the presence of Basque ETA members in Cuba stems from a 1984 agreement with the Spanish and Panamanian governments. Cuba asserts that the ETA members have never used Cuban territory for terrorist activities against Spain or any other country and that the issue is a bilateral matter between Cuba and Spain. On the other side, some observers maintain that after the 1984 agreement, some 20 ETA members sought by the Spanish authorities for killings in Spain were known to have found refuge and support in Cuba. Moreover, the Spanish government requested the extradition of an ETA suspect from Cuba in August 2003, and according to the State Department, publicly requested Cuba to deny ETA members sanctuary in November 2003. With regard to Colombian guerrilla group members in Cuba, the State Department annual reports on global terrorism for 2002 and 2003 acknowledged that Colombia acquiesced to the presence of Colombian guerrillas in the country, and has publicly said that it wants Cuba's continued mediation with the ELN in Cuba. The Cuban government maintains that it has been actively involved in hosting peace talks, and that its contributions to peace talks have been acknowledged by Colombia and the United Nations. On the other hand, some observers contend that Cuba's role in supporting the terrorist activities of the FARC was demonstrated by the arrest of three alleged Irish Republican Army (IRA) operatives in Colombia in August 2001—one of whom, Niall Connolly, had lived in Havana as Sinn Fein's representative since 1996. The three went into hiding in June 2004 after they had been acquitted by a lower court on charges of training the FARC in bombing techniques. In December 2004, however, they were subsequently convicted of the charges by a Colombian appeals court in absentia and sentenced to 17 years in prison. Connolly, who has denied being an IRA member, maintains that he was in Colombia to observe the conflict resolution process. The three announced that they were back in Ireland in early August 2005, days after the IRA announced that it was ending its armed campaign. Supporters of keeping Cuba on the terrorist list point to the more than 70 fugitives from U.S. justice residing in Cuba. These include such fugitives as: Joanne Chesimard, who was convicted for the killing of a New Jersey state trooper in 1973; Charles Hill and Michael Finney, wanted for the killing of a state trooper in new Mexico in 1971; Victor Manuel Gerena, member of a militant Puerto Rican separatist group, wanted for carrying out the robbery of a Wells Fargo armored car in Connecticut in 1983; and Guillermo Morales, another member of a Puerto Rican militant group, who was convicted of illegal possession of firearms in New York in the 1970s. Those who oppose this rationale for keeping Cuba on the terrorist list argue that this has nothing to do with terrorism and that many countries (e.g. Mexico and El Salvador) harbor fugitives from U.S. justice, but are not on the terrorist list. Moreover, they argue that Cuba has expressed interest in considering negotiation of the mutual extradition of fugitives. For example, Cuba would like to see the extradition of Orlando Bosch, a Miami resident, and Luis Posada Carriles. Both are accused of responsibility for the bombing a Cuban airliner in 1976, while Posada, as described above, was imprisoned in Panama for several years on weapons charges in a plot to assassinate Fidel Castro. Opponents of this rationale also point out that Cuba has vowed not to allow new U.S. fugitives from justice to live in Cuba. Several years ago it deported two fugitives from justice to the United States; U.S. drug fugitive Jesse James Bell was deported in January 2002, and William Joseph Harris, wanted on child abuse charges, was deported in December 2001. The level of terrorist activity by countries on the state sponsors of terrorism list varies considerably. As noted above, in addition to Cuba, there are four other countries on the list—Iran, Syria, Sudan, and North Korea. Iran is considered the most active state sponsor of terrorism, while countries believed to be less active supporters of terrorism include Sudan and Cuba. Given this wide range of activity, some suggest that there should be a tiered approach with sanctions calibrated to the degree of support for terrorism, while others maintain that any level of support for terrorism is unacceptable and must be met with strong sanctions. Some suggest that should there be more flexibility in the ability to add and remove countries from the terrorism list in order to bring about behavioral changes in the states that are involved in terrorist activities; others believe that there is already sufficient flexibility in the legislative conditions set forth in the Export Administration Act for the Administration to add and remove countries according to their behavior.

Cuba was first added to the State Department's list of states sponsoring international terrorism in 1982, pursuant to Section 6(j) of the Export Administration Act of 1979 (P.L. 96-72). At the time, numerous U.S. government reports and statements under the Reagan Administration alleged Cuba's ties to international terrorism and its support for terrorist groups in Latin America. Cuba had a history of supporting revolutionary movements and governments in Latin America and Africa, but in 1992 Fidel Castro stressed that his country's support for insurgents abroad was a thing of the past. Cuba's policy change was in large part a result of Cuba's diminishing resources following the breakup of the Soviet Union and the loss of billions of dollars in annual subsidies to Cuba. Cuba remains on the State Department's terrorism list with four other countries: Iran, Syria, Sudan, and North Korea. According to the State Department's Country Reports on Terrorism 2005 (issued in April 2006), Cuba has "actively continued to oppose the U.S.-led Coalition prosecuting the global war on terror and has publicly condemned various U.S. polices and actions." The State Department report also asserted that Cuba maintains close relationships with other state sponsors of terrorism such as Iran and North Korea and contended that Cuba has provided safe haven for members of several Foreign Terrorist Organizations. The report also maintained that Cuba continues to provide safe haven to U.S. fugitives from justice but noted that "Cuba has stated that it will no longer provide safe haven to new U.S. fugitives who may enter Cuba." Cuba's retention on the terrorism list has received more attention in recent years in light of increased support for legislative initiatives to lift some U.S. sanctions under the current economic embargo. Should U.S. restrictions be lifted, a variety of trade and aid restrictions would remain in place because of Cuba's retention on the terrorism list. Supporters of keeping Cuba on the terrorism list argue that there is ample evidence that Cuba supports terrorism. They point to the government's history of supporting terrorist acts and armed insurgencies in Latin America and Africa. They stress the government's continued hosting of members of foreign terrorist organizations and U.S. fugitives from justice. Critics of retaining Cuba on the terrorism list maintain that the policy is a holdover from the Cold War and that Cuba no longer supports terrorism abroad. They argue that domestic political considerations are responsible for keeping Cuba on the terrorism list and question many of the allegations made in the State Department report. For additional information on Cuba, see CRS Report RL32730, Cuba: Issues for the 109th Congress, by [author name scrubbed]. For further information on state-sponsored terrorism and U.S. policy, see CRS Report RL33600, International Terrorism: Threat, Policy, and Response, by [author name scrubbed]; and CRS Report RL32417, The Department of State's Patterns of Global Terrorism Report: Trends, State Sponsors, and Related Issues, by [author name scrubbed].

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The AMT provides for an alternative tax calculation on a broader tax base than theregular tax. Individuals add back a variety of provisions including not only business provisions but certain itemized deductions (mainly state and local taxes, some medicalexpenses and miscellaneous deductions), the standard deduction, and personal exemptions. After an exemption of $45,000 for joint returns and $33,750 for single returns, the first$175,000 is taxed at 26% and the remainder is taxed at 28%. Exemptions are phased out. Theindividual compares AMT liability and regular tax liability and pays the higher one. Whilethe AMT base is broader than the regular tax base, there are many provisions that are notincluded in its base, notably the benefits of lower capital gains tax rates and the exclusion fortax exempt bonds, and the itemized deduction for home mortgage interest. Indeed, theelimination of the capital gains exclusion in 1986 caused a significant contraction in thenumber of taxpayers subject to the AMT; the current rate preferences are not part of the AMT. Credits are automatically included in the base (i.e., effectively disallowed), although underprovisions adopted as part of H.R. 1836 , this rule does not apply to the mostimportant credit, the child credit. (1) However, unlike the rest of the income tax, the AMT exemptions are not indexed to inflation. The result has been an increase in the number of taxpayers who are covered by theAMT. (2) In 1987, about 140,000 returns paid the AMT, constituting 1/10 of one percent of allreturns filed. This number was below the 4/10 of a percent of returns that paid the tax in 1984and fell largely because the deduction for capital gains was eliminated by the 1986 tax act andtherefore automatically affected coverage under the AMT. Inflation, however, took its toll. By 1999, the AMT covered 823,000 returns, constituting 6/10 of a percent of all returns filed,an increase in percentage share of 600% between 1987 and 1999. This effect occurred eventhough the exemptions were increased in 1990. More growth is ahead, however. In 2009, the Joint Tax Committee projects that over 9 million taxpayers will pay the AMT, constituting 6.3% of all tax returns filed, an increase inpercentage share of over a thousand percent from 1990 to 2009. The AMT would probablyconstitute a larger share of joint returns filed, since incomes are higher for these returns thanfor single returns. The AMT would also constitute a larger portion of returns with tax liability;since typically about a quarter of returns filed pay no tax, taxpayers on the AMT wouldconstitute over 8% of returns with tax payments. Another 6 million returns would have been subject to limits on tax credits, such as the child credit and education credits enacted in 1997;this surge in the AMT coverage would have occurred in large part in 2002, but H.R. 1836 made the most important credit (the child credit) permanently availaleunder the AMT. While the AMT will still be concentrated among higher income individuals, it will gradually reach further down into the income distribution. This shift in the distribution isshown in Table 1. Note that this table understates the coverage of the AMT and its reach intothe middle income classes, because it does not include those taxpayers whose credits are stilllimited by the AMT (such as education tax credits). But it does illustrate how the failure toindex exemptions will substantially expand the AMT. As this table illustrates, the shift of exposure to the AMT from the very highest income classes to the middle and upper middle income classes is dramatic over time even withoutthe tax cuts in H.R. 1836 . In 1998, almost half of AMT taxpayers fell into the1.6% of tax-filers with adjusted income over $200,000; and over three-quarters fell into thetop 8% of taxpayers who had income over $100,000. In 2008, less than 15% of AMTtaxpayers have incomes over $200,000 and about half have incomes of $100,000 or more. Moreover, these effects occur despite the fact that taxpayers in these income classes areaccounting for a larger share of total taxpayers as incomes rise over time. Table 1: Percentage Distribution of AMT Taxpayers by Income Class (Excluding the Effects of Limits on Credits), Prior to H.R.1836 Source: Data from and CRS calculations based on data from Joint Committee on Taxation. A comparison of the fraction of taxpayers on the AMT in each income bracket shows a similar dramatic shift. While the shares increase in all of the middle and upper brackets, thedramatic changes are in the middle income brackets. For example, the share of taxpayers onthe AMT at income between $75,000 and $100,000, which most people would consider in themiddle class would increase from 1% to 20%. These effects understate the shift of the influence of the AMT toward the middle classthat is expected in the future because they do not include the interaction with the tax creditsthat were adopted in 1997. Under the AMT provisions, credits are limited to the excess ofregular tax over AMT liability except for the child credit which is now specifically excluded. For 2008, there would have been another 6 million returns that are constrained by the taxcredit; however, most of these will probably no longer be affected because they reflect effectsof the child credit. The Treasury Department recently completed a study of the AMT that showed a significant growth in the share of AMT taxpayers, inclusive of the effects of the credit. (3) Table2 shows these effects for 2000, 2005. and 2010. Overall, 15.7% of taxpayers will be coveredby the AMT in 2010, and the shares rise to as much as 64%. These numbers will be smallerafter considering the effects of H.R. 1836 , because of the adjustment in thecredit, but larger because of the lower rates and other tax cut provisions. Table 2: Percentage Distribution of AMT Taxpayers by Income Class (Including the Effects of Limits on Credits), Prior to H.R.1836 a - greater than 75% b - less than 0.05% Source: Treasury Department The cost of correcting the AMT is significant. According to data from the Joint Committee on Taxation, indexing AMT exemptions would cost $13.9 billion by 2008. Thiscost would be larger in the wake of the recent tax changes. Eliminating the credit limitprovision would cost about $1 billion currently, but would cost many billions of dollars by2008 or 2009. Eliminating the credit limit provision and adding standard deductions wouldcost the U.S. Treasury $26 billion by 2009 and $96 billion for the period 1999-2009. (4) According to the Treasury study AMT tax liability was projected projected to rise from $6.4billion in 2001 to $38.2 billion in 2010 before considering H.R. 1836 , with atotal amount of $182 billion over the ten year period. This number will now be higher dueto the rate reductions and marriage penalty provisions in H.R. 1836 . Clearly, the AMT will become increasingly important in the years to come, in the number of taxpayers covered and revenue cost of altering the AMT. And any tax cut thatreduces regular tax liabilities and does not also alter the AMT will interact with the AMT intwo ways: it will increase the number of taxpayers on the AMT and the number affected bythe credit limit, and it will cause some or all of the tax cut not to be received by certainfamilies. Tax provisions that are aimed at reducing taxes for joint returns may particularly interact with the AMT because married couples have a greater number of dependents, which increasesthe likelihood that taxpayers will be under the AMT. Married couples also tend to havehigher incomes and, while their AMT exemptions are also higher, may be more likely to beaffected by the AMT. The interaction is also affected by how the tax change is distributedacross the income classes, since only joint returns with more than $45,000 of taxable incomeare potentially subject to the AMT. Treasury data show that 21% of joint returns will beaffected by the AMT in 2010, compared to 15.7% for the overall taxpaying population. Forjoint returns with dependents, the share affected by the AMT rises to 39%. Thus, tax cutsdirected at joint returns are particularly likely to be restricted due to the AMT. A marriage penalty arises for some families because family income is combined andsubject to progressive tax rates. Since the standard deductions and rate brackets, while largerthan those of singles, are not twice as large, marriage can cause the loss of standarddeductions and cause some income to be taxed at higher rates. Other couples, however,experience bonuses; this outcome tends to arise when earnings are relatively unequal or whenthere is only one earner, because the exemption amounts and rate brackets are larger for thejoint returns filed by married couples than for singles' returns. H.R. 1836 proposed to address the marriage penalty for most taxpayers, granting bonuses to many taxpayers who formerly had penalties and expanding the bonusesof those with bonuses. (5) About 60% of joint returns are in the 15% bracket and would have any penalties that did exist eliminated (and bonuses increased) merely through increasing the standard deductionto twice that of single returns. Under H.R. 6 , a stand alone marriage penalty billpassed earlier this year by the House, this provision was estimated to cost $6.3 billion by2009. Another 26% are in the 28% bracket and would have the remainder of any penaltieseliminated (and bonuses increased) through both the standard deduction and the widening ofthe first bracket to twice that of single returns. This provision would have cost $ 26.3 billionby 2009. Thus, 86% of joint returns, ignoring the earned income tax credit and the AMT,would be covered by these provisions. There were also some provisions for partially reducingthe marriage penalty for the earned income tax credit, costing $1.4 billion by 2009. Someindividuals whose income is taxed above the 28% bracket currently would also have had theirpenalties eliminated, and since the next rate bracket is only slightly higher (31%) thisapproach would have also most marriage penalties for the vast majority of married couples(96% are in the 31% bracket or below). (6) These numbers do not take into account the rate reductions and the effect of thosereductions on the AMT. H. R. 1836, which included the provisions in H.R. 6 ,will have a slower phase-in and also a sunset. Because the estimates are calculated with asignificant rate reduction, the cost will be smaller, reaching about $3.1 billion for the standarddeduction and $4.7 billion for the increase in the 15% bracket. The increase in the bracketwidth would shift income from a 15% bracket to a 28% bracket under current law and to a25% bracket with the proposed rate revisions. Adjusting for this effect would make the costunder the new rate structure 10/13 of the cost under the old and reduce the estimate to $20billion, only accounting for a small part of the difference. About one fourth of the current15% bracket is being shifted to a 10% rate, lowering the cost of the standard deduction ($6.3billion) to at least 0.1375/0.15 under the new system compared to the old. But thisadjustment would shift the cost to $5.7 billion not the $3.1 billion reported. The cost of theearned income credit provisions is actually higher under H.R. 1836 than under H.R. 6 . The only remaining explanation is that large numbers of joint returnswill shift into the AMT because of the new rate schedule and will not become eligible formarriage penalty relief. A large part of this effect is that more individuals will be pushed into the Alternative Minimum Tax because of the rate reductions and these individuals will not benefit from themarriage penalty relief. As a result, many joint returns will not receive marriage penaltyreduction benefits. Marriage penalties still exist for higher income taxpayers as well. However, the flatter rates themselves would also reduce marriage penalties for thoseindividuals who remain on the regular tax. The Senate marriage penalty proposal in the 106th Congress initially proposed to expand the 28% bracket, which would increase the coverage of high income taxpayers. An even largerfraction of this group would ultimately fall under the AMT. The amount by which marriage penalties are reduced by the proposed legislation will declined over time because of the AMT. If a taxpayer is on the AMT, marriage penalty reliefprovisions would not have benefitted these taxpayers. Moreover, for taxpayers subject tocredit limits, a change in the regular tax would have been offset by a loss in the credit, so thetaxpayer would not have benefitted from the tax revision. And, the tax cuts in the marriagepenalty legislation were likely to substantially increase the number of taxpayers on the AMT,a number that, as noted earlier, is already growing rapidly. In 2000, the Treasury Department has estimated that the marriage penalty alone (from the stand alone provisions) would have increased the number of taxpayers on the AMT orconstrained by it via credits by 49% by 2010, raising the total number from 17 million to 25million. (Of the 17 million taxpayers already affected, 12.6 million are on the AMT and theremainder constrained by the credit). Since there were 91 million taxable returns in 1996,which would probably not grow much over 1% or 2% per year, 22% to 24% of taxpayerswould then be on the AMT or affected by the credit - a provision that currently affects lessthan one percent of taxpayers. Thus, it is clear that the growth in the AMT coverage wouldhave been sharply increased by this legislation. The revenue collected by the AMT would alsohave increased, by about 48%, from $38.2 billion per year to $46.5 billion. These resultswould have been even larger with the rate cuts. Treasury estimates indicate that 28% of the marriage penalty tax cuts in the 106th Congress's version of H.R. 6 over the next ten years are taken back by the AMT,making the net budget effect $67 billion smaller. (7) This take-back rate rises rapidly andreaches 44% by 2008. Thus, absent revisions to the AMT, about half the tax cuts in themarriage penalty legislation would have disappeared after ten years. Eight years after thelegislation is enacted, more than 47% of couples with two children would have been on theAMT. These effects are mitigated by provisions that allow personal credits to be offset against the AMT but increased by the rate reductions. This analysis of H.R. 6 in the 106th Congress shows how a tax proposal that affects many ordinary income taxpayers has powerful interactions with the AMT. Dependingon the nature of the legislation, the interactions can be larger or smaller. Proposals that lowertax rates or narrow brackets across the board would also be expected to have significantinteractions with the AMT because they tend to affect higher income taxpayers proportionallymore. Taxpayers already on the AMT would get no tax cut, and some taxpayers would beshifted to the AMT. For example, even in the year 2000, 44% of taxpayers with incomesover $50,000 would have received less than the full 10% tax cut in H.R. 3 , anacross-the-board tax cut proposal in the 106th Congress. (8) Tax cuts that add to credits or otherprovisions disallowed by the AMT would also interact with the AMT. Tax cuts that aredirected primarily at lower or middle income individuals would be less affected by AMTinteraction, at least in the near future. Left unchecked over a very long period of time, ofcourse, virtually all taxpayers will eventually fall under the AMT provisions as theexemptions erode in value. There were offsetting effects in the initial Senate Finance Committee proposal for the marriage penalty ( S. 2346 , S. 2839 ). This proposal also made theability to offset credits, such as the child credit, against the AMT permanent. This changewould have reduced the number of middle and upper middle income taxpayers who would have their credits limited as a result of the marriage penalty or who would be switched to theAMT. The expansion of the 28% rate bracket, however, would have expanded the interactionbetween the marriage penalty legislation and the AMT. For tax year 2000, the top of the 28%rate was $105,950, while twice the top of the single bracket is $124,900. Since adjusted grossincome is higher than taxable income, this change will affect many higher income individuals. The final proposal adopted by both houses, H.R. 4810 , included the credit offsets and not the 28% bracket expansion, so the effects of the AMT in limiting these tax cutswould have been smaller in this legislation. While the previous analysis describes the importance of AMT interaction with proposedtax cuts, there are a variety of approaches that could be taken to dealing with the AMT. However, one important point to note is that cutting taxes without altering the AMT, byincreasing the coverage of the AMT, makes proposals to slow or reverse its growth inimportance more costly in terms of revenue loss. The Congress has considered the most urgent issue that of dealing with the lack of offset of the credits adopted in 1997, which immediately catapulted many middle class taxpayersinto an interaction with the AMT that reduced their credits. Legislation temporarily correctingthat problem had already been enacted, and this provision was made permanent in the caseof child credits. Child credit provisions in H.R. 1836 eventually cost about $25billion per year, but this number reflects both a doubling of the credit and the AMT provision.Earlier estimates suggest eliminating the credit limit provision would cost about $1 billioncurrently, but would cost many billions of dollars by 2008 or 2009. Estimates for the Senateversion of the 1999 tax cut bill, H.R. 2488 , indicated a $1 billion cost currentlyfor both eliminating the restriction and allowing some small additional exemption, a cost thatgrew to become $26 billion in the tenth year. According to Joint Committee data, indexing AMT exemptions would cost $13.9 billion by 2008. Indexing the exemptions is the step that would be necessary to begin to keep theAMT more or less fixed in relative importance in the tax system, assuming that no otherchanges in the regular tax structure occurred. Some might see the AMT as a desirable, relatively-flat alternative tax with a wider base, and consider the expansion of the AMT desirable. If that is the case, of course, then the AMTstructure itself might be examined in light of general tax principles. (9) The exemption levelsin the AMT are not adjusted for family size or for head of household status; there are marriagepenalties within the AMT structure, and tax preferences are not uniformly included orexcluded. For example, while the AMT base disallows certain itemized deductions (mainlytaxes) and business preferences, it leaves other important preferences intact (capital gainsdifferentials, home mortgage interest deductions, exclusions for tax exempt interest on generalobligation state and local bonds, and exclusions for employer-paid fringe benefits). And, ifthere is concern about the marriage penalty in the regular tax, there is also an issue about themarriage penalty in the AMT. Others might see the AMT as an unnecessary and complicating feature of the current tax system. Under this view, adjustments to limit tax preferences should be directed at thepreferences themselves and not some overall restrictions on their use as embodied in the AMTapproach. These individuals might like to see not only corrections to allow the 1997 creditsto be used against the AMT and indexation of the AMT exemption levels, but also steps toeventually eliminate the AMT. Some steps in this direction were already taken for thecorporate AMT in 1997, where depreciation rules were brought more in line with regulardepreciation. Others want to see the AMT continue as a general back-up mechanism to keep tax preferences from being overused, but limited to a small fraction of the population. For them,several issues arise. While the indexation for price inflation of the exemption levels is clearlyappropriate to maintain the relative importance of the AMT, other questions are not as easilyanswered. They include questions as to whether the current base of the AMT is appropriateto its purpose, and how to adjust the AMT in tandem with regular tax changes to ensure thatit fulfills its role. The preferences taken away by the AMT are selective. They include, for example, itemized deductions for state and local taxes, but not for mortgage interest, even though a casemight be made that the former is not a preference, while almost everyone agrees that the latteris a preference. They do not include the major investment subsidies (capital gainspreferences and tax exempt bond interest), although they include a variety of business relatedpreferences. They include personal exemptions and standard deductions, although therationale for this inclusion is that the AMT flat exemption is much larger than the sum of thestandard deductions and personal exemptions. How the AMT should be altered as regular tax changes are made is also unclear. For example, if the principal purpose of the AMT is to limit the use of preferences, there is noapparent reason why changes in the basic structure of the tax system (wider brackets, lowerrates, larger standard deductions) should trigger additional coverage under the AMT. It wouldbe appropriate to simultaneously adjust the AMT deductions, brackets and rates to conformto the rate changes. In that case, if the standard deduction increases by $500, the AMTexemption should increase by that same amount. However, the adjustments in the AMT are limited and imperfect. For example, there is no adjustment for family size and no adjustment for head of household status. There are onlytwo rate brackets and the width of the first bracket does not bear a close relationship to thewidth of the regular income brackets. The exemption is phased out at high income levels. Thus, in the marriage penalty proposal, while it might make sense to increase the AMTexemption by the increase in the standard deduction, it is not clear what, if any, conformingchange the expansion of the 15% rate bracket should induce. Thus, it is not clear that changesof these nature should trigger conforming changes in the AMT. Also, under this view of the AMT there appears no clear reason to allow credits under the AMT although there is a reason to adjust the AMT for the expansion of the standarddeduction in the marriage penalty legislation. A case might be made for an adjustment in thechild credits, on the grounds that these credits are the equivalent of increasing personalexemptions and that such credits should be allowed against the AMT. There is less of ajustification for other types of credits, and the case for the child credits is complex becauseonly some taxpayers receive those credits, but the AMT exemption is uniform (distinguishingonly between single and joint returns). The growth in the AMT has been considered a potential problem for some time, and itsimportance increases with tax cuts, such as those passed in 1997 and 2001. Because of the AMT, not all taxpayers receive the full amount, or even any, tax cut. Moreover, every reduction in the regular tax that is not accompanied by adjustments in theAMT increases the number of taxpayers who pay the AMT and the complications for thosetaxpayers in filing their tax return. The marriage penalty legislation, as well as the ratereductions, cause a significant expansion of the fraction of the fraction of families. And eachtime this issue is not addressed, the higher the cost grows for doing so at some future time.

Tax cuts have been addressed recently. Rate reductions and across the board tax cuts were part of the H.R. 1836 , the tax cut signed by the President on June 7. Thisbill includes the changes in standard deductions and rate brackets relating to the marriagepenalty and also included in H.R. 6 , passed earlier by the House. The Alternative Minimum Tax (AMT) provides for an alternative tax calculation, on a broader base but with a large exemption and a two-tier rate that is below the top tax rates inthe regular tax structure. It is paid when the tax liability figured using the AMT base and ratesis higher than regular tax liability. The AMT is expected to grow rapidly and extend furtherinto the middle class because the exemptions in the AMT are not indexed for inflation. Inaddition, the tax credits (such as the child credit) enacted in 1997 would have caused manymiddle class taxpayers to be affected by the AMT. A temporary provision allowing thesecredits to be taken against the AMT was adopted last year, and was made permanent for thechild credit by H.R. 1836 . The marriage penalty legislation, and other proposals for cutting taxes will be limited in their effects for some individuals unless changes are also made in the alternative minimumtax (AMT). Individuals who pay the AMT are not affected by cuts in the regular tax andindividuals who switch to the AMT will not receive the full tax cut. This constraint will growover time. For example, about 28 % of the tax cuts over the next ten years, in a bill similarto H.R. 6 considered in the 106th Congress would not have been received bytaxpayers because of the AMT. This effect grows over time; by 2008, 44% of the tax cut willnot have been received. Cuts in regular tax, without also addressing the AMT, would cause more and more taxpayers to the subject to the complexities of the AMT, and also increase the revenue costsof future measures to restrain the growth of the AMT. H.R. 1836 partiallyaddressed this issue, by making the child credit apply against the AMT. The bill alsoincreased the exemptions by $2,000 for singles and $4,000 for joint returns, but theseprovisions sunset in 2004. There are a number of different policy options that might be considered in evaluating the AMT and its interaction with the regular tax. For some, a priority has been in making theexclusion for credits permanent, while for others indexing may be the most important priority. Both of these approaches will be costly in the future (about $26 billion for the credit ten yearsfrom now and about $14 billion for indexing). Others might wish to eventually phase out theAMT, which will raise about $37 billion by 2010. One can also make a case for expandingthe coverage of the AMT as an eventual flat tax, although in some ways the AMT does notconform to certain design principles (such as adjusting exemptions for family size). Anotherissue is how to adjust the AMT as changes in the regular tax system are made, to keep therelative position and original purpose of the AMT intact. In the latter case, the AMT mightbe adjusted when fundamental changes are made in the regular tax (rates, bracket widths,standard deductions) but not for proposals that provide special subsidies. This report will beupdated to reflect legislative developments.

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The Transportation, Housing and Urban Development, and Related Agencies (THUD) Appropriations Subcommittees in the House and Senate are charged with drafting bills to provide annual appropriations for the Department of Transportation (DOT), the Department of Housing and Urban Development (HUD), and six small related agencies. Title I of the annual THUD appropriations bill generally funds DOT. The department is primarily a grant-making and regulatory organization. Its programs are organized roughly by mode of transportation, providing grants to state and local government agencies to support the construction of highways, transit, airport, and intercity passenger rail infrastructure, while overseeing safety in all modes of transportation. The Federal Aviation Administration (FAA) is exceptional among DOT's large sub-agencies in that the largest portion of its budget is not for grants but for operating the U.S. air traffic control system. In support of that task, it employs over 80% of DOT's total workforce, roughly 46,000 of DOT's approximately 56,000 employees. Title II of the annual THUD appropriations bill generally funds HUD. The department's programs are primarily designed to address housing problems faced by households with very low incomes or other special housing needs. These include several programs of rental assistance for persons who are poor, elderly, and/or have disabilities. Three rental assistance programs—Public Housing, Section 8 Housing Choice Vouchers, and Section 8 project-based rental assistance—account for the majority of the department's funding. Two block grant programs—the HOME Investment Partnerships Program and Community Development Block Grants (CDBG)—help communities finance a variety of housing and community development activities designed to serve low-income families. Other, more specialized grant programs help communities meet the needs of homeless persons, including those with AIDS. HUD's Federal Housing Administration (FHA) insures mortgages made by lenders to homebuyers with low down payments, often first-time homebuyers, and to buyers and developers of multifamily rental buildings containing relatively affordable units. Title III of the THUD appropriations bill generally funds a collection of agencies involved in transportation or housing and community development. They include the Access Board, the Federal Maritime Commission, the National Transportation Safety Board, the Amtrak Office of Inspector General (IG), the Neighborhood Reinvestment Corporation (often referred to as NeighborWorks), the U.S. Interagency Council on Homelessness, and the costs associated with the government conservatorship and regulation of the housing-related government-sponsored enterprises, Fannie Mae and Freddie Mac. The Surface Transportation Board, formerly an agency of DOT, was made independent of DOT in 2015 legislation, and now appears in Title III of the THUD bill. Title IV of the THUD appropriations bill typically sets out general provisions applicable to the bill. They can range from, for example, restrictions placed on funding in the bill to supplemental funding for disasters. Most of the programs and activities in the THUD bill are funded through regular annual appropriations , also referred to as discretionary appropriations. This is the amount of new funding allocated each year by the appropriations committees. Appropriations are drawn from the general fund of the Treasury. For some accounts, the appropriations committees provide advance appropriations , or regular appropriations that are not available until the next fiscal year. In some years, Congress will also provide emergency appropriations , usually in response to disasters. These funds are sometimes provided outside of the regular appropriations acts—often in emergency supplemental spending bills. Although emergency appropriations typically come from the general fund, they may not be included in the discretionary appropriation total reported for an agency. Most of DOT's budget is in the form of contract authority . Contract authority is a form of mandatory budget authority based on federal trust fund resources, in contrast to discretionary budget authority, which is based on resources in the general fund. Contract authority controls spending from the Highway Trust Fund and the Airport and Airway Trust Fund. While the amount of contract authority is typically set in DOT authorizing legislation, appropriators have the final say in the amount of contract authority available each year by establishing a limitation on obligations (i.e., a limit on how much contract authority can be obligated). Total annual discretionary budget authority for THUD is typically around half of the total funding provided in the bill, with the remainder made up of DOT's mandatory contract authority. Congressional appropriators are generally subject to limits on the amount of new nonemergency discretionary funding they can provide in a year. One way to stay within these limits is to appropriate no more than the allocated amount of discretionary funding in the regular annual appropriations act. Another way is to find ways to offset a higher level of discretionary funding. A portion of the cost of regular annual appropriations for the THUD bill is generally offset in two ways. The first is through rescissions , or cancellations of unobligated or recaptured balances from previous years' funding. The second is through offsetting receipts and collections , generally derived from fees collected by federal agencies, the largest source being fees collected from the FHA mortgage insurance programs at HUD. Table 1 and Figure 1 show recent funding trends for the primary THUD agencies, DOT and HUD, in both nominal and constant dollars (excluding emergency supplemental funding). In real terms, DOT and HUD funding declined for several years after FY2010, and even in FY2017 their funding was still below their FY2010 levels. Table 2 provides a timeline of legislative action on the FY2018 THUD appropriations bill. The annual budget resolution includes spending and revenue levels for the upcoming fiscal year, including spending allocations to House and Senate committees. These levels are enforceable by points of order. After the House and the Senate Appropriations Committees receive their discretionary spending allocations from the budget resolution (referred to as 302(a) allocations), they divide their allocations among their 12 subcommittees (referred to as the 302(b) suballocations). Each subcommittee is responsible for developing and reporting one of the 12 regular appropriations bills. Once the Appropriations Committees reports these suballocations to their respective chamber, these levels are also enforceable by points of order. While these suballocations alone cannot be used to determine how much funding any individual account or program will receive, they do set the parameters within which decisions about funding for individual accounts and programs can be made. The House and Senate did not agree to a budget resolution for FY2018 ( H.Con.Res. 71 ) until October. By that point, the House and Senate Appropriations Committees had each already taken action on THUD appropriations. In July of 2017, both committees released an informal suballocation for THUD. While such informal suballocations cannot be enforced by points of order, it was stated by the House Appropriations Committees that that the levels were being issued in order "to continue developing the 12 fiscal year 2018 appropriations bills ... given a concurrent resolution for the budget for fiscal year 2018 has yet to be adopted." Subsequently, the House and Senate Appropriations Committee each reported their FY2018 THUD appropriations bills at the level noted in their interim suballocations. Table 3 shows the discretionary funding provided for THUD in FY2017, the Trump Administration request for FY2018, and the informal suballocations made by the House and Senate Appropriations Committees to the THUD subcommittees. Table 4 lists the total funding provided for each of the titles in the bill for FY2017 and the amount requested for that title for FY2018. As discussed earlier, much of the funding for this bill is in the form of contract authority, a type of mandatory budget authority. Thus the discretionary funding provided is only about half of the total funding provided in this bill. As shown in Table 4 , the Trump Administration's FY2018 budget included $106.65 billion for the programs in the THUD bill, $9.7 billion less than the $116.3 billion provided in FY2017. The request represented a reduction of roughly $2 billion for DOT and $7.5 billion for HUD. The DOT reduction came from zeroing out the Essential Air Service program and the TIGER (National Infrastructure Improvements) grant program and cutting funding for the New Starts program in DOT; the HUD reduction came from reducing funding for most HUD programs and eliminating funding for several large grant programs, including the CDBG and HOME programs. The House-passed H.R. 3354 would provide $115.3 billion for THUD; this represents a reduction of less than 1% from the comparable figure for FY2017. The Senate-reported S. 1655 recommended $119.1 billion for THUD; this represents an increase of just over 2% over FY2017 funding. With inflation forecast at 1.9% for FY2018, the House bill would result in a reduction of roughly 3% in real THUD funding, while the Senate bill would result in a slight increase in real funding, compared to FY2017. This situation is explored further in the next section of this report and in Table 5 . In the case of the THUD bill, net discretionary budget authority (which is the level of funding measured against the 302(b) allocation) is typically not the same as the amount of new discretionary budget authority made available to THUD agencies, due to budgetary savings available from rescissions and offsets. Each dollar available to the subcommittees in rescissions and offsets enables the subcommittee to provide an additional dollar of funding that does not count against the 302(b) allocation limit. As shown in Table 5 , in FY2017, due to rescissions and offsets, the THUD subcommittees were able to provide $10.1 billion in discretionary appropriations to THUD agencies above the net discretionary budget authority level. The amount of these budget savings generally vary from year to year, meaning that the "cost" in terms of 302(b) allocation of appropriating a given level of gross budget authority varies as well. The largest source of budgetary savings for the THUD subcommittees is generally HUD's FHA insurance fund. Estimates of FHA offsets change from year to year based on estimates of the number of mortgages that FHA will insure and how much those mortgages are expected to earn in fees versus cost in insurance payouts. Those estimates, in turn, are based on expectations about the housing market, the economy, the credit quality of borrowers, and changes to FHA's fee structure, most of which are factors outside of the immediate control of policymakers. Table 6 presents FY2018 appropriations totals and selected accounts for DOT, compared to FY2017 enacted levels. A brief summary of key highlights follows the table. For an expanded discussion, see CRS Report R44915, Department of Transportation (DOT): FY2018 Appropriations , by [author name scrubbed]. The Trump Administration requested a $1.1 billion reduction in DOT from FY2017 levels, chiefly by zeroing out the Essential Air Service program (-$150 million) and the TIGER (National Infrastructure Investments) grant program (-$500 million) and reducing funding for the transit New Starts program by $400 million. The House-passed bill would provide DOT an increase of less than 1% from FY2017. The Senate-reported bill recommends a 2% increase for DOT over FY2017. The increase is chiefly for highways ($1.0 billion) and FAA programs ($563 million). In addition to providing more funding than in the House-passed bill, the Senate bill includes several policy provisions different from those in the House bill. These include authorizing an increase in the passenger facility charge that airports can charge passengers to help pay for airport improvements, from the current limit of $4.50 (limited to two charges per one-way ticket) to $8.50 (limited to the originating airport; an airport through which the passenger is connecting would still be limited to a $4.50 charge). The bill would also authorize DOT to ban cell phone calls by passengers in flight. It also would appropriate considerably less funding for the Federal Railroad Administration State of Good Repair grant program than does the House bill, which may signal a disagreement over funding for Amtrak's Hudson Tunnel Replacement project. Table 7 presents account-level funding information for HUD, comparing FY2017 with FY2018 congressional action. The President's FY2018 budget request for HUD included the following: $40.7 billion in gross discretionary appropriations for HUD, not accounting for savings from offsets and other sources. That amount is about $7.3 billion (15%) less than was provided in the final FY2017 appropriations law. $31.2 billion in net discretionary appropriations for HUD, accounting for the effect of offsets, rescissions, and other savings. A proposal to eliminate funding for several HUD grant programs. Most notable among these are HUD's two largest block grant programs for states and localities, the CDBG and HOME programs, as well as grants funded in the Self-Help Homeownership Opportunity (SHOP) account (i.e., funding for sweat-equity programs, like Habitat for Humanity, and certain capacity building programs). Large funding reductions for public housing, including a 68% cut relative to FY2017 for the capital fund and elimination of funding for the Choice Neighborhoods program. Funding reductions for most other accounts relative to FY2017, with the exception of the Housing for the Elderly account (2% increase). Several policy proposals, including an increase in the share of rent paid by certain recipients of HUD-assisted housing from 30% of family income to 35% and an elimination of utility reimbursements paid to families in assisted housing. As reported by the House Appropriations Committee, H.R. 3353 would have provided the following for HUD: $48.0 billion in gross discretionary appropriations for HUD, which is about $7.3 billion (15%) more than was requested by the President and only slightly (<1%) less than was enacted for FY2017. ($38.3 billion in net discretionary funding.) Small increases in funding for the tenant-based rental assistance account (+1%) and project-based rental assistance account (+2%) relative to FY2017. The public housing operating fund would receive level funding, and the capital fund would be cut by 5%. Funding reductions for major HUD grant programs, but not an elimination of funding, as proposed in the President's budget. Relative to FY2017, the bill would have cut the SHOP account by 17%, HOME by 11%, and CDBG by 3%. During floor consideration of H.R. 3354 , which includes as Division H the text of H.R. 3353 , HUD-related floor amendments were approved: Increasing funding for: CDBG, SHOP, Public Housing Capital Fund, Housing for Persons with AIDS, and Housing for the Elderly (Section 202). Offsetting those increases with decreases for: Public Housing Operating Fund, Information Technology, FHA administrative expenses, and Research and Technology. Making policy changes to block HUD's implementation of some manufactured housing regulations and guidance (Sec. 424) and to allow for the study of certain foundation materials (amendment to the Community Development Fund account). As reported by the Senate Appropriations Committee, S. 1655 would provide the following for HUD: $49.9 billion in gross discretionary appropriations for HUD's programs and activities, which is 4% more than was enacted for FY2017 and 23% more than was proposed by the President ($40.2 billion in net discretionary appropriations). Increases in funding for the Section 202 Housing for the Elderly program (+14% over FY2017 enacted), the project-based rental assistance account (+6%), and the tenant-based rental assistance account (+5%). Level funding, relative to FY2017, for the grant programs slated for elimination in the President's budget request (CDBG, HOME, and the programs included in the SHOP account). Several new policy changes, including an expansion of the Rental Assistance Demonstration (eliminating the cap on the number of units that may convert, modifying the terms of conversion for some properties and expanding the program to Section 202 Housing for the Elderly properties (Section 236 of the General Provisions)) and new penalties for HUD if the agency does not issue reports to the committee about properties that fail inspection (Section 202 of the General Provisions). Table 8 shows appropriations levels for the various related agencies funded within the Transportation, HUD, and Related Agencies appropriations bill. The Surface Transportation Board was transferred from the DOT title to the Related Agencies title starting with FY2017. The President's FY2018 budget request included that Congress begin the process of winding down the Interagency Council on Homelessness (USICH) , which was created in 1987 to coordinate across government agencies to reduce and end homelessness. The requested funding level—$57 a more than 80% reduction from FY2017—is intended to cover salaries, benefits, and operational costs for permanently closing the agency by November 2017. The USICH has a statutory sunset date—currently, October 1, 2018—that has generally been extended in annual appropriations acts. The House committee bill would adopt the President's request, allowing for the termination of the USICH; the Senate committee bill would not, funding the USICH at FY2017 levels and permanently eliminating the statutory sunset. The President's FY2018 budget also included a request that Congress begin the process of winding down federal funding for the Neighborhood Reinvestment Corporation (commonly known as NeighborWorks America ), which was created via federal charter in 1978 to support affordable housing and neighborhood revitalization nationwide. The requested funding level of $27 million is intended to cover personnel, administrative, and other costs associated with winding down existing commitments. Both the House and Senate committee bills would continue to fund NeighborWorks at the FY2017 level.

The House and Senate Transportation, Housing and Urban Development, and Related Agencies (THUD) Appropriations Subcommittees are charged with providing annual appropriations for the Department of Transportation (DOT), Department of Housing and Urban Development (HUD), and related agencies. THUD programs receive both discretionary and mandatory budget authority; HUD's budget generally accounts for the largest share of discretionary appropriations in the THUD bill, but when mandatory funding is taken into account, DOT's budget is larger than HUD's budget. Mandatory funding typically accounts for around half of the THUD appropriation. The Trump Administration requested net new budget authority of $106.65 billion (after scorekeeping adjustments), including $47.9 billion in discretionary funding, for the departments and agencies funded in the THUD bill for FY2018, $9.65 billion (8%) less than the FY2017 level. The House Appropriations Committee reported its version of an FY2018 THUD appropriations bill on July 17, 2017 (H.R. 3353). It recommended $115.3 billion ($56.5 billion in discretionary funding), less than 1% below the FY2017 level. The text of that bill was incorporated into a consolidated appropriations bill (H.R. 3354), amended (with no change in total funding for THUD, but changes in some accounts within THUD), and passed by the House on September 14, 2017. The Senate Appropriations Committee reported its version of an FY2018 THUD bill on July 27, 2017 (S. 1655). It recommended $119.1 billion ($60.1 billion in discretionary funding), 2.4% more than FY2017. With inflation forecast at 1.9% for FY2018, the House bill would result in a roughly 3% decrease in real THUD funding, while the Senate bill would result in a slight increase in real funding, compared to FY2017. With no agreement on FY2018 funding, Congress passed a continuing resolution (H.R. 601) to provide funding through December 8, 2017, for federal agencies. That act extended FY2017 funding levels for the THUD agencies, less an across-the board rescission 0.6791%. DOT: The Trump Administration requested $75.1 billion in net new budgetary authority for DOT for FY2018. That was about $2 billion less than the comparable figure ($77.1 billion) for FY2016, with significant cuts requested for transit and rail programs. Both the House and Senate bills largely rejected the proposed cuts; the House approved $77.5 billion in new funding, and the Senate Appropriations Committee recommended $78.6 billion. HUD: The Trump Administration requested $31.4 billion in net new budget authority for HUD for FY2018, $7.4 billion less than FY2017 (-19%). It requested no funding for several major grant programs, including the Community Development Block Grant (CDBG) program and the HOME Investment Partnership program. The House bill proposed $38.3 billion, a small increase in overall funding relative to FY2017 (-1.3%), and did not include the proposed eliminations of HOME and CDBG funding. The Senate committee bill recommended $40.2 billion, a 4% increase over FY2017. Related Agencies: The Trump Administration requested $226 million for the agencies in Title III of the THUD bill (the Related Agencies). This was about $113 million less than was provided in FY2017. The major change in funding from FY2017 levels in the request was proposals to terminate funding for the Neighborhood Reinvestment Corporation (NRC) and the Interagency Council on Homelessness (ICH). The President's budget requested only enough funding to close out the commitments of those two entities. Neither the House nor Senate committee bills included the President's proposal to wind down funding for the NRC; the House bill, but not the Senate committee-passed bill, would eliminate funding for the ICH.

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A July 2005 Joint Statement resolved to establish a U.S.-India "global partnership" through increased cooperation on economic issues, on energy and the environment, on democracy and development, on non-proliferation and security, and on high-technology and space. U.S. policy is to isolate Iran and to ensure that its nuclear program is used for purely civilian purposes. India has never shared U.S. assessments of Iran as an aggressive regional power. India-Iran relations have traditionally been positive and, in January 2003, the two countries launched a "strategic partnership" with the signing of the "New Delhi Declaration" and seven other substantive agreements. Indian leaders regularly speak of "civilizational ties" between the two countries, a reference to the interactions of Persian and Indus Valley civilizations over a period of millennia. As U.S. relations with India grow deeper and more expansive in the new century, some in Washington believe that New Delhi's friendship with Tehran could become a significant obstacle to further development of U.S.-India ties. However, India-Iran relations have not evolved into a strategic alliance and are unlikely to derail the further development of a U.S.-India global partnership. At the same time, given a clear Indian interest in maintaining positive ties with Iran, especially in the area of energy commerce, New Delhi is unlikely to abandon its relationship with Tehran, or accept dictation on the topic from external powers. Many in Congress voice concern about India's relations with Iran and their relevance to U.S. interests. Some worry about New Delhi's defense relations with Tehran and have sought to link this with congressional approval of U.S.-India civil nuclear cooperation. There are further U.S. concerns that India plans to seek energy resources from Iran, thus benefitting financially a country the United States seeks to isolate. Indian firms have in recent years taken long-term contracts for purchase of Iranian gas and oil, and India supports proposed construction of a pipeline to deliver Iranian natural gas to India through Pakistan. The Bush Administration expresses strong opposition to any pipeline projects involving Iran, but top Indian officials insist the project is in India's national interest. Some analysts believe that geostrategic motives beyond energy security, including great power aspirations, drive India's pursuit of closer relations with Iran. Of immediate interest to some Member of Congress are press reports on Iranian naval ships visiting India's Kochi port for "training." Indian officials downplayed the significance of the port visit, and Secretary Rice challenged the report's veracity, although she did state that, "The United States has made very clear to India that we have concerns about their relationship with Iran." Such concerns include the proposed gas pipeline. Secretary of Energy Sam Bodman, visiting New Delhi in March 2007, reiterated U.S. opposition to the pipeline project. According to the 2006-2007 annual report of the Indian Ministry of External Affairs, India's relations with Iran are underlined by historical, civilizational and multifaceted ties. The bilateral cooperation has acquired a strategic dimension flourishing in the fields of energy, trade and commerce, information technology, and transit. During 2006-07, relations with Iran were further strengthened through regular exchanges. Past reports have lauded "further deepening and consolidation of India-Iran ties," with "increased momentum of high-level exchanges" and "institutional linkages between their National Security Councils." Iranian leaders, always looking for new allies to thwart U.S. attempts to isolate Iran, reciprocate New Delhi's favorable view and insist that warming U.S.-India relations will not weaken their own ties with New Delhi. However, there are signs that, following the 2005 launch of a U.S.-India "global partnership" and plans for bilateral civil nuclear cooperation, New Delhi intends to bring its Iran policy into closer alignment with that of the United States. Yet India is home to a sizeable constituency urging resistance to any U.S. pressure that might inhibit New Delhi-Tehran relations or which prioritize relations with the United States in disregard of India's national interests. While top Indian leaders state that friendly New Delhi-Tehran ties will continue concurrent with—or even despite—a growing U.S.-India partnership, some observers see such rhetoric as incompatible with recent developments. The Indian government has made clear that it does not wish to see a new nuclear weapons power in the region and, in this context, it has aligned itself with international efforts to bring Iran's controversial nuclear program into conformity with Non-Proliferation Treaty and IAEA provisions. At the same time, New Delhi's traditional status as a leader of the "nonaligned movement," its friendly links with Tehran, and a domestic constituency that includes tens of millions of Shiite Muslims, have presented difficulties for Indian policymakers. There are also in New Delhi influential leftist and opposition parties which maintain a high sensitivity toward indications that India is being made a "junior partner" of the United States. These political forces have been critical of proposed U.S.-India civil nuclear cooperation and regularly insist that India's closer relations with the United States should not come at the expense of positive ties with Iran. The current Indian National Congress-led coalition government has thus sought to maintain a careful balance between two sometimes conflicting policy objectives. India's main opposition, the Bharatiya Janata Party, has voiced its approval of the present government's policy toward Iran's nuclear program. There were reports in 2005 that India would oppose bringing Iran's nuclear program before the U.N. Security Council and was likely to abstain on relevant IAEA Board votes. However, on September 24, 2005, in what many saw as the first test of India's position, New Delhi did vote with the majority (and the United States) on an IAEA resolution finding Iran in noncompliance with its international obligations. The vote brought waves of criticism from Indian opposition parties and independent analysts who accused New Delhi of betraying a friendly country by "capitulating" to U.S. pressure. In January 2006, the U.S. ambassador to India explicitly linked progress on proposed U.S.-India civil nuclear cooperation with India's upcoming IAEA vote, saying if India chose not to side with the United States, he believed the U.S.-India initiative would fail in the Congress. New Delhi rejected any attempts to link the two issues, and opposition and leftist Indian political parties denounced the remarks. Yet, on February 4, 2006, India again voted with the majority in referring Iran to the Security Council, even as it insisted that its vote should not be interpreted as detracting from India's traditionally close relations with Iran. Overt U.S. pressure may have made it more difficult for New Delhi to carry out the policy it had already chosen. Some independent observers saw India's IAEA votes as demonstrating New Delhi's strategic choice to strengthen a partnership with Washington even at the cost of its friendship with Tehran. In July 2006, the House passed legislation ( H.R. 5682 ) to enable proposed U.S. civil nuclear cooperation with India. The bill contained non-binding language on securing India's cooperation with U.S. policy toward Iran (an amendment seeking to make such cooperation binding was defeated by a vote of 235-192). The Senate version of enabling legislation ( S. 3709 ) contained no language on Iran. The resulting "Hyde Act," which became P.L. 109-401 in December, preserved the House's "statement of policy" language and added a prerequisite that the President provide to Congress, inter alia , a description of India's efforts to participate in U.S. efforts to prevent Iran from obtaining weapons of mass destruction. In their explanatory statement ( H.Rept. 109-721 ), congressional conferees called securing India's participation "critical" and they emphasized an "expectation" of India's full cooperation on this matter. In recent years there have been occasional revelations of Indian transfers to Iran of technology that could be useful for Iran's purported weapons of mass destruction (WMD) programs. These transfers do not appear to be part of an Indian-government-directed policy of assisting Iran's WMD, but could represent unauthorized scientific contacts that have resulted from growing India-Iran energy and diplomatic ties. Some Indian persons have been sanctioned by the Bush Administration under the Iran Non-Proliferation Act (INA, P.L. 106-178 ). According to determinations published in the Federal Register, in 2003 an Indian chemical industry consultancy was sanctioned under the Iran-Iraq Arms Nonproliferation Act ( P.L. 102-484 ). In a September 2004 determination, two Indian nuclear scientists, Dr. Chaudhary Surendar and Dr. Y.S.R. Prasad, were sanctioned under the INA. The two formerly headed the Nuclear Power Corp. of India and allegedly passed to Iran heavy-water nuclear technology. Surendar denied ever visiting Iran and sanctions against him were ended in December 2005. In that same December determination, two Indian chemical companies were sanctioned under the INA for transfers to Iran. In August 2006, the United States formally sanctioned two additional Indian chemical firms under the INA for sensitive material transactions with Iran. The firms denied any WMD-related transfers and New Delhi later said the sanctions were "not justified." In February 2007, India moved to impose restrictions on nuclear-related exports to Iran in accordance with U.N. Security Council Resolution 1737 of December 2006. India and Iran have established steady but relatively low level defense and military relations since the formation of an Indo-Iran Joint Commission in 1983, three years after the start of the Iran-Iraq war. There is no evidence that India provided any significant military assistance to Iran during that war, which ended in 1988. Iran reportedly received some military advice from Pakistan during the conflict. Following the war, Iran began rebuilding its conventional arsenal with purchases of tanks, combat aircraft, and ships from Russia and China. No major purchases from India were reported during this time. However, Iran reportedly turned to India in 1993 to help develop batteries for the three Kilo-class submarines Iran had bought from Russia. The submarine batteries provided by the Russians were not appropriate for the warm waters of the Persian Gulf, and India had substantial experience operating Kilos in warm water. There have been expectations that Iran-India military ties would further expand under the 2003 "New Delhi Declaration," in which the two countries "decided to explore opportunities for cooperation in defense and agreed areas, including training and exchange of visits." Some experts see this as part of broad strategic cooperation between two powers in the Persian Gulf and Arabian Sea, but the cooperation has generally stalled since it was signed and has not evolved into a noteworthy strategic alliance. Instead, the cooperation appears to represent a manifestation of generally good Indo-Iranian relations and an opportunity to mutually enhance their potential to project power in the region. India had reportedly hoped the Declaration would pave the way for Indian sales to Iran of upgrades of Iran's Russian-made conventional weapons systems. Major new Iran-India deals along these lines have not materialized to date, but Iran reportedly has sought Indian advice on operating Iran's missile boats, refitting Iran's T-72 tanks and armored personnel carriers, and upgrading Iran's MiG-29 fighters. Under the Declaration, the two countries have held some joint naval exercises, most recently in March 2006. The first joint exercises were in March 2003. In March 2007, apparently at Iran's request, the two countries formed a joint working group to implement the 2003 accord, which Iran apparently feels has languished. During a visit of the commander of Iran's regular Navy—the first such high level exchange since 2003—India reportedly deferred specific Iranian requests, such as an exchange of warship engineers. India-Iran commercial relations are dominated by Indian imports of Iranian crude oil, which alone account for some 90% of all Indian imports from Iran each year. The value of all India-Iran trade in the fiscal year ending March 2007 topped $9 billion (by comparison, U.S.-India trade was valued at about $32 billion in 2006). Iran possesses the world's second-largest natural gas reserves, while India is among the world's leading gas importers. With a rapidly growing economy, India is building energy ties to Iran, some of which could conflict with U.S. policy and the Iran Sanctions Act (ISA). ISA requires certain sanctions on investments over $20 million in one year in Iran's energy sector. Under a reportedly finalized 25-year, $22 billion deal, the state-owned Gas Authority of India Ltd. (GAIL) is to buy 5 million tons of Iranian liquified natural gas (LNG) per year. To implement the arrangement, GAIL is to build an LNG plant in Iran, which Iran does not now have. Some versions of the deal include development by GAIL of Iran's South Pars gas field, which would clearly constitute an investment in Iran's energy sector. India currently buys about 100,000-150,000 barrels per day of Iranian oil, or some 7.5% of Iran's oil exports. It is also widely reported that Indian refineries supply a large part of the refined gasoline that Iran imports. Gasoline is heavily subsidized and sells for about 40 cents per gallon in Iran, and Iranian refining capacity is insufficient to meet demand. The purchase of Iranian petroleum product is not generally considered an ISA violation. A major aspect of the Iran-India energy deals is the proposed construction of a gas pipeline from Iran to India via Pakistan, with a possible extension from Pakistan to China. Some of the Indian companies that reportedly might take part in the pipeline project are ONGC, GAIL, Indian Oil Corporation, and Bharat Petroleum Corporation. Iran, India, and Pakistan have repeatedly reiterated their commitment to the $4 billion-$7 billion project, which is tentatively scheduled to begin construction later in 2007 and be completed by 2010. Pakistani President Musharraf said in January 2006 that there is enough demand in Pakistan to make the project feasible, even if India declines to join it. Since January 2007, the three countries have agreed on various outstanding issues, including a pricing formula, and the Indian and Pakistani split of the gas supplies, but talks continue on several unresolved issues, including the pipeline route, security, transportation tariffs, and related issues. During her March 2005 visit to Asia, Secretary of State Rice expressed U.S. concern about the pipeline deal. Other U.S. officials have called the project "unacceptable," but no U.S. official has directly stated that it would be considered a violation of ISA. Successive administrations have considered pipeline projects that include Iran as meeting the definition of "investment" in ISA. India and Iran are tacitly cooperating to secure their mutual interests in Afghanistan. Iran has perceived the Sunni Islamic extremism of the Taliban regime as a threat to Iran's Shiite sect. India saw the Taliban as a manifestation of Islamic extremism that India is battling in Kashmir, and which is held responsible for terrorist attacks in India. India and Iran both supported Afghanistan's minority-dominated "Northern Alliance" against the Taliban during 1996-2001 (in contrast to Pakistan, which supported the Taliban). Both countries also seek to prevent a Taliban return to power and have each given substantial economic aid to the U.S.-backed government in Kabul. India's presence in Afghanistan is viewed by Pakistan as a potential security threat as a policy of "strategic encirclement."

India's growing energy needs and its relatively benign view of Iran's intentions will likely cause policy differences between New Delhi and Washington. India seeks positive ties with Iran and is unlikely to downgrade its relationship with Tehran at the behest of external powers, but it is unlikely that the two will develop a broad and deep strategic alliance. India-Iran relations are also unlikely to derail the further development of close and productive U.S.-India relations on a number of fronts. See also CRS Report RL33529, India-U.S. Relations, and CRS Report RL32048, Iran: U.S. Concerns and Policy Responses. This report will be updated as warranted by events.

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Low farm milk prices and declining dairy farm incomes in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. MPCs are derived from raw milk and are used in a variety of food products, animal feed, and industrial products. Currently, U.S. imports of MPCs have limited or no trade restrictions while many other dairy product imports are restricted by tariff-rate quotas. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents respond that the prospective move would increase their costs and result in higher retail food prices. Major foreign suppliers of MPCs to the U.S. market would likely seek compensation under World Trade Organization (WTO) rules for new U.S. restrictions on MPC imports. Concerns about MPC imports have periodically surfaced since import levels rose sharply in the late 1990s. At that time, the U.S. price of nonfat dry milk, which competes on some level with MPC as a protein ingredient, was above the price for milk proteins in the international market, making the U.S. market an attractive destination. When the world and domestic prices began to converge in 2001, MPC imports dropped off significantly and have since remained at or below peak levels reached in 2000. Milk is comprised mostly of water, measured at 87.4% of total weight. The remaining 12.6% is called "milk solids," which is split four ways: fat (3.7% of total weight), protein (3.4%), lactose or sugar (4.8%), and minerals (0.7%). Milk protein is of two basic types: casein (2.8% of total weight or 82% of total protein) and whey protein (lactalbumin) (0.6% of total weight or 18% of total protein). Casein is extracted from milk by injecting a certain enzyme or acid into skim milk. Historically, casein was used in both industrial applications such as for glue and paper coatings, and in foods, mainly as an ingredient for "nondairy foods" such as imitation cheese, coffee creamers, and margarine. Whey protein is found in liquid whey, which is a by-product of the cheese manufacturing process that must be further processed to retrieve the protein. Whey protein is also used in a variety of food products. A "milk protein concentrate" (MPC) contains both casein and whey protein, and is often identified by its protein content, such as MPC42 for a product with 42% protein. MPCs are manufactured by ultrafiltration (use of membranes to separate larger molecules from smaller molecules in skim milk), blending (combinations of two or more products, such as skim milk powder and casein), or co-precipitation (a procedure similar to casein extraction). Protein concentrates have wide-ranging applications in the food manufacturing industry. Products that contain protein concentrates include infant formula, processed cheese products, imitation cheese, cultured products, frozen desserts, and specialty sports and medical nutrition products. Various protein levels are used in different products: MPC42-MPC56 are generally used in non-standardized cheeses (e.g., brie, ricotta), while MPC70-MPC85 are used in sports drinks and nutritional supplements. MPC90 is used in lactose-free or sugar-free products. Aside from the level of protein, some food manufacturers cite better "functionality" for MPC as an ingredient compared with nonfat dry milk (approximately 35% protein). Some typical functional characteristics include solubility, viscosity, water-binding, whipping and foaming, gelling, and heat stability. Also, processors favor MPC where exact product composition is important or where lactose (present in nonfat dry milk) is not needed or wanted. The United States produces very little casein or milk protein concentrates. Some dairy economists suggest that the federal dairy policies, particularly the Dairy Product Price Support program, have encouraged the production of nonfat dry milk (NDM) at the expense of milk protein concentrate or casein by assuring a buyer (i.e., the government) for NDM. Producers and others counter that foreign subsidies for exports of dairy products have at times limited U.S. production of protein products. U.S. imports of dairy products were valued at just over $3 billion in 2008 as measured by the USDA's Foreign Agricultural Service ( Table 1 ), with cheese accounting for the largest share at 38%. MPCs and casein/caseinates combined represented 35% of total import value. The United States also imports butter, lactose, and a variety of other dairy products such as chocolate milk drinks, pudding, and milk components for food manufacturing. Constraints on dairy product imports are affected by import barriers (see " Import Barriers "), which are needed to maintain the integrity of the domestic dairy program. The U.S. dairy program supports prices of dairy products and pays farmers subsidies when milk prices decline below certain levels. Unlimited market access would leave open the potential for import surges that could result in large purchases by the federal government under the price support program and/or lower farm prices that would drive up payments under the Milk Income Loss Contract (MILC) program. Dairy imports are modest relative to domestic production. The U.S. Department of Agriculture (USDA) estimated import quantities during 2000-2004 at about 3% of milk production, driven primarily by cheese imports. More recent figures indicate little change since then. During most of the last decade, total U.S. imports of MPCs and casein/caseinates have hovered around 150,000 metric tons or less ( Figure 1 ). Since the sharp rise in the late 1990s, there has been no discernible import trend, with a sharp decline in 2009 (reportedly related to weak demand) following a rise in 2008. Primary U.S. suppliers include New Zealand, Australia, and the European Union ( Figure 2 and Figure 3 ). Until 1995, imports of almost all dairy products (butter, cheese, dry milk) were subject to section 22 import quotas. Section 22 of the Agricultural Adjustment Act of 1933 (7 U.S.C. 624(f)) requires the President to impose quantitative limitations or fees on imports that the President finds are being, or are practically certain to be, imported under such conditions and in such quantities as to render or tend to render ineffective, or materially interfere with, any USDA domestic support or stabilization program. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 WTO Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into tariff rate quotas (TRQs). (The United States also agreed to progressive reductions in the quantity and value of export subsidies under the Dairy Export Incentive Program or DEIP.) Importers of dairy products under the low tariff in a TRQ must apply for a license from USDA. No license is required for over-quota imports which are subject to a higher tariff. Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs, nor were they subject to licensing requirements. Legislation to implement the WTO Uruguay Round Agriculture Agreement ( P.L. 103-465 ) amended section 22 to prohibit the application of quantitative import limitations or fees on products from other WTO members. Imports of MPCs are classified under the Harmonized Tariff Schedule of the United States (HTS) under subheadings 0404.90.10 for imports with a protein concentration of 40% to 90% and under 3501.10.10 for imports with a protein concentration of 90% or more. Imports of casein and caseinates are classified under subheadings 3501.10.50 and 3501.90.60. MPCs are subject to a very low tariff of 0.37 cents per kilogram. Imports of casein (under 3501.10.50) are duty free; other casein derivatives have a tariff of 0.37 cents per kilogram. During the early 2000s, milk producers and their supporters in Congress tried to change the tariff treatment of MPCs by petitioning the U.S. Customs Service to change the tariff classification of MPCs and by introducing legislation that would have established TRQs for MPCs. In 2002, the U.S. Customs Service (now Customs and Border Protection (CBP)) received a petition from the National Milk Producers Federation (NMPF) to review the tariff classification of MPCs and to change the classification from a non-quota to a quota classification. In its petition, the NMPF contended that dairy products classified under HTS 0404.90.10 did not meet the statutory definition of MPCs and were therefore not classifiable under that subhead of the HTS. They should instead, according to NMPF, be classified under heading 0402 which covers "milk and cream, concentrated or containing added sugar or other sweetening matter." If so classified, MPCs would become subject to TRQs and also in many cases would require import licenses. NMPF contended that to be properly classified as MPCs, a product must have been produced using the process of ultrafiltration and must contain casein and lactalbumin (whey protein) in the same proportion as found in milk. CBP responded, however, that the statutory language (Additional U.S. Note 13 to Chapter 4 of the HTS) refers to "any complete milk protein (casein plus lactalbumin) concentrate that is 40% or more protein by weight." Congress in the Additional Note had not specified a manufacturing process nor had it prohibited any blend or mix that met the 40% protein content by weight criterion. Thus, according to CBP, MPCs imported under 0404.90.10 met the statutory conditions provided in Additional Note 13 and were properly classified. During early 2003, bills were introduced in the 108 th Congress ( H.R. 1160 , S. 560 ) that would have accomplished the same purposes as legislation that has been introduced in the 111 th Congress (see " New Legislative Import Restrictions Proposed "). Both H.R. 1160 and S. 560 languished in committee. The Milk Import Tariff Equity Act ( S. 1542 ) was introduced on July 30, 2009, to limit imports of MPCs, casein, and caseinates. A companion bill was introduced in the House ( H.R. 3674 ) on September 29, 2009, with slight differences in aggregate quantities of permitted MPCs under the new tariff designations. S. 1542 would introduce two separate TRQs. The first would be for MPCs classified under HTS subheading 0404.90.10 for imports with a protein concentration of 40% to 90%. Annual imports in excess of 18,488 metric tons would be assessed a duty of $1.56/kg ($0.708/lb.). The second TRQ would be for the combined imports of three products: milk protein concentrate (90% protein), casein, and caseinates (HTS 3501.10.10, 3501.10.50, and 3501.90.60, respectively). Annual imports in excess of 55,477 metric tons would be assessed a duty of $2.16/kg ($0.98/lb.). The duty on import quantities below each quota would remain at the current low level ($0.0037/kg or $0.0017/lb.), except for imports under HTS 3501.10.50, which would remain free. More than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties. Imports under HTS 0404.90.10 averaged 51,000 metric tons during 2006-2008 compared with 18,499 metric tons under the proposed TRQ. Similarly, imports of casein products averaged 108,000 metric tons compared with 55,477 metric tons under the proposed TRQ. Enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. S. 1542 authorizes the President to enter into such negotiations (Section 3). Article XXVIII of the original General Agreement on Tariffs and Trade (GATT 1947) provides the mechanism for WTO member countries to negotiate compensation when a tariff concession (in this case the current low tariff for MPC imports) is modified or withdrawn. Article XXVIII allows member countries to increase tariffs or set new TRQs, but in exchange for withdrawing or modifying a concession compensation must be provided to affected member countries. Compensation does not mean a monetary payment; it means, in this case, that the United States is supposed to offer a benefit or concession such as a tariff reduction which is equivalent to the benefits which the United States has withdrawn or modified. Formulas for determining the amount of compensation are provided in the Understanding on the Interpretation of Article XXVIII that is part of the 1994 WTO Uruguay Round Agreements (GATT 1994). The Understanding on Article XXVIII provides that when an unlimited tariff concession is replaced by a TRQ, the amount of compensation provided should exceed the amount of the trade actually affected by the modification. The basis for the calculation of compensation is the amount by which future trade prospects exceed the level of the quota. The calculation spelled out in the Understanding says that the calculation of future trade prospects should be based on the greater of: (a) the average annual trade in the most recent representative three-year period, increased by the average annual growth rate of imports in that same period, or by 10%, whichever is the greater, or (b) trade in the most recent year increased by 10%. Based on these formulas and recent trade data, the aggregate amount of compensation for which the United States might be liable could be an estimated $500 million. Compensation could be in the form of tariff reductions on other products or other benefits. Article XXVIII negotiations would be held on a bilateral basis. That would mean that negotiations would be conducted with such principle suppliers as New Zealand, the European Union, India, and Australia. A major issue would be quota allocation. Current quotas for most dairy products are distributed on an historical basis, while importers must apply for licenses to import dairy products. On February 7, 2006, the Canadian Minister of Agriculture announced that Canada would be initiating negotiations under GATT Article XXVIII to restrict imports of MPCs. This trade policy move came after a year of work by a Canadian government-initiated technical working group composed of producers and processors failed to reach agreement on a common approach to challenges facing the Canadian dairy industry. Main suppliers of MPCs to the Canadian market are New Zealand and the European Union. It appears, according to USDA's Foreign Agricultural Service, that the Article XXVIII process would not be applicable to Canada's NAFTA partners (the United States and Mexico). The main dairy producer group, Dairy Farmers of Canada (DFC), is the major supporter of the move to restrict Canadian imports of MPCs. Canadian dairy processors, again according to FAS, have worked to restrict the scope of new restrictions to items imported under HTS of Canada Chapter 35, MPCs with a milk protein content equal to or greater than 85% by weight. If import restrictions on MPC were broadened beyond Chapter 35, the expectation among some observers is that Canadian dairy processors would shift operations to the United States. The Canada Gazette reported that the Article XXVIII negotiations were concluded in June of 2008 and that Canada would include in its tariff schedule a TRQ for MPCs with protein content of 85% or more by weight. Within quota quantities of MPC 85+ will enter free of duty, while over quota amounts will be subject to a 270% ad valorem tariff. The TRQ does not apply to NAFTA countries and other countries with which Canada has free trade agreements. U.S. milk producers in general support legislation to limit imports of MPCs. The National Milk Producers Federation (NMPF), the largest trade organization representing dairy farmers, supports the proposed legislation "in order to close a loophole in the U.S. dairy sector allowing certain dairy proteins ... to enter the U.S. and disrupt farm-level prices." Similarly, the National Farmers Union supports restrictions on MPCs. Although the NMPF supports the legislation, the organization has stated that imports are not the cause of the economic problem the industry is currently facing and cautions against taking import measures that could harm prospects for U.S. dairy exports. The International Dairy Foods Association (IDFA), representing dairy product processors and manufacturers, is adamantly opposed to more restrictions on dairy imports. IDFA is concerned that such a move would increase production costs for food manufacturers, raise prices for consumer products, and put at risk recent gains in U.S. dairy exports. They also argue that domestic production of MPCs is not sufficient to meet demands of food manufacturers, and MPCs are not interchangeable with domestically produced nonfat dry milk. The potential price impact of imposing TRQs depends on the level of farm prices relative to the implied level of support under the Dairy Product Price Support Program (DPPSP). In general, if dairy product prices (and hence, farm milk prices) are low relative to USDA's purchase price levels, resulting in USDA purchases of dairy products from manufacturers, the impact of additional imports falls primarily on the dairy program (i.e., higher government purchases and program costs) rather than on farm prices. Hence, stricter import controls could result in reduced government purchases of dairy products (and lower outlays). Conversely, if product prices are well above DPPSP purchase prices and the program becomes inactive, the impact shifts to the market. USDA purchased surplus dairy products from October 2008 to October 2009, primarily nonfat dry milk, with the pace slowing considerably in late summer 2009. This leaves open the question whether imposing TRQs on MPCs and caseins/caseinates would have affected farm prices. Dairy product prices have since moved above support levels. To the extent product prices remain above purchase prices in the DPPSP, the magnitude of the impact on farm milk prices would depend on: (a) the amount of product not imported because of the TRQ, and (b) how this quantity (in milk equivalent) relates to overall U.S. milk production. Using the proposed TRQ levels and average imports from 2006-2008, the amount of over-quota imports would total 85,000 metric tons. Converted to farm milk equivalent, the over-quota imports would equate to approximately 1.2 billion pounds of farm milk or about 0.7% of average U.S. milk production during 2006-2008. By itself, this amount of milk equivalent, if made unavailable to the U.S. market, would have a relatively small effect on average U.S. farm milk prices. However, some view it as part of a larger set of policies that would help address the current financial situation for U.S. dairy farmers.

Low farm milk prices and declining dairy sector income in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. To limit U.S. imports of MPCs, the Milk Import Tariff Equity Act was introduced in the Senate (S. 1542) on July 30, 2009, and in the House (H.R. 3674) on September 29, 2009. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents, including dairy product manufacturers, respond that the prospective move would increase their costs and result in higher retail food prices. MPCs are used in a variety of food products (e.g., infant formula, processed cheese products, and specialty sports and medical nutrition products), animal feed, and industrial products. Currently, U.S. imports of MPCs are assessed very low or no tariffs while many other dairy product imports are restricted by tariff-rate quotas (TRQs), which impose low import duties on quantities inside a quota while quantities above the quota are charged higher duty rates. During most of the last decade, total imports of MPCs have hovered around 150,000 metric tons or less. Imports fill a gap in limited domestic production. Until 1995, imports of almost all dairy products (butter, cheese, and dry milk) were subject to import quotas, which were established under Section 22 of the Agricultural Adjustment Act of 1933 to prevent imports from interfering with USDA domestic support programs. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into TRQs. Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs. The proposed bills in the 111th Congress, which are similar to previously introduced legislation, would establish two separate TRQs for (1) MPCs with a protein concentration of 40% to 90%, and (2) the combined imports of three products: milk protein concentrate (90% protein), casein, and caseinates. Based on recent trade data, more than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties. Under World Trade Organization (WTO) rules for any new U.S. restrictions on imports, enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. The amount of compensation for which the United States might be liable would be on based on WTO formulas, recent trade data, and bilateral negotiations with principal suppliers. Farm-level impacts of new TRQs depend on whether dairy product prices are below or above federal price support levels. If below, farm milk prices would likely not be affected because they would already be supported above market-clearing levels, and trade restrictions would simply limit government purchases of dairy products under the price support program. If above, farm prices would likely increase to the extent that product is withheld from the market. Based on recent trade data, this quantity is estimated to represent about 0.7% of U.S. milk production. The pace of USDA dairy product purchases slowed considerably in late summer 2009, leaving open the question of whether imposing TRQs on MPCs would have affected farm prices at that time. Market prices for dairy products have since moved above support levels.

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In October 2000, a coalition of democratic parties defeated Serbian strongman Slobodan Milosevic in presidential elections, overturning a regime that had plunged the country into bloody conflicts in the region, economic decline, and international isolation in the 1990s. The country's new rulers embarked on a transition toward Western democratic and free market standards, but success has been uneven. Serbia has held largely free and fair elections, according to international observers. A new constitution adopted in 2006 marked an improvement over the earlier, Socialist-era one. However, the global economic crisis dealt a setback to Serbia's economy. Organized crime and high-level corruption remain very serious problems. Serbia has set integration in the European Union as its key foreign policy goal, but its prospects have been clouded by concerns of some EU countries that it has not done enough to normalize relations with its former Kosovo province, which declared independence in 2008. U.S.-Serbian relations, although positive in many respects, have also been negatively affected by the leading role played by the United States in promoting Kosovo's independence. Serbia's most recent parliamentary, presidential, and local elections were held on May 6, 2012. In the parliamentary vote, a coalition of parties led by the nationalist Serbian Progressive Party (SNS) won 73 seats in the 250-seat Serbian parliament. A pro-EU coalition led by the Democratic Party (DS) won 68 seats. In the biggest surprise of the vote, a coalition led by the Socialist Party of Serbia (SPS) won 45 seats, significantly more than expected. The strongly nationalist Democratic Party of Serbia (DSS) won 20 seats, as did a coalition led by the Liberal Democratic Party, which favors a less nationalist approach than the DS. The United Regions of Serbia group won 16 seats. Most of the remaining seats were won by representatives of national minorities. In the presidential election, outgoing President Tadic of the DS faced Tomislav Nikolic from the SNS, as well as candidates from smaller parties. Tadic took first place with 26.7% of the vote. Nikolic came in a close second with 25.5%. The other candidates trailed far behind. As no candidate received a majority, a runoff election was held between Tadic and Nikolic on May 20. In a result that surprised almost all observers, Nikolic defeated Tadic, winning 49.55% to Tadic's 47.3%. Voter turnout was 46.37%. Analysts believe that Tadic's defeat may have been due to low turnout among his supporters, some of whom may have wished to punish him for the poor economic situation in the country and persistent government corruption. The powers of the Serbian presidency are modest, but the presence of the Progressives in the government will likely strengthen his hand greatly. Until a few years ago, Nikolic held extreme nationalist views, but he has moved closer to the center and now advocates stances close to those of the DS, including on European Union membership. Negotiations on forming a new government were difficult. At first, it appeared that former President Tadic would head the new government as Prime Minister, renewing the DS's alliance with the Socialists. However, these efforts failed, and the Socialists decided instead to form a government with the Progressives and the United Regions of Serbia. Unusually, despite having secured many more seats that the Socialists, the Progressives ceded the position of Prime Minister to Socialist leader Ivica Dacic. Indeed, some observers assert that this was a key reason, among others, for the Socialists' switch of alliances. Aleksandar Vucic, who became acting leader of the Progressives after Nikolic became President, is Defense Minister, and also oversees the intelligence services. The Foreign Minister is Ivan Mrkic, a career diplomat who served as ambassador to Cyprus during the regime of Serbian strongman Slobodan Milosevic. The speaker of the Serbian parliament is Nebojsa Stefanovic, from the Progressives. The Serbian parliament approved the new government on July 27, 2012. The continuing economic crisis in Serbia remains the key problem for the government, one lacking an easy solution. However, the government boosted its popularity (and especially that of Vucic) by launching an anti-corruption drive. The campaign has implicated former and current government ministers and Miroslav Miskovic, a prominent businessman with powerful political connections. Observers have lauded the government's first steps in fighting corruption, but caution that the rule of law must be preserved in all investigations and trials. Moreover, they note that it will be at least as important to institute lasting changes in the current political and legal systems to make corruption less likely to occur in the future. Another political controversy in Serbia has been the powers of the autonomous region of Vojvodina in northern Serbia, with some local authorities (often affiliated with the opposition in Belgrade) demanding more powers, and the central government wishing to keep a tight rein on the province. Serbia has faced some problems with the Presevo Valley region in southern Serbia. This ethnic Albanian majority region bordering Kosovo has been relatively quiet since a short-lived guerrilla conflict there in 2000-2001 between ethnic Albanian guerrillas and Serbian police, in the wake of the war in Kosovo. However, there have been sporadic incidents and problems since then, some resulting in injuries to Serbian police. Local Albanians claim discrimination and a lack of funding from Belgrade. Some local ethnic Albanian leaders have called for the region to be joined to Kosovo, perhaps in exchange for Serbian-dominated northern Kosovo. The United States and the international community have strongly opposed this idea. After the signature of an agreement between Serbia and Kosovo in April 2013, ethnic Albanian leaders in the Presevo valley have demanded the same rights for their area as Serbs in northern Kosovo would receive from the agreement. Until the global economic crisis hit in late 2008, Serbia experienced substantial economic growth. This growth was fueled by loose monetary and fiscal policies (in part keyed to election cycles), including increases in pensions and public sector salaries. The international economic crisis had a negative impact on Serbia's growth, and recovery has been slow due to continuing weakness in the EU, which is Serbia's main export market. After a decline of 1.7% in 2012, the International Monetary Fund expects Serbia's real Gross Domestic Product (GDP) to rise by 2% in 2013, and by the same percentage in 2014. Serbia's unemployment rate in 2012 was 23.1%, and will likely remain very high for the foreseeable future. Serbian net salaries are low, at roughly $488 a month in March 2013. Serbia's currency, the dinar, has depreciated sharply as a result of the economic crisis. This has aggravated inflation, leading the central bank to keep a tight rein on the money supply. Serbia is seeking a precautionary loan arrangement with the IMF. Serbia might not need to draw on the loan, as it has been successful in borrowing in the Eurobond market, but the loan agreement would signify IMF approval for Serbia's policies. This could keep the costs of borrowing in private markets relatively inexpensive and could encourage foreign investment. However, the IMF wants Serbia to make more credible efforts to cut its budget deficit and public debt before it commits itself to a new program. The economic crisis has caused a drop in foreign direct investment in Serbia. In early 2012, international investors sold their stakes in two key Serbian firms to the government. US Steel sold the Smederovo steel works, the country's largest exporter, to the Serbian government for the nominal price of $1. Declining steel prices and heavy competition made the plant unprofitable. The Serbian government bought the steel works to prevent large job losses, and hopes to resell it to another international investor. The Serbian government also bought the Greek telecom company OTE's 20% share in Telekom Srbija, with hopes of selling a stake in the company to a strategic investor. Serbia's budgetary problems have resulted in increased pressure from the IMF to privatize inefficient state-owned firms, whose losses amount to 2.5%-3.5% of GDP. However, the Serbian government has been reluctant to do so, fearing an increase in unemployment. One of Serbia's most difficult political and foreign policy challenges in recent years has been its relations with its former Kosovo province. Belgrade strongly opposed Kosovo's declaration of independence in February 2008. Serbia won an important diplomatic victory when the U.N. General Assembly voted in October 2008 to refer the question of the legality of Kosovo's declaration of independence to the International Court of Justice (ICJ). However, Serbia's diplomatic strategy suffered a setback when the ICJ ruled in July 2010 that Kosovo's declaration of independence did not contravene international law. After the ICJ ruling, under strong EU pressure, Serbia agreed to hold talks with Kosovo under EU mediation. The dialogue, which began in March 2011, at first focused on technical issues, although it has been difficult to separate technical issues from the main political one—Kosovo's status as an independent state. In an effort to make better progress in the talks, talks were moved to a higher political level in October 2012, when Prime Minister Dacic and Kosovo Prime Minister Hashim Thaci met. Such meetings became a regular feature of the negotiations in the following months. The technical agreements reached so far have included ones on free movement of persons, customs stamps, mutual recognition of university diplomas, cadastre (real estate) records, civil registries (which record births, deaths, marriages, etc. for legal purposes), integrated border/boundary management (IBM), and on regional cooperation. Implementation of most of these accords has lagged. A technical protocol on IBM went into effect at the end of 2012, with the opening of several joint Kosovo/Serbia border/boundary posts. The two sides also agreed to exchange liaison personnel (to be located in EU offices in Belgrade and Pristina) to monitor the implementation of agreements and address any problems that may arise. An issue that has proved particularly difficult to solve has been the status of the four Serbian-majority municipalities in northern Kosovo. The area, which borders directly on Serbia, is overwhelmingly ethnically Serbian. Prime Minister Dacic and other senior Serbian leaders have raised the possibility that Kosovo could be partitioned. Most observers have said that the line of partition would likely follow the current line of de facto control at the Ibar River, between the Serbian-dominated north and the Albanian-dominated south. In the past, some Serbian officials even suggested that they might discuss swapping the Albanian-dominated parts of the Presevo valley for northern Kosovo. However, the Kosovo government is strongly opposed to partition. The United States and the international community also oppose it, fearing that it could touch off the disintegration of Bosnia and Macedonia, which both have ethno-territorial tensions of their own. Serbian leaders have refrained from raising the idea of partition in recent months, due to strong pressure from the United States, Germany, and other EU countries that have recognized Kosovo. The key EU countries have made clear to Serbia that continuing to discuss partition as a viable option would jeopardize Belgrade's EU membership prospects. Belgrade currently exercises de facto control over northern Kosovo through what the Kosovo government, the United States, and many EU countries call "parallel institutions." These range from municipal governments to healthcare and educational facilities to representatives of Serbian military and intelligences agencies, although the last of these are not formally acknowledged to be deployed there. In the EU-mediated dialogue, the Kosovo government has demanded the dissolution of the parallel institutions and insists that the region come under its control. Kosovar leaders claimed that the area would enjoy the same level of decentralization enjoyed by Serb-majority municipalities in the rest of Kosovo under Kosovo's constitution. The United States, Germany, and other countries that have recognized Kosovo have demanded the dismantling of Serbian military and intelligence structures in Kosovo. They have called on Belgrade to make its funding of healthcare, education, and other institutions in northern Kosovo more transparent. In December 2012, EU member states agreed that any agreement should ensure that Kosovo has a "single institutional and administration set-up." For its part, Serbia pushed for the linking of Serb-dominated municipalities in northern Kosovo with Serbian enclaves in ethnic Albanian-dominated southern Kosovo in an association of Serb municipalities that would have executive powers. Kosovar leaders didn't dispute the right to form such an association but rejected giving it significant powers. Otherwise, Kosovar leaders feared, the association could result in the de facto partition of Kosovo, much as some observers see the existence of the Republika Srpska, the Serb-dominated largely autonomous "entity" within Bosnia and Herzegovina. On April 19, 2013, in the 10 th round in their EU-mediated dialogue, Serbian Prime Minister Ivica Dacic and Kosovo Prime Minister Hashim Thaci initialed a "First Agreement of Principles Governing the Normalization of Relations" between Kosovo and Serbia. The 15-point agreement calls for the creation of an "Association/Community of Serbian-majority municipalities" in Kosovo. This "Association/Community" will have "full overview" of the areas of economic development, education, health, urban and rural planning, and any others that Kosovo's central government in Pristina grants. The police in northern Kosovo will form part of Kosovo's unified police force, and will be paid only by Pristina. The police commander in the north will be a Kosovo Serb selected by Pristina from a list of nominees provided by the mayors of the four Serb municipalities in the north. The ethnic composition of the local police in the north will reflect the ethnic composition there. The situation in the judicial system is to be resolved in a similar manner. The judicial system in northern and southern Kosovo will operate under Kosovo's legal framework, but the Appellate Court in Pristina will have a panel composed of a majority of Kosovo Serb judges to deal with all Kosovo Serb-majority municipalities. A division of the Appellate Court will be based in northern Mitrovica, the largest town in northern Kosovo. The agreement also calls for new municipal elections in the north in 2013, under Kosovo law and with the assistance of the Organization for Security and Cooperation in Europe. The two sides agreed that "neither side will block, or encourage others to block, the other side's progress in their respective EU path." On April 21, Kosovo's parliament overwhelmingly approved the agreement. The Serbian government approved the agreement on April 22. Initial opposition in Serbia to the agreement was very sharp but limited in scope. The agreement was denounced by the Holy Synod of the Serbian Orthodox Church, and by many Kosovo Serb leaders. Several thousand people have held peaceful demonstrations against the accord in Belgrade and northern Kosovo. Nevertheless, the Serbian parliament approved the government's report on the negotiations with Kosovo on April 29 by an overwhelming vote of 173-24. In addition to support from the government parties, the report was also approved by most of the opposition parties as well. Opposing it was the nationalist Democratic Party of Serbia, and several other members of parliament, mainly those from Kosovo. Despite approving the agreement, Serbia still refuses to recognize Kosovo as an independent state, considering it to be an autonomous province of Serbia. Belgrade's position could be viewed perhaps as a convoluted effort to present the "Association/Community" of Serbian-majority municipalities in Kosovo (at least to itself) as an autonomous entity within another autonomous entity within Serbia. For their part, Pristina and the Serbian government's opponents have portrayed the agreement as Serbia's de facto recognition of Kosovo as an independent country. The agreement faces serious challenges to its implementation, including the strong opposition of most Serb leaders in northern Kosovo. Kosovo Serb leaders in northern Kosovo have rejected even a symbolic Kosovo government presence in the area. In February 2012, Kosovo Serb leaders in the north organized a local referendum (which was not monitored by international observers) that rejected Kosovo government institutions by an overwhelming margin. Prime Minister Dacic has said that, although he wants northern Kosovo leaders to voluntarily agree to implementation, the government also has the ability to bring pressure to bear, such as by cutting off salaries to those who refuse to cooperate. Dacic and other Belgrade leaders warn that the implementation process must be well underway before the end of June, when the EU Council will decide on whether to grant Serbia a date to begin membership negotiations. Key EU countries are particularly insistent that progress be made as soon as possible on dismantling Serbian security structures in Kosovo. Holding new local elections in northern Kosovo later this year under Kosovo laws also appears challenging. Turnout among Serbs may be very low, which could impair the perceived legitimacy of those institutions. KFOR, the NATO-led peacekeeping force in Kosovo, is expected to play an important role in the agreement's implementation. During the talks, Serbia demanded that Kosovo pledge not to deploy the Kosovo Security Force (a quasi-military force) or its special police units in northern Kosovo without the consent of local leaders. Pristina has not made such a formal pledge, but Prime Minister Dacic has said that during the talks he received a letter from NATO Secretary General Anders Fogh Rasmussen pledging that such deployments would not be made without KFOR's consent, and then only in cases of natural disaster and in consultation with local Serbian leaders. Since 2008, Serbia's foreign policy has focused on two main objectives—integration into the European Union and hindering international recognition of the independence of Serbia's former Kosovo province by legal and diplomatic means. To this end, Serbia has focused on seeking good relations with the EU, in order to achieve its long-term goal of EU membership. It has tried to avoid conflicts with the 22 EU countries that have recognized Kosovo's independence, while cultivating the five states whose non-recognition of Kosovo serves to block a closer formal relationship between the EU and Kosovo. Serbia has also bolstered ties with Russia and China, partly in an effort to secure loans, investment, and other economic advantages and partly to ensure they maintain their opposition to Kosovo's independence. U.S.-Serbian ties have improved since U.S. recognition of Kosovo's independence in February 2008, but appear not to play a central role in either country's foreign policy at present. Although the United States has offered to "agree to disagree" with Serbia over Kosovo, the issue may continue to affect relations, particularly as the United States remains Kosovo's most powerful international supporter. The European Union signed a Stabilization and Association Agreement (SAA) with Serbia in April 2008. The agreement grants trade concessions to Serbia. It provides a framework for enhanced cooperation between the EU and Serbia in a variety of fields, including help in harmonizing local laws with EU standards, with the perspective of EU membership. The Netherlands blocked implementation of provisions of the SAA until all EU countries agreed that Serbia is cooperating with the International Criminal Tribunal for the former Yugoslavia (ICTY). Serbia made substantial progress in this regard when it detained indicted war criminal Radovan Karadzic on July 21, 2008, and later transferred him to the ICTY. In an effort to show its strong support for EU integration, Serbia unilaterally began to implement trade provisions of the SAA in February 2009, lowering tariff barriers for EU goods to enter Serbia. After a largely favorable report on Serbia's cooperation with the ICTY from the Tribunal's chief prosecutor, the EU decided in December 2009 to allow the key trade provisions of the SAA to be implemented before ratification. In June 2010, after another favorable report on Serbia's ICTY cooperation, the Netherlands lifted its veto on submitting the SAA to ratification by EU member governments. As of April 2013, 26 of the 27 EU countries have ratified the accord, with only Lithuania remaining. Serbia submitted its application for EU membership in December 2009. However, it was not until November 2010 that the EU took the first step in the process, giving Serbia a detailed questionnaire on its qualifications as a membership candidate. Serbia's EU membership prospects are clouded by several factors. One concern is the difficulty of meeting the EU's stringent requirements and growing "enlargement fatigue" in many EU countries. Perhaps the most intractable problem is the issue of Kosovo. Twenty-two of the 27 EU countries have recognized Kosovo (including key countries such as Britain, France, Germany, and Italy). Five EU countries (Greece, Cyprus, Slovakia, Romania, and Spain) have declined to recognize Kosovo's independence. These countries are either traditional allies of Serbia, or have minority populations for whom they fear Kosovo independence could set an unfortunate precedent, or both. Serbian leaders have said that they will reject EU membership if it is conditioned on recognizing Kosovo's independence. Given the sensitivity of the issue for Serbian public opinion and the EU's own divisions, such an explicit condition is unlikely. However, since 2008 the EU has successfully pressed Serbia to cooperate with the EULEX law-and-order mission in Kosovo, to drop its efforts to have the U.N. General Assembly condemn Kosovo's independence as illegitimate, and to hold talks with the Kosovo government. Leaders of many EU member states are reluctant to "import" an unresolved territorial question such as Kosovo into the EU, as it did when it admitted Cyprus. Serbia may therefore gradually be pressed by the most influential EU states into de facto (if not de jure) recognition of Kosovo's independence or be forced to give up its membership hopes. In October 2011, the European Commission released a report on Serbia's qualifications to become a member of the EU. Noting the progress made in the EU-brokered talks with Kosovo, the Commission recommended that Serbia be given the status of a membership candidate if it re-engages in the dialogue with Kosovo and implements in good faith agreements already reached. The Commission recommended that Serbia be given a date to begin membership negotiations if it achieves further steps in normalizing its relations with Kosovo. These include "fully respecting the principles of inclusive regional cooperation; fully respecting the provisions of the Energy Community Treaty; finding solutions for telecommunications and mutual acceptance of diplomas; by continuing to implement in good faith all agreements reached; and by cooperating actively with EULEX in order for it to exercise its functions in all parts of Kosovo." In February 2012, Serbia and Kosovo reached agreement on Kosovo's participation in regional institutions. The deal will permit Kosovo to participate in the institutions under the name "Kosovo*," with the asterisk referring to both U.N. Security Council Resolution 1244 (which Serbia says recognizes Kosovo as part of its territory) and a 2010 International Court of Justice ruling that Kosovo's declaration of independence did not contravene international law. The two sides also reached a technical protocol on Integrated Border Management. In response to the conclusion of these agreements, in March 2012 the EU accepted Serbia as a membership candidate. However, the EU made clear that the granting of a date for the EU to begin negotiations with Serbia will depend upon reaching agreements on energy and telecommunications and implementation of the accords already agreed to. On April 22, 2013, in part as a result of the signing of the April 19 normalization agreement with Kosovo, the European Commission recommended that the EU grant Serbia a starting date for its EU membership talks. EU member states will make a decision based on this recommendation at their next EU Council summit in late June 2013. The Council's decision will likely be based in part on the implementation of Kosovo-Serbia agreements. Since December 2009, the EU has permitted Serbian citizens to travel visa-free to the EU. Many Serbs may see the decision as the most tangible (and most prized) benefit they have received so far from the Serbian government's pro-EU policy. A surge of asylum-seekers from Serbia and elsewhere led the EU in May 2011 to adopt a policy allowing visa-free travel to be temporarily suspended if there is a surge in illegal immigration from a given country. This policy has not been applied to Serbia as yet, in part due to measures by Serbia to clamp down on illegal migrants. The government has reportedly focused on areas of the country inhabited by ethnic Albanians and Roma, considered by Serbia to be major sources of such illegal migrants. In December 2006, Serbia joined NATO's Partnership for Peace (PFP) program. PFP is aimed at helping countries come closer to NATO standards and at promoting their cooperation with NATO. Serbia's government has pledged to enhance cooperation with NATO through the PFP program, including through joint exercises and training opportunities. Serbia has generally supported KFOR, the NATO-led peacekeeping force in neighboring Kosovo, while sometimes criticizing it for allegedly not doing enough to protect Serbs there. Serbia is also unhappy with NATO's role in overseeing the Kosovo Security Force (seen by both Serbia and ethnic Albanians in Kosovo as a de facto Kosovo army in the making). Serbian leaders have expressed support for the NATO membership aspirations of all of the other countries in the region, but are not seeking NATO membership for Serbia. Due in part to memories of NATO's 1999 bombing of Serbia and anger at the U.S. role in Kosovo's independence, public support for NATO membership is low. Public opinion polls have repeatedly shown that less than 20% of the Serbian public favor NATO membership. Serbia's relations with the other countries in its region have improved markedly in recent years, but tensions remain over some issues; Croatia and Bosnia filed cases with the International Court of Justice (ICJ) charging Serbia with genocide during the wars of the 1990s. (Ruling in the Bosnia case in 2007, the ICJ cleared Serbia of genocide, but found Serbia in violation of international law for not preventing the Srebrenica massacre, and other failings.) In 2009, Serbia countered with an ICJ suit of its own against Croatia. Serbian and Croatian leaders have discussed the possibility of both sides dropping their suits. Some Bosnian leaders, mainly from the Bosniak (Muslim) ethnic group, have complained that Serbian leaders have done little to rein in Bosnian Serb leader Milorad Dodik's perceived efforts to undermine the effectiveness of Bosnia's central government institutions. Serbia asserts that it respects Bosnia's sovereignty and territorial integrity and abides fully by the terms of the Dayton Peace Agreement that established Bosnia's current governmental system. In March 2010, at the urging of President Tadic, the Serbian parliament passed a resolution condemning the crimes committed by Serbian forces in Srebrenica in Bosnia in 1995. President Nikolic has also made a statement expressing strong regret for the crimes committed in Srebrenica. On the other hand, Nikolic has made other statements that have unsettled relations with Bosnia. Serbia has played a key role in U.S. policy toward the Balkans since the collapse of the former Yugoslavia in 1991. U.S. officials came to see the Milosevic regime as a key factor behind the wars in the region in the 1990s, and pushed successfully for U.N. economic sanctions against Serbia. On the other hand, the United States drew Milosevic into the negotiations that ended the war in Bosnia in 1995. The United States bombed Serbia in 1999 to force Belgrade to relinquish control of Kosovo, where Serbian forces had committed atrocities while attempting to suppress a revolt by ethnic Albanian guerrillas. U.S. officials hailed the success of Serbian democrats in defeating the Milosevic regime in elections in 2000 and 2001. The United States has seen a democratic and prosperous Serbia, at peace with its neighbors and integrated into Euro-Atlantic institutions, as an important part of its key policy goal of a Europe "whole, free, and at peace." U.S. aid to Serbia has declined sharply in recent years, perhaps reflecting overall U.S. budgetary stringency, changing U.S. global priorities, and Serbia's EU membership candidacy, which is expected to result in greater EU aid to the country. In FY2011, Serbia received $45 million in U.S. aid for political and economic reforms, $1.896 million in Foreign Military Financing (FMF), $0.9 million in IMET military training funds, and $1.15 million in Nonproliferation, Antiterrorism, Demining and Related (NADR) aid. In FY2012, Serbia was expected to receive $33.5 million in aid for political and economic reform for Serbia, $2 million in FMF, $0.9 million in IMET, and $2.65 million in NADR funding. For FY2013, the Administration requested $19.913 million to aid Serbia's political and economic reforms in the Economic Support Fund (ESF) account, $3 million in International Narcotics Control and Law Enforcement funding (INCLE), $0.9 million in IMET, and $1.8 million in FMF. For FY2014, the Administration aid request for Serbia includes $16.103 million in ESF assistance, $3 million in the INCLE account, $1.05 million in IMET aid, and $1.8 million in FMF. The goal of U.S. aid for political reform is to strengthen democratic institutions, the rule of law, and civil society. It includes programs to strengthen the justice system, support local governments, help fight corruption, foster independent media, and increase citizen involvement in government. Aid is being used to help Serbia strengthen its free market economy by reforming the financial sector and promote a better investment climate. Other U.S. aid is targeted at strengthening Serbia's export and border controls, including against the spread of weapons of mass destruction. U.S. military aid helps Serbia participate in NATO's Partnership for Peace program and prepare for international peacekeeping missions. The signing of a Status of Forces Agreement with Serbia in September 2006 has permitted greater bilateral military cooperation between the two countries, including increased U.S. security assistance for Serbia as well as joint military exercises and other military-to-military contacts. The Ohio National Guard participates in a partnership program with Serbia's military. However, despite U.S. urging, Serbia declined to contribute troops to the NATO-led ISAF peacekeeping force in Afghanistan. In 2005, the Administration granted duty-free treatment to some products from Serbia under the Generalized System of Preferences (GSP). The most serious cloud over U.S.-Serbian relations is the problem of Kosovo. The United States recognized Kosovo's independence on February 18, 2008. On the evening of February 21, 2008, Serbian rioters broke into the U.S. Embassy in Belgrade and set part of it on fire. The riot, in which other Western embassies were targeted and shops were looted, took place after a government-sponsored rally against Kosovo's independence. The embassy was empty at the time. Observers at the scene noted that Serbian police were nowhere to be found when the incident began, leading to speculation that they had been deliberately withdrawn by Serbian authorities. Police arrived later and dispersed the rioters at the cost of injuries on both sides. One suspected rioter was later found dead in the embassy. U.S. officials expressed outrage at the attack and warned Serbian leaders that the United States would hold them personally responsible for any further violence against U.S. facilities. President Tadic condemned the attack and vowed to investigate why the police had allowed the incident to occur. In April 2013, 12 persons went on trial in Belgrade for the attack. The United States also continues to raise with Serbian authorities the case of the Bytyqi brothers. During the 1999 war in Kosovo, the three U.S. citizens were murdered by Serbian Interior Ministry troops, who were never brought to justice. In May 2009, Vice President Joseph Biden set the tone for the Obama Administration's policy toward Serbia, in a trip to the region that also included Kosovo and Bosnia, in addition to Serbia. Biden said the United States wanted to improve ties with Serbia. He acknowledged that Serbia must play "the constructive and leading role" in the region for the region to be successful. He expressed the belief that the United States and Serbia could "agree to disagree" on Kosovo. Biden stressed that the United States did not expect Serbia to recognize Kosovo's independence, and would not condition U.S.-Serbian ties on the issue. However, he added that the United States expects Serbia to cooperate with the United States, the European Union, and other key international actors "to look for pragmatic solutions that will improve the lives of all the people of Kosovo," including the Serbian minority. Biden said the United States also looks to Serbia to help Bosnia and Herzegovina become "a sovereign, democratic, multi-ethnic state with vibrant entities." U.S. officials have often asked Serbia to use its influence with Bosnian Serb leaders to persuade them to cooperate with international officials there. Finally, Biden called on Belgrade to cooperate fully with the International Criminal Tribunal for the Former Yugoslavia. Biden said that the United States "strongly supports Serbian membership in the European Union and expanding security cooperation between Serbia, the United States, and our allies." He called for strengthening bilateral ties, including military-to-military relations, economic ties, and educational and cultural exchanges. More recently, in February and March 2012, Secretary of State Clinton praised progress in the Serbia-Kosovo negotiations and hailed the EU's subsequent granting of EU membership candidate status to Serbia. In June, she congratulated Nikolic on his victory in the presidential election and said that the United States wanted to cooperate with Serbia. She said Serbia should continue its path toward EU integration and establish open and transparent relations with Kosovo. In the wake of the surprising decision of the Progressives and Socialists to form a new government, Deputy Assistant Secretary of State Philip Reeker visited Belgrade in early July 2012, followed by Assistant Secretary Gordon a few days later. Serbian press sources claimed that the U.S. diplomats were trying to break up the coalition, or at least to secure the participation in it of the Democrats. Gordon denied these claims, saying the visit was intended to reinforce the message that the new government should continue on the path of EU integration and normalizing relations with Kosovo, including the implementation of existing agreements. He said Serbia must dismantle the Serbian security presence in northern Kosovo, although some Serbian government civilian infrastructure such as healthcare facilities could remain. Secretary of State Hillary Clinton visited the region again in late October and early November 2012, stopping in Bosnia, Serbia, Kosovo, Croatia, and Albania. In a move that underlined the U.S. focus on coordination with the EU, she visited Bosnia, Serbia, and Kosovo jointly with EU foreign policy chief Baroness Catherine Ashton. At every stop, Clinton emphasized the solidarity between Brussels and Washington on Balkan policy. During visits to Serbia and Kosovo, Clinton stressed the importance for both sides to negotiate in good faith in the EU-brokered talks aimed at normalizing their relationship so that they can integrate with the European Union. Clinton stressed that the United States regards Kosovo's sovereignty and territorial integrity as completely non-negotiable. Although most EU countries would agree with the statement, Ashton could not make such a comment, as the EU is divided on the issue of Kosovo's independence. On April 19, 2013, Secretary of State John Kerry issued a statement hailing the agreement on northern Kosovo, and calling on both sides to speedily implement it and the other agreements they have reached. Kerry also commended Baroness Ashton for her role in facilitating the talks. He said the United States remained deeply committed to seeing Serbia and Kosovo and the region achieve their goals of integrating into a Europe whole, free, and at peace. On April 24, the Subcommittee on Europe, Eurasia, and Emerging Threats of the House Foreign Affairs Committee held a hearing on Kosovo-Serbia relations. Acting Deputy Assistant Secretary of State Jonathan Moore expressed strong Administration support for the April 19 agreement and underlined that close U.S.-EU policy coordination helped bring it about. Subcommittee Chairman Representative Dana Rohrabacher expressed strong skepticism about the viability of the agreement. He reiterated his long-standing support for referendums to be held in Serb-majority areas of northern Kosovo and ethnic Albanian-majority areas of southern Serbia on which country the populations there want to belong to. Such referendums would likely result in a swap of territories between the two countries. Moore repeated the Administration's opposition to this approach, claiming it could lead to further conflict in the region.

Serbia faces an important crossroads in its development. It is seeking to integrate into the European Union (EU), but its progress has been hindered by tensions with the United States and many EU countries over the independence of Serbia's former Kosovo province. The global economic crisis poses serious challenges for Serbia. Painful austerity measures have been required for Serbia by the International Monetary Fund and other international financial institutions. Serbia held parliamentary and presidential elections in May 2012. One party in the former government, the Socialist Party, did much better than anticipated in the parliamentary vote. In another surprise, in the presidential vote the incumbent president Boris Tadic was defeated by Tomislav Nikolic of the nationalist Progressive Party. After protracted negotiations, in July 2012 the Progressives formed a new government with the Socialists and another group, the United Regions of Serbia. Socialist leader Ivica Dacic was elected as Prime Minister. Serbia has vowed to take all legal and diplomatic measures to preserve its former province of Kosovo as legally part of Serbia. Nevertheless, nearly 100 countries, including the United States and 22 of 27 EU countries, have recognized Kosovo's independence. Russia, Serbia's ally on the issue, has used the threat of its Security Council veto to block U.N. membership for Kosovo. After the International Court of Justice ruled in July 2010 that Kosovo's declaration of independence did not contravene international law, the EU pressured Serbia to hold talks with Kosovo starting in March 2011. Serbia's other key foreign policy objective is to secure membership in the European Union. In March 2012, the EU accepted Serbia as a candidate for membership after having judged that Belgrade has made sufficient progress in reaching and implementing agreements with Kosovo on a series of practical issues. In April 2013, the EU Commission recommended that the EU give Serbia a date for the start of the talks. Even if talks formally begin late this year, many years of negotiations will be required before Serbia can join the EU. In December 2006, Serbia joined NATO's Partnership for Peace (PFP) program. PFP is aimed at helping countries come closer to NATO standards and at promoting their cooperation with NATO. Although it supports NATO membership for its neighbors, Serbia is not itself seeking NATO membership. This may be due to such factors as memories of NATO's bombing of Serbia in 1999, U.S. support for Kosovo's independence, and a desire to maintain close ties with Russia. U.S.-Serbian relations have improved since the United States recognized Kosovo's independence in February 2008, when Serbia sharply condemned the U.S. move and demonstrators sacked a portion of the U.S. Embassy in Belgrade. During a 2009 visit to Belgrade, Vice President Joseph Biden stressed strong U.S. support for close ties with Serbia. He said the countries could "agree to disagree" on Kosovo's independence. He called on Serbia to transfer the remaining war criminals to the former Yugoslavia war crimes tribunal (since accomplished), promote reform in neighboring Bosnia, and cooperate with international bodies in Kosovo. The United States has strongly supported the EU-led talks between Kosovo and Serbia, while making clear that it plays no direct role in them. The United States has applauded the agreements reached by the two sides, including a key one on normalizing relations in April 2013.

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The Supreme Court decided four search and seizure cases during its October 2012 term. Florida v. Jardines involved the question of "[w]hether a trained narcotics-detection dog's sniff at the front door of a suspected [marijuana] grow house is a Fourth Amendment search." Florida v. Harris related to whether an alert by a trained drug-detection dog is sufficient to establish probable cause for a search of a vehicle. Bailey v. United States concerned the question of whether "the detention of an individual who has just left premises to be searched under warrant is permissible when the individual is detained out of view of the house as soon as possible." Missouri v. McNeely addressed whether "the natural metabolization of alcohol in the bloodstream presents a per se exigency that justifies an exception to the Fourth Amendment's warrant requirement for nonconsensual blood testing in all drunk-driving cases." Is a dog sniff at the front door of a suspected grow house by a trained narcotics-detection dog a Fourth Amendment search requiring probable cause? Last term in Jones , five Justices declared that a Fourth Amendment "search" occurs when "the Government obtains information by physically intruding on a constitutionally protected area." This term, the Court declared that a search occurs when the police obtain information on the basis of the performance of a drug-sniffing dog on the front porch of a private house. Although the answer might seem something of a departure from the Court's past treatment of dog sniffing cases, those cases relied upon the "expectation of privacy rationale" rather than the alternative Jones "property intrusion" rationale. On November 3, 2006, Miami-Dade Police received an unverified "crime stoppers" tip that Jardines was growing marijuana in his house. A month later, as part of an elaborate multi-agency enterprise, authorities descended on Jardines's house at dawn. They saw no activity in the house. The blinds were drawn. The driveway was empty. The air conditioning was running. An officer and a trained drug-sniffing dog entered the front porch, where the dog "alerted" for the presence of drugs, most emphatically at the front door. A second officer then stepped to the front door to conduct a "knock and talk." He received no response. He used the dog's reaction to obtain a search warrant. A subsequent search turned up marijuana growing in the house. On appeal, the Florida district court overturned the trial court's suppression of the evidence seized at Jardines's house. The Florida Supreme Court in turn reversed the district court's decision, concluding that the dog's use under the circumstances constituted a warrantless search. It also endorsed the trial court's determination that without the dog-sniffing evidence, authorities had presented insufficient evidence to establish the probable cause necessary for issuance of the search warrant. Drug-sniffing dogs first appear in the Court's jurisprudence in Place . There, federal agents, suspicious of Place's conduct when he arrived in New York on a flight from Miami, stopped him, questioned him, and seized his luggage. A trained dog eventually alerted to the presence of drugs in one of the bags. Place sought to suppress evidence found in the bag. The Court concluded that the 90-minute delay between when the luggage was seized and when it was sniffed by the dog exceeded the delay permissible under Terry for detention of the luggage detained solely on reasonable suspicion. In doing so, however, the Court observed that "the particular course of investigation that the agents intended to pursue here—exposure of respondent's luggage, which was located in a public place, to a trained canine—did not constitute a 'search' within the meaning of the Fourth Amendment." Again in Edmond , the use of dogs was not an issue. But again, the Court noted in passing that use of drug-sniffing dogs in a public area was something less than a typical Fourth Amendment search. Edmond objected to the City's suspicionless drug checkpoint program that had ensnarled him. The program featured a drug-sniffing dog walking around each of the cars stopped at the checkpoint. The Court held the drug-interdiction, law enforcement purpose precluded the program's claim to the "special needs" exception necessary to excuse the checkpoint seizures without either probable cause or a warrant. In the course of its opinion, the Court pointed out that "[i]t is well established that a vehicle stop at a highway checkpoint effectuates a seizure within the meaning of the Fourth Amendment. The fact that officers walk a narcotics-detection dog around the exterior of each car ... does not transform the seizure into a search, see United States v. Place ." Nevertheless, the Court went out of its way to emphasize that the case was not about the use of dogs: "The Chief Justice's dissent also erroneously characterizes our opinion as holding that the 'use of a drug-sniffing dog ... annuls what is otherwise plainly constitutional under our Fourth Amendment jurisprudence.' Again, the constitutional defect of the program is that its primary purpose is to advance the general interest in crime control." In Caballes , the dog sniff was the issue, that is, "[w]hether the Fourth Amendment requires reasonable, articulable suspicion to justify using a drug-detecting dog to sniff a vehicle during a legitimate traffic stop." The Court said no: "A dog sniff conducted during a concededly lawful traffic stop that reveals no information other than the location of a substance that no individual has any right to possess does not violate the Fourth Amendment." The proposition that the use of a dog, trained to detect drugs, carries no Fourth Amendment implications seemed to bode ill for Jardines's claim. The Florida Supreme Court held that the use of a drug-sniffing dog on Jardines's front porch constituted a search and that such a search required probable cause before it could be conducted. The court distinguished the case at hand from the United States Supreme Court precedents on several grounds. It noted that the sniff tests conducted in Place , Edmond , and Caballes were all conducted in a "minimally intrusive manner upon objects ... that warrant no special protection." The Jardines sniff test was a "public spectacle" conducted at a private home, an area entitled to the highest level of Fourth Amendment protection. Then, the court pointed out that "[a]ll the tests were conducted in an impersonal manner that subjected the defendants to no untoward level of public opprobrium, humiliation or embarrassment." The Jardines sniff test involved the presence of multiple police vehicles and many officers that produced a spectacle "in a residential neighborhood [that would] invariably entail a degree of public opprobrium, humiliation and embarrassment for the resident ... for such dramatic government activity in the eyes of many—neighbors, passers-by, and the public at large—[would] be viewed as an official accusation of crime." Finally, the court emphasized that the Place , Edmond , and Caballes tests were conducted under circumstances in which they "were not susceptible to being employed in a discriminatory or arbitrary manner." In contrast, "if government agents can conduct a dog 'sniff test' at a private residence without any prior evidentiary showing of wrongdoing, there is simply nothing to prevent the agents from applying the procedure in an arbitrary or discriminatory manner, or based on whim and fancy, at the home of any citizen." The concurring justices offered another factor: "the lack of a uniform system of training and certification for drug-detection canines ... [:] conditioning and certification programs vary widely in their methods, elements, and tolerances of failure ... [; and] dogs themselves vary in their abilities to accept, retain, or abide by their conditioning in widely varying environments and circumstances." In the absence of exigent circumstances or non-law enforcement special needs, the court concluded that the dog sniff searches such as the one that occurred in Jardines may only be conducted on the basis of probable cause. The dissenters contended that the majority opinion flew in the face of binding United States Supreme Court precedent. Beyond Place , Edmond , and Caballes , they mention the Court's observation in Kyllo to the effect that "'a Fourth Amendment search does not occur—even when the explicitly protected location of a house is concerned—unless the individual manifested a subjective expectation of privacy in the object of the challenged search and society is willing to recognize that expectation as reasonable.'" Couple this with the Court's statement "that government conduct that only reveals the possession of contraband compromises no legitimate privacy interest," and the position of the majority opinion becomes untenable, the dissenters suggested. The justices of the Florida Supreme Court, however, did not have the advantage of the United States Supreme Court's Jones decision. There, a majority of the Court made clear that a Fourth Amendment search occurs whenever the government physically intrudes upon constitutionally protected property. The "expectation of privacy" concept, born of Katz , supplements, it does not condition, the traditional protection of the Amendment. The United States Supreme Court may have had Jones in mind when it agreed to hear Jardines . In any event, for five Justices, the principle announced in Jones dictated the result in Jardines . If anything, Jardines seems to present a clearer example of the Jones principle than does Jones . Jones , after all, involved placing a tracking device on a car parked in a public parking lot, while Jardines involved a home. On the other hand, Jardines did not involve an intrusion into the home itself, but rather the use of a drug-detecting dog at the front door and on the porch of the home. Justice Scalia began the opinion for the Court with the observation that a Fourth Amendment search occurs when the government "obtains information by physically intruding" upon constitutionally protected areas of person, houses, papers, or effects. He pointed out that the curtilage—the area immediately surrounding the house, including any porch—is afforded the same protection as a house. In the case of the front door, however, the Court stated that the householder is thought to have granted an implicit license for some level of intrusion by the public and government alike. Yet the license is limited as to place and purpose. A license to knock and talk is not a license to conduct a search at the front door and certainly not on the porch. The suggestion that the Court's earlier dog sniff cases demanded a different result were unavailing. Justice Scalia explained that "The Katz reasonable-expectations test has been added to, not substituted for, the traditional property-based understanding of the Fourth Amendment, and so is unnecessary to consider when the government gains evidence by physically intruding on constitutionally protected areas." Consequently, "[t]he government's use of trained police dogs to investigate the home and its immediate surrounding [was] a search within the meaning of the Fourth Amendment, [and] [t]he judgment of the Supreme Court of Florida [was] therefore affirmed." Although they joined the opinion for the Court in full, Justice Kagan with Justices Ginsburg and Sotomayor would also have affirmed the judgment of the Florida Supreme Court on "expectation of privacy grounds." From their perspective, the Court's thermal imaging Kyllo case controlled the expectation of privacy analysis. Applying the Kyllo rule, "[t]he police officers [in Jardines] conducted a search because they used a 'device ... not in general public' (a trained drug-detection dog) to 'explore details of the home' (the presence of certain substances) that they would not otherwise have discovered without entering the premises." The dissenters, Justice Alito with Chief Justice Roberts as well as Justices Kennedy and Breyer, could not accept the notion that the officer's presence at Jardines's front door became a Fourth Amendment search simply because he was accompanied by his dog. Nor did they believe that Jardines had a reasonable expectation of privacy with respect to the smell of marijuana escaping from the house and detectable at the front door, a place open to the public. Has the Florida Supreme Court decided an important question in a way that conflicts with established Fourth Amendment precedent of the U.S. Supreme Court by holding that an alert by a well-trained narcotics-detection dog certified to detect illegal contraband is insufficient to establish probable cause to search a vehicle? The Florida Supreme Court's Jardines decision was perhaps not surprising in light of its earlier decision in Harris . It refused to accept a trained drug-detection dog's positive reaction as per se probable cause in Harris . Instead, it listed a host of criteria under which a trained dog's alert might be considered probable cause. Neither the per se standard nor the Florida court's list seemed consistent with the "totality of the circumstances" standard that the United States Supreme Court had favored. A canine officer pulled Harris's truck over for a traffic violation. His trained dog alerted to the presence of narcotics. A search of the truck, however, did not yield the drugs the dog had been trained to detect. Nevertheless, it did lead to the discovery of precursor chemicals. Two months later, the same canine team again pulled Harris over for a traffic violation with the same result. The dog reacted positively to the presence of drugs, but none were found. The trial court denied Harris's motion to suppress the evidence seized following the first search. The district court affirmed. The Florida Supreme Court reversed, holding that "the fact that a drug-detection dog has been trained and certified to detect narcotics, standing alone, is not sufficient to demonstrate the reliability of the dog" and thereby establish probable cause to conduct a search. Probable cause to believe that the search will reveal contraband or evidence of a crime is a prerequisite for the issuance of a search warrant. And probable cause permits police to search a car or truck without a warrant. Probable cause exists when "there is a fair probability that contraband or evidence of a crime will be found in a particular place." Whether that standard has been met is a common sense assessment of all of the circumstances in a particular case. At one point, the Court held that bare, conclusionary statements to a magistrate that officers had reliable information from a credible source, without indicating why the tip was reliable or the source credible, did not constitute probable cause. Shortly thereafter, the Court refused to find probable cause to secure a warrant in a case in which the informant's tip was offered without evidence of the information's reliability or of the tipster's credibility, even in the presence of some corroboration of the tip's accuracy. The two cases, Aguilar and Spinelli , led some to believe that an informant's tip might serve as the basis for probable cause only with evidence of the information's reliability and tipster's credibility. The Court found this too restrictive a test in Illinois v. Gates . Better instead, it held, to rely upon a "totality of the circumstances" standard that permits a common sense assessment of the individual facts presented in a particular case. Since Gates , the federal courts of appeals have usually held that the positive reaction of a reliable dog trained to detect the presence of narcotics is sufficient to establish probable cause. The Florida Supreme Court concluded that in Harris the state had failed to show that, taking all the circumstances into account, the alert of a trained dog to the door of a truck entitled an officer to believe that there was a fair probability that the truck contained illicit drugs. The suppression hearing featured apparently uncontradicted evidence that the dog had twice reacted positively to the door of the truck when in fact the truck had none of the drugs the dog was trained to detect. The court did not feel that the state had offered sufficient evidence to explain away the factors that might have contributed to such a result: false alerts attributable to environmental factors, handler cuing or error, or the dog's inability to distinguish between odors attributable to the current presence of narcotics on the one hand, and residual odors attributable to the presence of narcotics minutes, hours, days, or weeks earlier, on the other. It held that [T]o meet its burden of establishing that the officer had a reasonable basis for believing the dog to be reliable in order to establish probable cause, the State must present the training and certification records, an explanation of the meaning of the particular training and certification of that dog, field performance records, and evidence concerning the experience and training of the officer handling the dog, as well as any other objective evidence known to the officer about the dog's reliability in being able to detect the presence of illegal substances within the vehicle. To adopt the contrary view that the burden is on the defendant to present evidence of the factors other than certification and training in order to demonstrate that the dog is unreliable would be contrary to the well-established proposition that the burden is on the State to establish probable cause for a warrantless search. In addition, since all of the records and evidence are in the possession of the State, to shift the burden to the defendant to produce evidence of the dog's unreliability is unwarranted and unduly burdensome. The dissent objected that the court demanded certainty where the Fourth Amendment required only probability: "[T]he majority demands a level of certainty that goes beyond what is required by the governing probable cause standard.... The majority here ... imposes evidentiary requirements which can readily be employed to ensure that the police rely on drug-detection dogs only when the dogs are shown to be virtually infallible." The United States Supreme Court unanimously reversed the judgment in the Florida Supreme Court's decision. The Florida court had simply disregarded the common sense, ad hoc, totality-of-the-circumstances standard that the Supreme Court's Fourth Amendment precedents demanded. The test "is whether all the facts surrounding a dog's alert, viewed through the lens of common sense, would make a reasonably prudent person think that a search would reveal contraband or evidence of a crime. A sniff is up to snuff when it meets that test." Justice Kagan, speaking for the Court, noted that a defendant must be afforded the opportunity to challenge a dog's reliability, but that the prosecution had presented substantial evidence of the dog's proficiency at detecting drugs, which Harris had chosen not to contest in the lower court. Harris instead concentrated on the fact that the dog signaled the presence of drugs where they were not to be found. Yet in the eyes of the Court, this confirmed rather than undermined the dog's reliability, since Harris regularly touched the truck's door handle and readily admitted that he regularly handled methamphetamine. The smell of drugs was there. The dog signaled that the smell of drugs was there. Consequently, the officer had probable cause to believe that a search would find drugs there. Whether, under Michigan v. Summers , 452 U.S. 692, 705 (1981), the detention of an individual who has just left the premises to be searched under warrant is permissible when the individual is detained out of view of the house as soon as practicable. The Fourth Amendment prohibits unreasonable searches and seizures. Searches and seizures are presumptively unreasonable, unless they are conducted pursuant to a warrant issued by a neutral magistrate upon a sworn showing of probable cause. Nevertheless, there are circumstances under which authorities enjoy limited authority to detain an individual without a warrant and with less than probable cause to believe the individual has committed a crime. One such instance occurs when officers seek to execute a search warrant. Then, said the Supreme Court in Michigan v. Summer , "a warrant to search for contraband founded on probable cause implicitly carries with it the limited authority to detain the occupants of the premises while a proper search is conducted." Some of the lower federal courts had permitted detention only within the letter of the Summers rule; others had permitted detention consistent with what they considered its spirit. The Supreme Court granted certiorari in Bailey to consider the question, and held that under the Summers rule the occupants must be taken into custody in the immediate vicinity of the premises to be searched. The First District Court of New York issued a warrant for the search of the basement apartment at 103 Lake Drive and for a "chrome .380 handgun" believed to be found there. Shortly before execution of the warrant, narcotics detectives saw two men come up the stairs from the basement of the building and drive away. Both men, later identified as Bailey and a companion, matched the informant's general description of the resident of the apartment. The officers followed them, and pulled them over after they had travelled about a mile. They patted down the two men, handcuffed them, and seized Bailey's wallet and keys. The detectives called for a patrol car that carried Bailey and his companion back to the apartment. They returned Bailey's wallet, but used his keys to drive his car back to the apartment. Once there, officers, who had executed the warrant in the meantime, disclosed that they had discovered a handgun and drugs in plain view. Then, they arrested Bailey. At some point, Bailey was turned over to federal authorities. He was charged with possession of cocaine, possession of a firearm by a felon, and possession of a firearm during and in furtherance of drug trafficking. His pre-trial motion to suppress the evidence he claimed was seized in violation of the Fourth Amendment was denied. He was convicted and sentenced to prison for 30 years and to five years of supervised release. He unsuccessfully petitioned for relief in the nature of habeas corpus based on a claim of ineffective assistance of counsel. The Second Circuit Court of Appeals considered the appeal of the denial of petition together with the appeal of his conviction. It affirmed both his conviction and the denial of relief under Section 2255. Speaking with regard to the Fourth Amendment issue, the Second Circuit declared that " Summers applies with equal force when, for officer safety reasons, police do not detain the occupant on the curbside, but rather wait for him to leave the immediate area and detain him as soon as practicable." That is, Summers imposes upon police a duty based on both geographic and temporal proximity; police must identify an individual in the process of leaving the premises subject to search and detain him as soon as practicable during the execution of the search. The Supreme Court disagreed. In Summers , the police arrived to execute a search warrant for narcotics as Summers was leaving the house to be searched and coming down the steps. They detained him until after they had entered the house and then brought him inside. When the search uncovered suspected narcotics in the cellar, they arrested him. They discovered a packet of heroin in his pocket in a search incident to his arrest. The Supreme Court held that "a warrant to search for contraband founded on probable cause carries with it the limited authority to detain the occupants of the premises while a proper search is conducted." Several considerations influenced the Court's decision. First, detaining Summers would reduce the risk of flight should the search reveal incriminating evidence. Second, detaining Summers would reduce the risk that he or someone in the premises whom he might warn would destroy evidence. Third, detaining Summers would reduce the risk of harm to the officers, particularly if incriminating evidence were discovered. Last, Summers's presence during the execution of a search warrant might assist in the orderly completion of the search. Two decades later, the Court pointed out in Muehler v. Mena that the Summers rule implies the authority to use reasonable force to detain occupants, including handcuffing them in some instances. The use of handcuffs may be particularly appropriate when firearms are the object of the search and risk of violence is real. The Court mentioned but placed no significance on the fact that, unlike Summers , Muehler involved a search warrant for evidence rather than for contraband. The Second Circuit acknowledged that the federal courts of appeals are divided over the question of whether the Summers rule may be extended. Like the Second Circuit, the Fourth, Sixth, Seventh, and Eighth Circuits admit the possibility of some extension of the rule. The Fifth and Tenth Circuits have declined to expand it. The Second Circuit's Bailey decision would have permitted off-site detention incident to the execution of a search warrant under some conditions. The Second Circuit understood that a decision must be supported by the Summers rule factors: officer safety, preservation of evidence, and prevention of flight. It misunderstood how and when the factors should be weighed. Justice Kennedy, writing for six Justices, made three points: the Second Circuit misunderstood the Summers rule factors; it failed to recognize the limits the Fourth Amendment places on intrusions upon individual liberty; and the facts of the cases suggested that Bailey's detention or arrest may have been justified under rules other than the Summers rule. Summers rested in part on the risk of harm to officers posed by those present during the execution of the search warrant. The breadth of the authority that the Court confirmed in Muehler (handcuffing occupants for several hours) "counsel[ed] caution before extending the power to detain persons stopped or apprehended away from the premises where the search is being conducted." The Summers observation that occupants might assist officers in the search hardly applied in the case of remote detention. The Summers flight risk concern arose "not because of the danger of flight itself but because of the danger that potential flight can cause to the integrity of the search." Moreover, the Summers rule stands as a narrow exception to the Fourth Amendment's limit on intrusions on personal liberty. Detention within one's residence involves a minimum of public stigma and inconvenience; not so with off-site apprehension and transportation in public view. Finally, Justice Kennedy noted that after Bailey left his apartment he might have been followed, stopped, and questioned under the authority of Terry . He might also have been arrested on probable cause based on the discovery of the gun and drugs in his apartment. Justice Kennedy left for another day the determination of what constitutes the "immediate vicinity" for purposes of the Summers rule. Justice Scalia, joined by Justices Ginsburg and Kagan, endorsed the majority opinion, but wrote separately to emphasize that a Summers rule inquiry need go no further than to ask whether detention occurred in the immediate vicinity of the premises to be searched. The three dissenters, Justice Breyer with Justices Thomas and Alito, would have found the police conduct in Bailey reasonable based on the circumstances of the case and the Second Circuit's determination that "(1) the premises [were] subject to a valid search warrant, (2) the detained persons were seen leaving those premises, and (3) the detention [was] effected as soon as reasonably practicable ." Whether the natural metabolization of alcohol in the bloodstream presents a per se exigency that justifies an exception to the Fourth Amendment's warrant requirement for nonconsensual blood testing in all drunk-driving cases. The Fourth Amendment insists that in most instances officials secure a search warrant before they search a person's house, papers, effects, or person. There are exceptions. The Supreme Court recognized one such exception in Schmerber v. California , a case that involved a warrantless blood test ordered for a drunk driving suspect. Later state courts were unable to agree on whether the rate at which alcohol disappears from the blood alone constitutes exception or whether other factors must be considered. The police stopped Tyler McNeely for speeding and driving erratically. He admitted he had been drinking. He smelled of alcohol. He slurred his speech, and he performed poorly on the roadside sobriety tests. After McNeely refused to take a breathalyzer test, the officer transported McNeely to the hospital for a blood test. No effort was made to secure a search warrant, although the officer knew that the necessary prosecutor and magistrate were both available. The test showed that McNeely's blood alcohol level was well above the legal limit, and he was charged with driving while intoxicated. The trial court granted McNeely's motion to suppress the results of the blood test. The state appealed. The Missouri Supreme Court refused to accept a per se exception to the Fourth Amendment's warrant requirements. It held that the officer had violated McNeely's Fourth Amendment rights when he ordered the blood test without first obtaining a warrant. The Supreme Court granted certiorari to resolve the split among the state courts. The United States Supreme Court agreed with the Missouri Supreme Court in a 5-4 decision in which only Justice Thomas would have endorsed a per se rule. Three members of the Court who dissented and concurred in part—Chief Justice Roberts, Justices Breyer and Alito—would have endorsed a per se rule as long as there was insufficient time to obtain a search warrant before conducting the blood test. The majority went no further than to reject a per se rule. Justice Sotomayor, the author of the opinion for the Court, explained that the general rule that a search can only be executed pursuant to a warrant is particularly compelling when the search involves an intrusion upon bodily integrity. Nevertheless, the rule yields to exceptions when it encounters certain emergency circumstances. One such exception exists when compliance with the warrant requirement would result in loss of the evidence that the warrant seeks. The existence of this "destruction of the evidence" exception, however, can only be determined on a case-by-case basis, taking into account all the relevant facts presented in a specific case. So it was in Schmerber . First, the "evidence could have been lost because 'the percentage of alcohol in the blood begins to diminish shortly after drinking stops, as the body functions to eliminate it from the system.'" Yet in addition in that case, because "'time had to be taken to bring the [injured] accused to the hospital and to investigate the scene of the accident, there was no time to seek out a magistrate and secure a warrant.'" Consistent with its understanding of Schmerber , the Court held "that in drunk-driving investigations, the natural dissipation of alcohol in the bloodstream does not constitute an exigency in every case sufficient to justify conducting a blood test without a warrant." Four of the Justices who joined in the majority—Justices Sotomayor, Scalia, Ginsburg and Kagan—would have specifically rebutted, in the name of the Court, arguments raised by the dissenters. Nevertheless, Justice Kennedy, upon whose concurrence the majority depended, would go no further than to reject a per se exception.

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized. U.S. Const. Amend. IV. This term, the Supreme Court decided that (1) deploying a drug-detecting dog at the front door of a house qualifies as a Fourth Amendment search (Florida v. Jardines); (2) the positive reaction of a trained, drug-detecting dog constitutes probable cause per se (Florida v. Harris); (3) the rationale which permits the warrantless, suspicionless detention of individuals found in a place covered by a search warrant also permits the warrantless, suspicionless off-site apprehension and return of individuals who have recently left a place covered by a search warrant (Bailey v. United States); and (4) the body's capacity to absorb blood alcohol, without more, does not constitute a "destruction of evidence" exigency justifying a per se exception to the warrant requirement (Missouri v. McNeely). The Supreme Court has said in the past that walking a drug-detecting dog around a car pulled over on the highway or around luggage in an airport is not a Fourth Amendment search. Nevertheless, the Court in Jardines noted that those cases were decided under the "expectation of privacy" rationale. Under the alternative "property intrusion" rationale, a Fourth Amendment search occurred when police used a trained dog to test for the smell of marijuana on Jardines's porch. Probable cause exists when there is a fair probability that contraband or evidence of a crime will be found in the place to be searched. The Supreme Court has held that informers' tips, used to establish probable cause, need not be subjected to uniform, rigid reliability standards. The Florida Supreme Court in Harris held that the prosecution had not established the existence of probable cause because it had failed to satisfy court-mandated standards for the reliability of drug-detecting dogs and their handlers. The U.S. Supreme Court declared in Harris that the Florida court was in error for failure to apply the traditional common sense, totality-of-the-circumstances standard. In order to minimize the risk of harm to the officers, the destruction of evidence, or the flight of suspects, officers executing a search warrant for contraband may detain individuals found on the premises to be searched. They may do so though they have no probable cause to arrest the individuals. The Supreme Court in Bailey held that this exception to the Fourth Amendment's usual requirements does not permit officers to allow individuals to leave the premises to be searched before apprehending them off-site and returning them to the place being searched. Exigent circumstances will sometimes excuse strict compliance with Fourth Amendment requirements. One such instance arises when the evidence sought will likely be lost by the time officers secure a search warrant. The Supreme Court in McNeely held destruction of the evidence exceptions are judged using a totality of the circumstances standard. The natural dissipation of alcohol from the blood, by itself, does not permit warrantless blood tests in drunk driving cases.

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The federal government first supported a program for energy storage and electric power system technology during the 1970s, before the establishment of the Department of Energy (DOE). In those early days, the program was focused mainly on energy storage—especially to even out the variable power production from rapidly growing use of wind and solar technologies—but also to support large coal and nuclear power plants. The advancement of computer capacity, miniaturization, and industrial controls has expanded the ability of grid operators to monitor and control electric power flows. The subsequent increase in networking of computerized devices for grid data collection and control advanced the ability of operators to anticipate, avoid, and otherwise mitigate potential power crises, such as blackouts. However, in more recent years, Internet-connected networks have become vulnerable to unwanted computer-driven intrusions and disruptions, revealing a new cybersecurity challenge for electric power systems. The nation's energy infrastructure is diverse. It includes a variety of transmission and distribution system network structures (electricity, oil, and natural gas), an array of operating models (public and private), and a variety of hardware and software. The energy sector consists of thousands of electricity, oil, and natural gas assets that are dispersed geographically. Thus, interdependency within the sector and across the nation's critical energy infrastructure sectors is significant. Coordinating the security and resilience of energy assets is complicated by the virtually borderless nature of energy use and the reliance on predominantly privately-owned infrastructure. Key challenges and opportunities facing the electric power industry include a changing power generation mix, replacing aging infrastructure (transmission, storage, distribution, and generation); modernizing and securing communication networks (e.g., analog to digital); accommodating new end-use technologies (for solar and other distributed resources); planning for increased interdependencies of natural gas, water, and electricity systems; and devising business models to manage the challenges while providing reliable and affordable electricity. These activities are constrained by the need for cost control, physical security, cybersecurity, improved system resiliency, and the flexibility to adapt to weather and market uncertainties. Further opportunities arise from growing use of shale gas production and decreasing costs for information technologies which allow improved grid control and more opportunities for customer management of power use. The DOE Office of Electricity Delivery and Energy Reliability (OE) is charged with a mission to support more economically competitive, environmentally responsible, secure, and resilient U.S. energy infrastructure. To achieve that mission, OE supports electric grid modernization and resiliency through research and development (R&D), demonstration projects, partnerships, facilitation, modeling and analytics, and emergency preparedness and response. OE is the federal government's lead entity for energy sector-specific responses to national energy security emergencies which are due to either hardware (infrastructure) or software (cybersecurity) problems. OE leads DOE's efforts to strengthen, transform, and improve our energy infrastructure so that consumers have access to reliable, secure, and clean sources of energy. To accomplish this mission, the Office works with a variety of stakeholders, including private industry and federal, state, local, and tribal governments on a variety of initiatives to modernize the electric grid. Grid modernization is needed to address aging infrastructure, achieve public policy objectives, sustain economic growth, support environmental stewardship, and mitigate risks. OE's goal for the future grid is to support economic growth and energy innovation through delivery of reliable, affordable, and clean electricity to consumers where, when, and how they want it. The largest share of OE funding (e.g., about 80% of the FY2016 appropriation) goes to R&D on technology development. The remainder of OE funding (e.g., about 20% of the FY2016 appropriation) goes to a variety of planning and other operational areas. OE divides these responsibilities into five general areas: R&D and Deployment—pursues technologies to improve grid reliability, efficiency, flexibility, functionality, and security. OE makes investments and sponsors demonstration projects to help bring new and innovative technologies to maturity and to help the technologies transition to market. Much of this activity takes place through partnerships with private firms that provide matching funds. Modeling and Analytics—develops core analytic, assessment, and engineering capabilities that can evolve as the technology and policy needs mature to support decisionmaking within DOE and for stakeholders. Also OE supports analyses to explore complex interdependencies among infrastructure systems, such as between electricity and natural gas systems. Institutional Support and Technical Assistance—builds capacity in industry and convenes stakeholders to coordinate grid transformation efforts. Also, OE provides technical assistance to states and regions to improve policies, utility incentives, state laws, and programs that facilitate modernization of electric infrastructure. Coordination of Federal Transmission Permits—streamlines permits, special use authorizations, and other approvals required under federal law to site electric transmission facilities. Emergency Preparedness and Response—pursues enhancements to the reliability, survivability, and resiliency of energy infrastructure, and facilitates faster recovery from disruptions to energy supply. In 2007, DOE established an independent Assistant Secretary for OE and, thereby, elevated the office to an administrative status equal to that for the major energy technologies (nuclear, fossil, renewables). OE currently has five deputy assistant secretaries, each of whom reports to the Assistant Secretary. The corresponding five offices are: Power Systems Engineering R&D, National Electricity Delivery, Infrastructure Security and Energy Restoration, Energy Infrastructure Modeling and Analysis, and Advanced Grid Integration. OE's mission is guided mainly by two key DOE planning documents: the Quadrennial Technolo gy Review and the Grid Modernization Multi-Year Program Plan . DOE's second (2015) Quadrennial Technology Review (QTR) outlined key elements of the department's strategy for grid modernization. The report concluded that: Fundamental changes in both supply and demand technologies are placing new requirements on the electric power system... Accompanying these changes is a convergence of digital communications and control systems ("smart grid" technologies) to improve performance and engage consumers... These trends create new technical requirements for a grid that is more flexible and agile, with the ability to dynamically optimize grid operations in near-instant time frames." Further, from DOE's cross-cutting programs viewpoint, the report stressed the R&D aspects of grid modernization: The electric grid is transitioning from a centrally-controlled, predictable system with one-way power flows in distribution to a much more distributed, stochastic, and dynamic system with bi-directional flows in distribution... Grid-related technologies need to evolve with the changing supply and end-use technologies landscape. Simultaneously, the RDD&D [research, development, demonstration, and deployment] associated with technologies that connect to the grid (e.g., renewable power supplies, efficient motor controllers, and smart loads) should consider the evolving interface with the grid. If electricity displaces petroleum and natural gas in electric vehicles and heating applications, respectively, the grid may serve an even more central role in the future energy system. DOE's 2015 Grid Modernization MYPP describes its vision for "a future electric grid that provides a critical platform for U.S. prosperity, competitiveness, and innovation by delivering reliable, affordable, and clean electricity to consumers where they want it, when they want it, how they want it." To help achieve this vision, DOE aims at three key national targets: A 10% reduction in the economic costs of power outages by 2025. A 33% decrease in the cost of reserve margins while maintaining reliability by 2025. A 50% decrease in the net integration costs of distributed energy resources by 2025. Progress toward the targets will be assessed by looking at RD&D efforts in individual technical areas and by looking at three integrated demonstrations, referred to in the MYPP as "major technical achievements." They are: (1) a transmission and distribution system operating reliably on a lean reserve margin, (2) resilient distribution feeders with high percentages (50%) of low-carbon distributed energy resources, and (3) an advanced modern grid planning and analytics platform. The MYPP states that multiple demonstrations will be conducted across various regions of the country to underpin these "major technical achievements." OE programs are aligned with the Obama Administration's priorities, as documented in A Policy Framework for the 21 st Century Grid: Enabling Our Secure Energy Future (June 2011), the President's Climate Action Plan (June 2013), and other DOE efforts to address energy infrastructure needs and challenges. The FY2017 OE request aimed to support the Obama Administration's "all-of-the-above" energy strategy and emphasized priorities that increase electric grid resilience—through managing risks, increasing system flexibility and robustness, increasing visualization and situational awareness, and deploying advanced control capabilities. Historically, electric systems technology development programs have supported all four major types (nuclear, fossil, renewable, efficiency) of energy technology. For most of DOE's funding history, OE programs received a relatively small portion of funding, compared to the portion provided for the energy technology programs. However, the OE program received a major one-time boost in funding—$4.5 billion—from the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5 ). The funding was targeted for "grid modernization." Thus, much of it was used to provide grants to the electric utility industry to deploy smart grid technologies to modernize the electric grid. As a part of these programs, independent system operators (ISOs), regional transmission organizations (RTOs), and electric utilities installed about 1,100 synchrophasors and other related technologies in their electric power transmission systems. That deployment of synchrophasors, however, covered only a small portion of the total national grid. Figure 1 provides a condensed visual summary of the relative portion of funding for electric systems in three different historical time periods. Since 2005, the Energy and Water Development (E&W) appropriations bill has funded all DOE programs, including those operated by OE. The office mainly conducts R&D, which is often performed in funding partnership with industry. OE administers a wide range of R&D programs, each with its own set of goals and objectives. Since FY2011, DOE has requested sizeable increases in OE spending each year, but Congress did not significantly boost spending until FY2016. DOE's FY2016 request for OE sought $270 million, nearly double the FY2015 level of $147 million. The final appropriation for FY2016 was $206 million. Table 1 , below, shows the recent pattern of OE requests and final appropriation levels. DOE presented its FY2017 budget request on February 9, 2016. The request for OE sought $262 million, which would have been a $56 million, or 27%, increase over the FY2016 level. As part of that requested increase, DOE proposed to fund three new programs: a Grid Institute, State Distribution-Level Reform, and State Energy Assurance. The two largest increases for existing programs would have gone to the Energy Storage and Transformer Resilience programs. The Cybersecurity program would have gotten the largest cut in funding. About $44 million (79%) of the requested OE increase would have been spread almost equally across these three new programs. The other large increases are sought for the Energy Storage (up $24 million) and the Infrastructure Security (up nearly $9 million) programs. The Cybersecurity program would have been cut by nearly $17 million. FY2017 request also notes that OE plays the central role in two of DOE's broad cross-cutting initiatives: grid modernization and cybersecurity. In FY2017, the Budget Request proposed to: Issue a funding opportunity for a new institute, focused on grid applications to help transition innovative materials processes and production technologies to industry. This Grid Institute would become part of the National Network for Manufacturing Innovation (NNMI). Enable transformational R&D on advanced distribution management systems, synchrophasor applications, and, especially, energy storage technologies to modernize and enhance the resilience of the nation's electric grid backbone. Advance cybersecurity technologies and operational capabilities to fortify grid security. Launch two new state programs to facilitate reliable and flexible grid modernization by addressing distribution system challenges (State Distribution‐Level Reform) and energy assurance planning (State Energy Assurance). This section presents the key OE-requested program funding changes and describes some highlights for the largest requested changes. DOE sought funding changes for several programs and proposes the creation of three new programs for FY2017. Table 2 shows all requested program increases in dollar amounts and percentages, relative to the FY2016 levels. Table 2 shows that the largest requested increases are for Energy Storage and three new programs—State Distribution-Level Reform, State Energy Assurance, and Grid Institute. The largest requested cuts are sought for Cybersecurity and for Clean Energy Transmission and Reliability. A discussion of the planned FY2017 activities in these areas follows. The CETR program aims to improve energy system decisionmaking by fostering the development of system measurement, modeling, and risk analysis. The program provides tools and analyses needed to assess risks, inform decisions, and improve system performance, planning, and policy. CETR is focused on ensuring the reliability and resiliency of the U.S. electric grid through R&D focused on measurement and control of the electricity system and risk assessment to address challenges across integrated energy systems. It is OE's main program for energy modeling and analysis. CETR also brings together energy stakeholders from government, industry, and academia to generate ideas and develop solutions to the nation's energy infrastructure challenges. CETR activities are organized into three R&D subprograms: Transmission Reliability, Advanced Modeling Grid Research, and Energy Systems Risk and Predictive Capability. This program focuses mainly on developing innovative technologies, tools, and techniques to modernize the distribution portion of the electric delivery system. Distribution infrastructure takes power from the transmission system and delivers it to individual businesses and homes. The Smart Grid program aims to improve reliability, operational efficiency, resiliency, and faster outage recovery. It builds on previous and ongoing grid modernization efforts, including the 2009 Recovery Act's Smart Grid Investment Grants and Smart Grid Regional Demonstrations. The Smart Grid program strengthens distribution system modernization by accommodating greater numbers of distributed energy resources (solar photovoltaics, combined heat and power, energy storage, electric vehicles, etc.), enabling higher levels of demand-side management and control practices, and enhancing reliability and resiliency during both normal operations and extreme weather events. Information and communication technologies play a key role in Smart Grid goals to address technical challenges such as rising demand and supply variability, two-way power flow, data management and security, interoperability between new and legacy technologies, and the increasing linkages of distribution and transmission operations. This program aims to strengthen the energy infrastructure against current and future cyber threats. The energy sector, which includes both the electricity and oil and natural gas sectors, has been subjected to a dramatic increase in focused cyber probes, data exfiltration, and malware development for potential attacks in recent years. The sophistication and effectiveness of these intrusions mark the transition to an era of nation-state level threats to the United States. Reliable and resilient energy infrastructure is essential to the nation's economic vitality, national security, and public health and safety. Energy delivery system cybersecurity is one of the nation's most vital grid modernization and infrastructure security issues. Innovative solutions designed to meet the unique requirements of high-reliability energy delivery systems are needed to ensure the success of grid modernization and transformation of the nation's energy systems to meet future needs for economic growth. As the energy sector-specific agency (SSA), DOE has the mission and domain expertise to work with industry to mitigate risks resulting from the cyber-physical environment. DOE's long history of collaboration with industry has created integral relationships to activities that expand situational awareness (of activities such as data exfiltration) and information sharing to reduce cyber risk. OE contends that effective solutions must be based on industry best practices, sound risk management processes, and improved situational awareness, and will require multidisciplinary collaborations and shared expertise in power systems engineering, computer science, and cybersecurity. In meeting the SSA requirement for DOE, the CEDS program supports activities with four key objectives: (1) researching technologies to improve energy reliability and resilience, (2) accelerating information sharing to enhance situational awareness, (3) expanding implementation of the Cybersecurity Capability Maturity Model and Risk Management Process, and (4) developing innovative solutions for reconstitution after a large-scale cyber event. This program develops and demonstrates new and advanced energy storage technologies (e.g., batteries, pumped hydro, flywheels) that will enable the stability, resiliency, and reliability of the future electric grid. Also, Energy Storage enables increased deployment of variable renewable energy resources such as wind and solar power generation. The Energy Storage program focuses on accelerating the development and deployment of energy storage in the electric grid through directly addressing the four principal challenges identified in the 2013 DOE Strategic Plan for Grid Energy Storage : (1) cost competitive energy storage technology, (2) validated reliability and safety, (3) equitable regulatory environment, and (4) industry acceptance. Storage technology still needs to make substantial improvements in safety, cycle life, energy density, and cost before becoming fully competitive. The Energy Storage program supports technology cost reductions, performance improvements, and reliability and safety validations. The program works toward an equitable regulatory environment and industry acceptance. The FY2017 request sought three to four new highly leveraged, cost‐shared demonstrations with states, which were designed to encompass more than 5 megawatts of energy storage assets. Transformers, power lines, and substation equipment are often exposed to the elements and are vulnerable to an increasing number of natural and man-made threats. To ensure a reliable and resilient electric power system, next-generation grid hardware needs to be designed and built to withstand and recover from the impact of lightning strikes, extreme terrestrial or space weather events, electrical disturbances, accidents, equipment failures, deliberate attacks, and other as yet unknown threats. The TRAC program supports modernization and resilience of the grid by addressing the unique challenges facing transformers and other critical components (i.e., grid hardware) that are responsible for carrying and controlling electricity from where it is generated to where it is needed. As the electric power system evolves to enable a more resilient and clean energy future, R&D and testing will be needed to understand the physical impact these changes have on transformers and other vital grid components and to encourage adoption of new technologies and approaches. Development of advanced components aims to provide the physical capabilities required in the future grid and help avoid infrastructure lock-in with outdated technologies that are long-lived and expensive. TRAC increases investments in the development of technologies and assessments to mitigate system vulnerabilities such as geomagnetic disturbances and electromagnetic pulses. Planned activities would also focus on developing next‐generation transformers to fill a critical gap identified in the 2015 Quadrennial Technology Review . Research efforts are to address the unique challenges associated with high power levels (voltage and current), high reliability requirements (25 to 40 years in field operation), and high costs of critical components. The National Electricity Delivery (NED) program helps state, regional, and tribal entities to develop, refine, and improve their programs, policies, and laws related to electricity while mitigating market failures. The scope of this activity includes facilitating the development and deployment of reliable and affordable electricity infrastructure, whether generation, transmission, storage, distribution, or demand-side electricity resources. In addition, NED implements a number of legal requirements, such as coordination of transmission permitting by federal agencies, periodic transmission congestion studies, permitting of cross-border transmission lines, and authorization of electricity exports. This program leads efforts for securing the U.S. energy infrastructure against all hazards, reducing the impact of disruptive events, and responding to and facilitating recovery from energy disruptions, in collaboration with industry and state and local governments. The three main areas of ISER activities are: (1) executing effective emergency preparedness, response, and restoration operations; (2) providing reliable energy infrastructure tactical analysis (event analysis) and situational awareness to all stakeholders; and (3) encouraging a risk-based approach to energy system assurance. ISER enables the security and resilience of the nation's energy infrastructure (electricity, petroleum, and natural gas) through implementation of the National Preparedness System to help achieve the National Preparedness Goal: "a secure and resilient nation with the capabilities required across the whole community to prevent, protect against, mitigate, respond to, and recover from the threats and hazards that pose the greatest risk." ISER is the DOE office responsible for executing DOE's Energy Sector Specific Agency (SSA) role, executing DOE's Emergency Support Function-12 (ESF-12) (Energy) role and providing DOE's support to the Infrastructure Systems Recovery Support Function (IS-RSF). ISER facilitates the creation of a favorable security and resilience environment by delivering analysis, training, data (which includes situational awareness and modeling data), tools, and validation exercises to assist its partners with executing Preparedness activities across the five mission areas specified in Presidential Policy Directive 8: National Preparedness . ISER's development and delivery of these capabilities is informed by coordination with energy infrastructure stakeholders by virtue of its SSA authorities and through active participation with its sister agencies. This allows ISER to serve as a point of entry for energy infrastructure security and resilience stakeholders at all levels, including the private sector, to DOE and the federal government. The proposed Grid Clean Energy Manufacturing Innovation Institute was designed to focus on projects that help transfer to industry innovative material processes and production technologies for grid infrastructure application. The Institute would have focused on technologies related to critical metals for grid application, and advances would be broadly applicable in multiple industries and markets. The Grid Institute would have become part of the larger multi-agency National Network for Manufacturing Innovation (NNMI). The NNMI implementation model promotes collaboration, complements university research, and supports innovation to increase the competitiveness of U.S. manufacturers. Manufacturing institutes are a partnership among government, industry, and academia, supported with cost-share funding from federal and non-federal sources. Within five years of its launch, the Grid Institute was intended to become financially independent and sustainable using only private sector and other sources without further federal funding. Industry estimates that about $1.1 trillion will be needed to expand, upgrade, and, as necessary, replace the U.S. electric delivery infrastructure through 2040. The process of modernizing the grid and replacing older assets will create an opportunity to develop and deploy next-generation grid hardware. However, successful commercialization of advanced grid components will require materials with new physical properties and enhanced functionality. Electric power infrastructure (e.g., cables, conductors, transformers) depends heavily on industrial metals such as aluminum, iron, and copper. In particular, the Institute would have aimed to spur grid infrastructure applications of recent advances in metallurgy, nanotechnology, and materials science that have enabled better control and optimization of the various properties of metals. The technical assistance provided by this proposed program would have employed system analysis to ensure that the integration of distribution energy resources with new markets would be accommodated through appropriately designed business and regulatory processes. There is broad recognition that the electricity sector is undergoing a major transformation. Much of this change is occurring at the distribution level, where utilities and other entities are working to offer consumers products and services to help them cut electricity costs and obtain new kinds of benefits from the use of electricity. Several states have embarked on major efforts to reform the regulatory frameworks for their distribution sectors, leveraging OE support. The common theme among their efforts is the need to "unlock new sources of value" that are latent in the existing framework, while preserving or enhancing traditional values such as reliability and affordability. Through 5 to 10 competitive awards, this program would have aimed to help states identify and address issues involving structural, policy, and/or regulatory reforms. While OE already provides high-level policy and technical expertise to states, this support would have allowed state officials to utilize DOE's national laboratories, associated academic institutions, and other subject matter experts to develop targeted solutions to specific issues that are too situation specific to be addressed by existing OE programs. This program was designed to assist state, local, tribal, and territorial stakeholders in planning, training, and exercising in advance of energy emergencies. Specifically, it would have aimed to improve the capacity of states, localities, and tribes to identify the potential for energy disruptions, quantify the impacts of those disruptions, develop comprehensive response plans, and devise plans to mitigate the threat of future disruptions. OE has worked on energy assurance planning across the states and U.S. territories (including the District of Columbia). A key lesson learned is that such plans should be continually updated and exercised annually—in order to reflect changing conditions, identify and address new threats, and maintain staff capacity to implement plans. The proposed program would have provided funds through competitive regional cooperative assistance awards. The funds would have supported continual energy assurance plan improvement, promoted regional and state capabilities to identify potential supply disruptions, and improved training programs for energy planning and emergency response. OE's goal for state and local energy assurance planning would have been to achieve a robust, secure, and reliable energy infrastructure that is also resilient—better able to withstand catastrophic events, able to restore services rapidly in the event of any disaster, and designed to diminish future vulnerabilities. Through support of state energy assurance planning improvement and regional resilience exercises, the federal government would have partnered with states and local governments—which are ultimately responsible for responding to disasters and disruptions—to build and maintain preparedness and assurance capabilities. This activity provides for the costs associated with the federal workforce, including salaries, benefits, travel, training, building occupancy, information technology (IT) services, and other related expenses. It also provides for the costs associated with contractor services that, under the direction of the federal workforce, support OE's mission. The FY2017 request also sought to continue crosscutting programs that coordinate across the department and to employ DOE's full ability to address national energy, environmental, and security challenges. OE serves as the central hub of the Grid Modernization and Cybersecurity crosscutting programs. OE operates seven program offices and one administrative office (program direction). Each program office has its own set of goals and funding needs. The FY2017 request sought to establish three new programs. Table 3 shows the funding breakdown for existing and proposed activities by program office. It also shows congressional recommendations for FY2017. After the Administration issued its FY2017 budget request, Congress held a number of DOE oversight and appropriations hearings. As noted previously, further actions were taken in the House and Senate on DOE funding recommendations in the E&W bills, S. 2804 and H.R. 5055 . In the Senate, S. 2804 was incorporated into H.R. 2028 as an amendment in the nature of a substitute, and it was approved on the Senate floor. The Senate-passed FY2017 E&W bill included $206 million for OE—the same amount as the FY2016 appropriation. In the House, H.R. 5055 was defeated in House floor action. That bill had included $225 million for OE, which was the amount recommended by the House Appropriations Committee. In late September 2016, a continuing resolution ( P.L. 114-223 , Division C) set FY2017 funding for OE at the FY2016 level through December 9, 2016. On December 10, 2016, a second continuing resolution provided funding at the FY2016 level through April 28, 2017.The various steps of the congressional process for the FY2017 E&W appropriations are outlined in Table 4 . For additional background on selected OE programs, funding, and policy aspects, see the following CRS reports. CRS Report R44465, Energy and Water Development: FY2017 Appropriations , by [author name scrubbed] CRS Report R43966, Energy and Water Development: FY2016 Appropriations , by [author name scrubbed] CRS Report RS22858, Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear Energy, Fossil Energy, and Energy Efficiency R&D , by [author name scrubbed] CRS Report R41886, The Smart Grid and Cybersecurity—Regulatory Policy and Issues , by [author name scrubbed] CRS Report R43604, Physical Security of the U.S. Power Grid: High-Voltage Transformer Substations , by [author name scrubbed] CRS Insight IN10425, Electric Grid Physical Security: Recent Legislation , by [author name scrubbed]

The nation's energy infrastructure is undergoing a major transformation. For example, new technologies and changes in electricity flows place increasing demands on the electric power grid. These changes include increased use of distributed (mostly renewable energy) resources, Internet-enabled demand response technologies, growing loads from electric vehicle use, continued expansion of natural gas use, and integration of energy storage devices. The Department of Energy's (DOE's) Office of Electricity Delivery and Energy Reliability (OE) has the lead role in addressing those infrastructure issues. OE is also responsible for the physical security and cybersecurity of all (not just electric power) energy infrastructure. Further, OE has a key role in developing energy storage, supporting the grid integration of renewable energy, and intergovernmental planning for grid emergencies. As an illustration of the breadth of its activities, OE reports that, during FY2014, its programs responded to 24 energy-related emergency events, including physical security events, wildfires, severe storms, fuel shortages, and national security events. OE manages five types of research and development (R&D) programs, usually conducted in cost-shared partnership with private sector firms. OE also operates two types of deployment programs, conducted mainly with state and tribal governments. Each OE program office has its own set of goals and objectives. OE plays the central role in two of DOE's broad cross-cutting initiatives: grid modernization and cybersecurity. President Obama treated grid modernization as a high priority, stressing its importance to jobs, economic growth, and U.S. manufacturing competitiveness. Since 2005, the Energy and Water Development (E&W) appropriations bill has funded all DOE programs, including those operated by OE. DOE's FY2017 request for OE sought $262 million, an increase of $56 million (27%) over the FY2016 appropriation of $206 million. Most congressional action for FY2017 OE funding has taken place through the two E&W appropriations bills, S. 2804 and H.R. 5055. In the Senate, S. 2804 was incorporated into H.R. 2028 as an amendment in the nature of a substitute, and it was approved on the Senate floor. That Senate-passed FY2017 E&W bill included $206 million for OE—the same amount as the FY2016 appropriation. In the House, H.R. 5055 was defeated in House floor action. That bill had included $225 million for OE, which was the amount recommended by the House Appropriations Committee. In late September 2016, a continuing resolution (P.L. 114-223, Division C) set FY2017 funding for OE at the FY2016 level through December 9, 2016. On December 10, 2016, a second continuing resolution (CR) provided funding at the FY2016 level through April 28, 2017. Most of DOE's requested FY2017 increase for OE aimed to create three new programs: a Grid (Manufacturing Innovation) Institute, a State Distribution Level Reform program, and a state Energy Assurance program. The House Appropriations Committee's report on FY2017 E&W funding does not mention those proposed programs. The Senate Appropriations Committee's report on FY2017 E&W funding expressed support for the regional and state activities that DOE proposed for two of the new programs, but encouraged DOE to support those activities with some of the funding it recommended for the OE Infrastructure Security and Energy Restoration program. Neither the first nor the second CR included funding for any of the proposed new programs.

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Since Congress approved an equestrian statue to George Washington in 1783, more than 100 other memorials have been authorized in the District of Columbia. Prior to 1986, however, statutory criteria for authorizing commemorative works, including memorials, did not exist. Not only did Congress authorize commemorative works, but it also established how the sponsoring organizations would choose site locations and approve memorial designs. In some cases, special memorial commissions were established and given authority to select a location for the memorial. The Lincoln Memorial Commission and the Jefferson Memorial Commission, for instance, were provided with such authority. Congress also authorized private organizations to select a site, sometimes with the approval of the President, as in the case of the Washington Monument. Although a general practice for the commemorative work creation process existed by the mid-20 th century, impetus for a statutory commemorative work creation program was not realized until the 1980s. In 1986, Congress debated and passed the Commemorative Works Act to guide the memorial creation process in the District of Columbia. This report examines the evolving process by which memorials have been proposed, approved, and constructed in the District of Columbia. It begins with a discussion of the creation of the District and its unique place as the center of the U.S. government and the location of numerous memorials to individuals and historic events. The report then discusses the creation and operation of the Commemorative Works Act that was enacted to guide the process for creating a commemorative work in the District of Columbia. It concludes with four appendixes: a summary of the original Commemorative Works Act legislation; the 24-step process recommended for creating a memorial in the District of Columbia; a map showing various areas eligible for memorial construction in the District of Columbia; and a list of government agencies that might be involved in the memorial creation process. This report does not address memorials outside the District of Columbia. On July 16, 1790, President George Washington signed a bill authorizing him to designate "a district of territory, not exceeding ten miles square, to be located as hereafter directed on the river Potomac, at some place between the mouths of the Eastern Branch and Connogochegue, be, and the same is hereby accepted for the permanent seat of government of the United States." Pursuant to the Residency Act, the President had a choice between two areas on the Potomac River—land where the Eastern Branch (now the Anacostia River) met the Potomac River and the area around the Village of Georgetown. After ordering surveys of both areas, Washington chose the confluence of the Potomac River and Anacostia Rivers as the capital site. Subsequently, he chose Major Pierre Charles L'Enfant, who had just completed a successful refurbishment of Federal Hall in New York City, as the city's architect and commissioned Major Andrew Ellicott to survey the 10-square-mile district. Major L'Enfant was charged with designing the federal city, including spaces for the President's house, the Capitol Building, and the grid of streets that would transport political leaders from one part of the city to another. The federal spaces are widely considered to be the "most significant design feature of the plan for the nation's capital." Within the federal precinct, L'Enfant's plan deemphasized any single part of the federal government. Political scientist James Sterling Young, in his book The Washington Community , describes L'Enfant's vision in creating the federal capital. There is no single center in the ground plan of the governmental community, no one focus of activity, no central place for the assembly of all its members. What catches the eye instead is a system of larger and lesser centers widely dispersed over the terrain, "seemingly connect," as L'Enfant put it, by shared routes of communication. It is clear that the planner intended a community whose members were to work or live not together but apart from each other, segregated into distinct units. As depicted in Figure 1 , Major L'Enfant worked to provide symbolic separation between Congress, the President, and the Supreme Court as provided for by separation of powers principles found in the Constitution. In describing the decision to keep the constitutional centers of powers separated, L'Enfant "argued that the distance between the two buildings [the President's house and the Capitol] was not all that great in his plan and further that 'no message to nor from the President is to be made without a sort of decorum which will doubtless point out the propriety of Committee waiting on him in carriage should his palace be even contiguous to Congress.'" The original boundaries of the District of Columbia extended beyond the federal city depicted in Figure 1 . A 10-mile square, created from land ceded from Maryland and Virginia, it also included much of modern-day Alexandria, Virginia, and Arlington County. Following Congress's move to the District in 1800, proposals were introduced to retrocede (return) portions of the District south of the Potomac River to Virginia. In 1846, Congress determined that "the portion of the District of Columbia ceded to the United States by the State of Virginia has not been, or is ever likely to be, necessary for that purpose…" and passed legislation returning Alexandria to Virginia. President James Polk signed the bill into law on July 9, 1846. For nearly a century, Congress and city planners ignored many elements of L'Enfant's plan for Washington, DC, until a new call for planning was developed to celebrate the city's 100 th anniversary in 1900. Led by Senator James McMillan, the effort to review and create a new comprehensive plan for the District of Columbia was undertaken by the Senate Park Commission. Created in March 1901, as part of a Senate resolution directing the Committee on the District of Columbia to study the park system in the District, the commission was instructed to examine questions that had "arisen as to the location of public buildings, of preserving spaces for parks in the portion of the District beyond the limits of the city of Washington, of connecting and developing existing parks by attractive drives, and of providing for the recreation and health of a constantly growing population." The committee hired Daniel Burnham and Frederick Law Olmsted as consultants to study the design of the city and the landscaping of the National Mall. The McMillan Commission plan examined all aspects of L'Enfant's original design and made recommendations to return the monumental core of the city, particularly the Mall, to the intent of L'Enfant's plans. In their report to the Senate Committee on the District of Columbia, the commission summarized why such a plan was necessary. Now that the demand for new public buildings and memorials has reached an acute stage, there has been hesitation and embarrassment in locating them because of the uncertainty in securing appropriate sites. The Commission were thus brought face to face with the problem of devising such a plan as shall tend to restore that unity of design which was the fundamental conception of those who first laid out the city as a national capital, and of formulating definite principles for the placing of those future structures which, in order to become effective, demand both a landscape setting and a visible orderly relation one to another for their mutual support and enhancement. Figure 2 shows the McMillan Commission plan for the National Mall. While the McMillan plan was never fully implemented, it laid the foundation for additional studies and plans for further development in the District of Columbia over the next 100 years. Additionally, the McMillan plan included concepts for the creation of monuments within the federal landscape. The McMillan Plan also emphasized various design features of the federal core including the National Mall, Federal Triangle, the area that is now the Lincoln Memorial, and the Ellipse. In recent years, the McMillan Plan's concepts have been codified through plans and studies by the National Capital Planning Commission, the official planning agency authorized by Congress in 1924. In 1986, the Commemorative Works Act (CWA) was enacted to guide the creation of memorials in the District of Columbia. Congress created the act in an effort (1) to preserve the integrity of the comprehensive design of the L'Enfant and McMillan plans for the Nation's Capital; (2) to ensure the continued public use and enjoyment of open space in the District of Columbia and its environs, and to encourage the location of commemorative works within the urban fabric of the District of Columbia; (3) to preserve, protect, and maintain the limited amount of open space available to residents of, and visitors to, the Nation's Capital; and (4) to ensure that future commemorative works in areas administered by the National Park Service and the Administrator of General Services in the District of Columbia and its environs are…appropriately designed, constructed, and located; and…reflect a consensus of lasting national significance of the subjects involved. The act further defined a commemorative work as "any statue, monument, sculpture, memorial, plaque, inscription, or other structure of landscape feature, including a garden or memorial grove, designed to perpetuate in a permanent manner the memory of an individual, group, event or other significant element of American history, except that the term does not include any such item which is located within the interior of a structure or a structure which is primarily used for other purposes." The CWA does not apply to military properties, such as the Pentagon, Arlington National Cemetery, or Fort McNair, nor does the act apply to land under the jurisdiction of the Smithsonian or the Architect of the Capitol. On March 11, 1986, Representative William Hughes introduced H.R. 4378 "a bill to govern the establishment of commemorative works within the National Capital Region of the National Park System." It was initially referred to the House Committee on Interior and Insular Affairs, then to the Subcommittee on National Parks and Recreation, which held a hearing on April 15 and reported the bill to the full committee. On April 23, the full committee approved H.R. 4378 and on May 5 recommended its enactment by the House. The committee's report indicated that legislation was necessary because of the "numerous groups" seeking to place additional commemorative works in the District of Columbia and the need to strike a balance between different uses of park land. The report also indicated that "[b]alance needs to be achieved between commemorative works on National Park land and the myriad of activities that occur there. Commemorative works erected in the future should meet the appropriate tests of being of lasting national significance, and designed and constructed to be physically durable." On May 5, the House debated H.R. 4378 . Representative Bruce Vento, one of the bill's supporters, linked the placement of commemorative works to the L'Enfant and McMillan plans for the District of Columbia. Mr. Speaker, as Americans, we are fortunate as a nation to have a capital city specifically planned and designed to embody our ideals, a city of both magnificence and practicality. The design we now have comes to us only because of the diligence and vigilance of our predecessors. Through their efforts we can still see the city that Pierre L'Enfant planned and that the 1902 U.S. Senate Park Commission with the McMillan plan restored, with its vistas, its orderly but grand street patterns and its open space. Other Members expressed reservations about aspects of the bill. For example, Representative Michael Strang focused on placing commemorative works within the context of the city's design, and the importance of finding balance among uses of public lands. I believe the major goal of this legislation—to limit the proliferation of insignificant works in D.C.—is certainly meritorious. As additional works are located in this area, the open space which is used by numerous residents and visitors for a variety of activities, is lost forever. While I strongly support commemorating worthy individuals and events in our Nation's history, I also feel a balance of uses for the public lands in our Nation's Capital must be established shortly. H.R. 4378 passed the House by voice vote later that day. Subsequently, H.R. 4378 was referred to the Senate Committee on Energy and Natural Resources. On June 24, the Senate Energy and Natural Resources Committee's Subcommittee on Public Lands, Reserved Water, and Resource Conservation held a hearing on both S. 2522 , a "bill to provide standards for placement of commemorative works on certain federal lands in the District of Columbia and its environs, and for other purposes," and H.R. 4378 . The committee reported H.R. 4378 , replacing the House language with the text of S. 2522 . The Senate debated H.R. 4378 on September 10 and passed the bill by voice vote. On September 29, the House took up H.R. 4378 , agreed to the Senate amendments with a few House clarifying amendments, and passed H.R. 4378 , as amended, by voice vote. On October 16, the Senate concurred with the House amendments and passed the bill. The Commemorative Works Act (CWA) was signed into law by President Ronald Reagan on November 14, 1986. The CWA, as enacted, contained 10 sections covering the purposes of the bill, definitions, congressional authorization for memorials, creation of the National Capital Memorial Commission, conditions for memorial placement in different parts of the District of Columbia, site design and approval, issuance of construction permits, creation of a temporary memorial site, and other administrative provisions. Table A-1 , in Appendix A , provides a summary of the original provisions contained in the CWA for each section of the bill. By 1991, Congress realized that many authorized sponsor groups were not able to complete memorial construction in the allocated time period. Pursuant to Section 10(b) of the CWA, legislative authority for commemorative works expired within five years of its enactment, unless a construction permit was issued. Of the eight commemorative works authorized between the 99 th Congress (1985-1986) and the 101 st Congress (1989-1990), only one, the American Armored Force Memorial, had met the five-year deadline. To address this issue, Representative William Clay introduced H.R. 3169 , "To lengthen from five to seven years the expiration period applicable to legislative authority relating to construction of commemorative works on Federal land in the District of Columbia and its environs." During the House debate, Representative Wayne Allard argued that lengthening the time required to complete a commemorative work was necessary: As the subcommittee chairman has described, the Commemorative Works Act was enacted in 1986 in order to address the numerous requests received by Congress to authorize commemorative works on public space in the D.C. area. Overall this act has been very successful in ensuring that only the most important works are constructed and that those works constructed are of the highest quality. Of course, it takes time to develop an outstanding proposal and it appears that when Congress enacted this law 5 years ago, we underestimated the amount of time required to secure the necessary approvals and raise funds for these projects. Following debate, the House passed H.R. 3169 by voice vote. The Senate Committee on Energy and Natural Resources reported the bill on November 12, and the full Senate passed the measure without debate on November 27. The bill was signed into law by President George H.W. Bush on December 11, 1991. Following the extension of authority to complete a commemorative work to seven years, on August 6, 1993, Representative Nancy Johnson introduced H.R. 2947 to further extend the legislative authority of the Black Revolutionary War Patriots Foundation to nine years from the date of initial enactment. The Committee on Natural Resources reported the bill on November 20 with amendments to not only extend the legislative authority for the Black Revolutionary War Patriots Foundation, but also for the Women in Military Service for America Memorial, and the National Peace Garden. In addition, the committee included other technical amendments to the CWA at the request of the National Capital Memorial Commission. During the ensuing floor debate, Representative Bruce Vento summarized the committee's rationale for further extending legislative authorities of the three memorials and the necessity of further amending the CWA. Mr. Speaker, H.R. 2947 as originally introduced by Congresswoman Nancy Johnson, would extend the authorization for the Black Revolutionary War Patriots Memorial…. As amended by the Committee on Natural Resources, H.R. 2947 extends the authorization for the establishment of three commemorative works to be constructed here in the Nation's Capital and makes various technical amendments to the Commemorative Works Act. …The Black Revolutionary War Patriots Memorial, the women in military service to America and the National Peace Garden have all been authorized under the Commemorative Works Act. All three have obtained the initial site and design approvals as required by the law. But for various reasons, particularly because of the difficulty of fundraising, each of them has requested an extension for the completion of their commemorative works. This legislation extends their authorizations to 10 years—an additional 3 years for each. I support this extension with the understanding that there will be no further extensions. As amended by the Committee on Natural Resources, H.R. 2947 also makes various changes to the Commemorative Works Act. Primarily technical, these changes were requested by the National Capital Memorial Commission, and by those responsible for administrating the act. The most important of these changes adds provisions on accountability for fundraisers so that the public's trust is not abused. The House passed H.R. 2947 by voice vote, and it was referred in the Senate to the Committee on Energy and Natural Resources. In the Senate, the Committee on Energy and Natural Resources reported a further amended version of the bill that included changes to the National Capital Memorial Commission amendments, including restoring a previous deleting of a provision that "directed the Secretary of the Interior and the Administrator of the General Services Administration to develop fundraising standards and to suspend a groups' fundraising authority if the Secretary or Administrator …determined that the group's fundraising activities were not in compliance with those standards." The Senate passed the bill, as amended, by voice vote. Upon its return to the House, H.R. 2947 was further debated. During the debate, Representative Vento explained the Senate amendments and urged passage of the bill. The Senate deleted a provision in the House-passed bill authorizing the Secretary to suspend a memorial organization's activity if there are excessive administrative and fundraising expenses. It is the committee's intent that the National Park Service develop guidelines which provide direction to memorial organizations on the subject of unreasonable or excessive administrative costs and fundraising fees. The committee believes that guidelines from the National Park Service would also be helpful to avoiding problems in the future. The committee expects the National Park Service to monitor the fundraising activities of the memorial organizations more closely and it intends that all of the provisions of H.R. 2947 apply to all commemorative works authorized under the Commemorative Works Act. The House passed H.R. 2947 , as amended in the Senate, by a vote of 378 to 0. It became P.L. 103-321 on August 26, 1994. After receiving several requests for the placement of memorials on the National Mall, Congress recognized the need to preserve the L'Enfant and McMillan visions for the Mall and prevent the area from being overbuilt. In March 2000, the Senate Committee on Energy and Natural Resources Subcommittee on National Parks, Historic Preservation, and Recreation held an oversight hearing on monuments and memorials in the District of Columbia. At the hearing, representatives from the National Capital Planning Commission, the U.S. Commission of Fine Arts, the National Park Service, the District of Columbia, and the Committee of 100 on the Federal City all testified on proposed amendments to the CWA. The proposed amendments were the result of a study conducted by the National Park Service, the National Capital Planning Commission, and the U.S. Commission of Fine Arts and provided to Congress in May 1997. In summarizing the need for the creation of a new "reserve" area, or no-build zone, on the National Mall, J. Carter Brown, chair of the U.S. Commission of Fine Arts, also testified that the Reserve should have a building moratorium to protect the National Mall area. With the considerable pressures to add new memorials to the city, it is inevitable that many sponsors of what they feel are preeminent causes would favor a location in the proposed reserve. Under such a continuing threat, it makes sense to define this central precinct as a no-build zone. Even with the substantial size of the reserve, there will still be many sites available for memorials in the foreseeable future. The genius of L'Enfant's plan … created literally hundreds of sites across the city, and it is our hope their abundance and desirability will lead to the placement of future memorials throughout the capital. In the 107 th Congress (2001-2002), Senator Chuck Hagel introduced S. 281 , the Vietnam Veterans Memorial Education Act. Reported by the Senate Committee on Energy and Natural Resources, it contained amendments to the CWA to create the Reserve and prohibit building of new memorials within its boundaries. S. 281 was not considered further by the Senate. The issue was reintroduced in the 108 th Congress (2003-2004) by Representative Richard Pombo. Reported by the House Committee on Resources, H.R. 1442 authorized the design and construction of the Vietnam Visitor Center, and following Senate amendment, contained language to amend the CWA to create a "reserve" area. Enacted as P.L. 108-126 , a reserve area and building moratorium were established on the National Mall. Pursuant to P.L. 108-126 , no additional commemorative works, unless they were authorized prior to P.L. 108-126 , are permitted in the Reserve. As a result, the definitions proscribed for memorial placement in Area I, where new commemorative works must be of preeminent historical and lasting significance to the United States, and Area II, which is reserved for subjects of lasting historical significance to the American people, became more important when deciding where a commemorative work should be placed. More information about the placement of commemorative works is contained below under " Designation of Areas of Washington, DC " Historically, commemorative works have been expensive. Sponsor groups are often statutorily prohibited from using federal funds to design, construct, or dedicate the monuments or memorials. Consequently, to raise the necessary funds, groups sometimes turn not only to the general public for donations, but also to corporations and foundations. Occasionally, contributors—especially corporate and foundation donors—request recognition for donation. Whether groups sponsoring monuments and memorials are allowed to recognize donations could affect the sponsor groups' ability to raise the necessary funds. Donor recognition for monuments and memorials can generally be divided into two categories: on-site and off-site donor recognition. On-site donor recognition is the acknowledgment—either permanent or temporary—of contributions at the location of a monument or memorial. Off-site donor recognition is the acknowledgement of contributions in a manner that does not involve the monument or memorial location. This recognition can include, but is not limited to, thank you letters, awards, publicity, press conferences, mementos, and online acknowledgment. Additionally, policies on recognizing donations differ for works authorized under the CWA and for non-CWA monuments and memorials. When it was enacted in 1986, the CWA prohibited the on-site recognition of donors at memorial sites in the District of Columbia. Between 1986 and 2013, memorial sponsors were not allowed to recognize donors on-site. In the 113 th Congress, the first exemption to the on-site ban on donor acknowledgement was provided to the Vietnam Veterans Memorial Fund to aid its effort to build the Vietnam Veterans Memorial Visitor Center. The law provided the sponsor group with the ability to recognize donors on-site, subject to the approval of the Secretary of the Interior, and at the expense of the sponsor group. At the same time that the Vietnam Veterans Memorial Visitor Center was granted permission to recognize donors, Representative Doc Hastings introduced H.R. 2395 , "to provide for donor contribution acknowledgements to be displayed at projects authorized under the Commemorative Works Act." The bill would have amended 40 U.S.C. §8905(b) to allow acknowledgement of donor contributions, subject to several conditions. Additionally, the bill would have retroactively applied to all memorials dedicated after January 1, 2010. In testimony on the bill before the House Natural Resources Committee, Subcommittee on Public Lands and Environmental Regulation, Stephen Whitesell, regional director of the National Capital Region for the National Park Service, supported the on-site recognition of donors. He said, Although the Department has supported the CWA ban on donor recognition, this ban has proven to be impractical, given the challenge of funding new memorials and the reliance of the memorial sponsors on the generosity of the public in order to establish and construct memorials that Congress has authorized. We recognize the importance of acknowledging large donations for effective fundraising and, therefore, support donor recognition with appropriate limitations as described below. We do not support permanent donor recognition. After the subcommittee hearing on July 19, 2013, H.R. 2395 did not receive further consideration. As part of the National Defense Authorization Act for FY2015, however, the language from H.R. 2395 was included as §3054. Pursuant to P.L. 113-291 , §3054(c), the CWA was amended to allow donor recognition "inside an ancillary structure associated with the commemorative work or as part of a manmade landscape feature at the commemorative work." Further, donor acknowledgement applies to all commemorative works dedicated after January 1, 2010, is to be paid for by the sponsor, and is subject to the permission of the Secretary of the Interior or the Administrator of General Services. The acknowledgment also must (A) be limited to an appropriate statement or credit recognizing the contribution; (B) be displayed in a form in accordance with National Park Service and General Services Administration guidelines; (C) be displayed for a period of up to 10 years, with the display period to be commensurate with the level of the contribution, as determined in accordance with the plan and guidelines described in subparagraph (B); (D) be freestanding; and (E) not be affixed to—(i) any landscape feature at the commemorative work; or (ii) any object in a museum collection. The standards for consideration and placement of commemorative works in areas administered by the National Park Service (NPS) and the General Services Administration (GSA) in the District of Columbia and its environs are contained in the Commemorative Works Act (CWA) of 1986, as amended. The following sections examine how commemorative works are established and maintained. Pursuant to the CWA, the National Park Service (NPS) has developed a 24-step outline to guide groups interested in creating a commemorative work in the District of Columbia. The NPS outline guides initiation, legislation, site election and approval, design approval, fundraising, construction, and dedication of commemorative works. In addition, groups have asked for, and been granted, extensions to their initial authorization to allow additional time to complete the memorial creation process. The full guidelines from NCPC can be found in Appendix B . Since 1986, most commemorative works placed in the District of Columbia have been sponsored by non-governmental groups. Sponsors interested in creating a commemorative work to an individual, group, or event must find a congressional sponsor to introduce authorizing legislation. The National Capital Memorial Advisory Commission offers consultative services to potential sponsors. The CWA provides that no "commemorative work may be established in the District of Columbia unless specifically authorized by Congress." The CWA further specifies requirements for military works and works commemorating events, individuals, or groups. For military works, the CWA requires Congress to consider legislation only for the commemoration of "a war or similar major military conflict or a branch of the armed forces" that has been designated as officially ended for at least 10 years. Works proposed to commemorate a limited military engagement or a unit of the armed forces are not allowed. For works commemorating events, individuals, or groups, the CWA specifies that Congress will not consider legislation "until after the 25 th anniversary of the event, death of the individual, or death of the last surviving member of the group." Legislation authorizing a commemorative work typically contains three sections: authorization to establish the work, payment of expenses, and deposit of excess funds. Authorizing legislation does not designate a specific site or design for the commemorative work, and additional information, such as findings, can be included, but is not a standard part of most commemorative works legislation. Once introduced, legislation is generally referred to the House Committee on Natural Resources and to the Senate Committee on Energy and Natural Resources. Following authorization, additional legislation is required to designate a commemorative work in Area I (see map in Appendix C ). For example, the Adams Memorial Foundation was authorized to consider sites in Area I by Congress following the recommendation of the National Capital Memorial Advisory Commission and the Secretary of the Interior. The first section of most commemorative works authorization bills includes specific mention of the group authorized to establish the memorial; and the individual, event, or group that is to be honored. The legislation also typically provides for the memorial's general location (i.e., in the District of Columbia or its environs), but does not provide for a specific site location. For example, the authorization language for the group authorized to create the memorial to President John Adams and his family stated, Congress approves the location for the commemorative work to honor former President John Adams and his legacy, as authorized by P.L. 107-62 (115 Stat. 411), within Area I as described in section 8908 of title 40, United States Code, subject to the limitation in section 2. Other sections of commemorative works authorization bills provide the sponsor with authority to accept contributions and requires the group to make payment for all expenses related to site selection, design, and construction of the memorial. Further, the CWA requires that the sponsor must donate an amount "equal to 10 percent of the total estimated cost of construction to offset the costs of perpetual maintenance and preservation" of the commemorative work. Many statutes authorizing commemorative works also contain a statement specifically prohibiting the use of federal funds. For example, the payment language for the Benjamin Banneker memorial stated, The Washington Interdependence Council shall be solely responsible for the acceptance of contributions for, and payment of the expenses of, the establishment of the memorial. No federal funds may be used to pay any expense of the establishment of the memorial. Legislation to authorize a commemorative work often provides for disposal of excess funds raised by the authorized group. Excess funds raised are often directed to be delivered to the Department of the Interior and the National Park Service for deposit with the National Park Foundation as provided for pursuant to 40 U.S.C. §8906 (b). For example, the excess funds language for the Brigadier General Francis Marion memorial stated, If, upon payment of all expenses of the establishment of the commemorative work authorized by subsection (b) (including the maintenance and preservation amount provided for in section 8906(b) of title 40, United States Code), or upon expiration of the authority for the commemorative work under chapter 89 of title 40, United States Code, there remains a balance of funds received for the establishment of that commemorative work, the Marion Park Project, a committee of the Palmetto Conservation Foundation, shall transmit the amount of the balance to the Secretary of the Treasury for deposit in the account provided for in section 8906 (b)(1) of such title. In some instances, Congress has chosen to extend the legislative authority for a commemorative work. All authorized commemorative works are provided a seven-year period to complete the work unless the group has a construction permit issued by the Secretary of the Interior (Secretary) or the Administrator of the General Services Administration (Administrator). In some circumstances, an administrative extension may be provided by the Secretary or Administrator if final design approvals have been received from the National Capital Planning Commission (NCPC) and the Commission of Fine Arts and 75% of the amount estimated to be required has been raised. If an authorized commemorative works legislative authority expires, Congress may extend that authority by amending the initial authorizing statute. For example, the Adams Memorial Foundation was initially authorized to create a commemorative work to the Adams family in 2001. In 2009, Congress extended the authority until September 30, 2010, and in 2010, it was further extended until December 2, 2013. The amendment to the legislative authority stated, Section 1(c) of P.L. 107-62 is amended by striking "accordance with" and all that follows through the period at the end and inserting the following: "according with chapter 89 of title 40, United States Code, except that any reference in section 8903(e) of that chapter to the expiration at the end of or extension beyond a seven-year period shall be considered to be a reference to an expiration on or extension beyond December 2, 2013." Based on the criteria discussed below in " Designation of Areas of Washington, DC ," the Secretary or the Administrator may, after consultation with the National Capital Memorial Advisory Commission, recommend the location of a commemorative work in either Area I or Area II (depicted in Figure C-1 ). If the Secretary or Administrator agrees with the recommendation and finds that the subject of the commemorative work is of preeminent historical and lasting significance to the nation, he or she will recommend placement in Area I and notify Congress of his or her determination. The location of a commemorative work in Area I shall be deemed disapproved unless it has been approved by law within 150 calendar days. If the commemorative work is of lasting historical significance it may be located in Area II, and Congress does not require notification, nor is further legislation needed. The CWA divides the District of Columbia and its environs into three sections for the placement of memorials: the Reserve, Area I, and Area II. For each area the standards for memorial placement are specified in law and enforced through a requirement for congressional approval of monument location through the passage of a joint resolution. For a map of the District marked with these sections, see Appendix C . The Reserve, created by P.L. 108-126 , is defined as "the great cross-axis of the Mall, which generally extends from the United States Capitol to the Lincoln Memorial, and from the White House to the Jefferson Memorial" and "is a substantially completed work of civic art." Within this area, "to preserve the integrity of the Mall … the siting of new commemorative works is prohibited." Works authorized prior to the enactment of P.L. 108-126 in November 2003—the Dr. Martin Luther King Jr. Memorial is the only such work—continue to be eligible for placement within the Reserve, pursuant to the process established by the National Park Service and outlined below under " Establishing a Memorial in the Nation's Capital ." Area I is reserved for commemorative works of "preeminent historical and lasting significance to the United States." Shown on Figure C-1 , Area I is roughly bounded by the West Front of the Capitol; Pennsylvania Avenue N.W. (between 1 st and 15 th Street, N.W.); Lafayette Square; 17 th Street, N.W. (between H Street and Constitution Avenue); Constitution Avenue, N.W. (between 17 th and 23 rd Streets); the John F. Kennedy Center for the Performing Arts waterfront area; Theodore Roosevelt Island; National Park Service land in Virginia surrounding the George Washington Memorial Parkway; the 14 th Street Bridge area; and Maryland Avenue, S.W., from Maine Avenue, S.W., to Independence Avenue S.W., at the U.S. Botanic Garden. Pursuant to 40 U.S.C. §8908, the Secretary of the Interior or the Administrator of General Services, after seeking the advice of the National Capital Memorial Advisory Commission, can recommend that a memorial be placed in Area I. If either the Secretary or the Administrator recommends placement in Area I, he or she must notify the House Committee on Natural Resources and the Senate Committee on Energy and Natural Resources. If the recommendation is not enacted into law within 150 calendar days, the recommendation is not adopted and the memorial sponsor must consider sites in Area II. Area II is reserved for "subjects of lasting historical significance to the American people." Shown on Figure C-1 , Area II encompasses all sections of the District of Columbia and its environs not part of the Reserve or Area I. In considering commemorative works legislation, both the House Committee on Resources and Senate Committee on Energy and Natural Resources solicit the views of the National Capital Memorial Advisory Commission. The Secretary or the Administrator likewise seeks the advice of the commission prior to recommending a location for a commemorative work. For example, the joint resolution approving the location of the Vietnam Women's Memorial stated, Whereas section 6(a) of the Act entitled "An Act to provide standards for placement of commemorative works on certain Federal Lands in the District of Columbia and its environs, and for other purposes," approved November 14, 1986 (100 Stat. 3650, 3651), provides that the location of a commemorative work in the area described therein as area I shall be deemed disapproved unless, not later than one hundred and fifty days after the Secretary of the Interior or the Administrator of General Services notifies the Congress of his determination that the commemorative work should be located in area I, the location is approved by law; Whereas the Act approved November 15, 1988 (102 Stat. 3922), authorizes the Vietnam Women's Memorial Project, Incorporated, to establish a memorial on Federal land in the District of Columbia or its environs to honor women who served in the Armed Forces of the United States in the Republic of Vietnam during the Vietnam era; Whereas section 3 of the said Act of November 15, 1988, states the sense of the Congress that it would be most fitting and appropriate to place the memorial within the two and two-tenths acre site of the Vietnam Veterans Memorial in the District of Columbia which is within area I; and Whereas the Secretary of the Interior has notified the Congress of his determination that the memorial authorized by the said Act of November 15, 1988, should be located in area I: Now, therefore, be it Resolved by the Senate and House of Representatives of the United States Of America in Congress assembled, That the location of a commemorative work to honor women who served in the Armed Forces of the United States in the Republic of Vietnam during the Vietnam era, authorized by the Act approved November 15, 1988 (102 Stat. 3922), in the area described in the Act approved November 14, 1986 (100 Stat. 3650), as area I, is hereby approved. Following site selection, the memorial planners begin the process of hiring a designer and work with National Park Service (NPS) to get plans approved by the NCPC and the Commission of Fine Arts. Memorial sponsors, in the development of a concept(s), are to consult with the National Capital Memorial Advisory Commission, which in turn provides advice to the Secretary or to Members of Congress. Once the memorial sponsor has chosen a designer and selected a concept design plan, those plans are presented to the NPS or General Services Administration, the Commission of Fine Arts, and the NCPC. In considering the plans, these entities are guided by several criteria established by the CWA. The design reviews include, but are not limited to, the memorial's surroundings, location, materials, landscape features, site specific guidelines, and the prohibition of donor contributions. Final designs and specifications are completed in coordination with NPS or GSA (as appropriate). As discussed above in " Payment of Expenses ," authorizing legislation often contains a statement that the commemorative work is to be created pursuant to the CWA and that the use of federal funds is not generally authorized or appropriated for the creation of commemorative works. Subsequently, sponsor groups are statutorily authorized to raise funds for the completion of the commemorative work. Fundraising for the creation of commemorative works can sometimes be difficult. In some instances, Congress has appropriated federal funds to assist with the creation of the commemorative work. For example, in 2005, Congress appropriated $10 million to the Secretary of the Interior "for necessary expenses for the Memorial to Martin Luther King, Jr." The appropriation was designated as matching funds and available only after being matched by non-federal contributions. The Commemorative Works Act specifies four criteria that the Secretary or the Administrator must determine prior to issuing a construction permit: 1. Approval of site and design by the Secretary or Administrator, the National Capital Planning Commission, and the Commission of Fine Arts 2. Consultation of "knowledgeable individuals qualified in the field of preservation and maintenance … to determine structural soundness and durability of the commemorative work and to ensure that the commemorative work meets high professional standards" 3. Submission of construction documents by authorized memorial sponsor to the Secretary or Administrator 4. Proof that sufficient funds exist to complete project construction 5. In advance of receiving a permit, the sponsor must donate an amount equal to 10% of the estimated cost of construction to offset the costs of perpetual maintenance and preservation Once a permit is issued, memorial construction may commence. Following the memorial's completion, the sponsor schedules a dedication and transfer ceremony to NPS or GSA. Past dedications have sometimes been attended by the President, but no specific ceremony requirements exist. For example, President George W. Bush dedicated the World War II Memorial in 2004. In his remarks, President Bush briefly commented on the memorial creation process and on the importance of honoring World War II veterans. Raising up this Memorial took skill and vision and patience. Now the work is done, and it is a fitting tribute, open and expansive like America, grand and enduring like the achievements we honor. The years of World War II were a hard, heroic, and gallant time in the life of our country. When it mattered most, an entire generation of Americans showed the finest qualities of our Nation and of humanity. On this day, in their honor, we will raise the American flag over a monument that will stand as long as America itself. In November 2000, Attorney General Janet Reno and Secretary of Commerce Norman Mineta represented President Bill Clinton at the dedication ceremony for the National Japanese-American Memorial to Patriotism during World War II. In a statement following the dedication, President Clinton recognized the importance of the memorial and the presence of his Cabinet secretaries. Earlier today America honored the patriotism of Japanese-Americans during World War II with the dedication of the National Japanese-American Memorial in the Nation's Capital. Attorney General Janet Reno and Commerce Secretary Norman Mineta joined distinguished members of the Japanese-American community and Americans of all ancestries in reminding us of a time when this county lost sight of the very foundations of democracy it was defending abroad. This Nation must never forget the difficult lessons of the Japanese-American internment camps during World War II and the inspirational lessons of patriotism in the face of that injustice. Since the passage of the CWA in 1986, Congress has authorized 33 memorials to be constructed on federal lands in the District of Columbia or its environs. Of these works, 18 have been dedicated and completed—15 under the auspices of the CWA and 3 outside the CWA process —11 are in-progress, and 4 have lapsed authorizations. Table 1 provides the number of memorials authorized per Congress, pursuant to the CWA, since the 99 th Congress (1985-1987). Memorials authorized by Congress since the passage of CWA have focused on a variety of individuals, groups, and events. Among the individuals recognized have been Francis Scott Key, George Mason, and Dr. Martin Luther King Jr. Groups commemorated have included Black Revolutionary War Patriots, Victims of Communism, and Ukrainian Famine-Genocide Victims. Still others have sought to memorialize events including the Korean War, World War II, and Dr. Martin Luther King Jr.'s "I Have a Dream Speech." Table 2 lists memorials authorized by Congress since 1986. Appendix A. Summary of Original Commemorative Works Act Provisions The Commemorative Works Act (CWA), as enacted, contained 10 sections covering the purposes of the bill, definitions, congressional authorization for memorials, creation of the National Capital Memorial Commission, conditions for memorial placement in different parts of the District of Columbia, site design and approval, issuance of construction permits, creation of a temporary memorial site, and other administrative provisions. Table A-1 provides a summary of the original provisions contained in the CWA for each section of the bill. Appendix B. Steps for Establishing a Memorial in the Nation's Capital In 1987, the National Park Service created a 24-step outline of the commemorative works process. In 2001, the National Capital Planning Commission published the outline for establishing a monument or memorial in the District of Columbia as part of the Museums and Memorials Master Plan. The 24-steps, reprinted verbatim below, are designed to guide interested groups and help ensure appropriate legislation, site selection, design approval, fundraising, and construction. 1. Memorial sponsor seeks National Capital Memorial Advisory Commission (NCMAC) assistance to review the requirements and process established by the Commemorative Works Act (CWA) and its applicability to the proposed memorial. 2. Memorial sponsor seeks a Senator or Representative who is willing to draft and introduce a bill to authorize establishment of the memorial. 3. Staffs of NCMAC, Member of Congress who will introduce the bill, and authorizing committees draft a bill that conforms to the provisions of the CWA. 4. Congressman and/or Senator introduce bill authorizing the memorial and designating the sponsor as the entity responsible for its erection at no cost to the federal government. 5. NCMAC considers proposed authorizing legislation to establish its view pursuant to CWA. 6. Chairmen of House and Senate authorizing Subcommittees on National Parks solicit views of NCMAC, may hold hearings on proposed authorizing legislation, and take action on a bill before sending it to the full House and Senate for a vote on the bill. 7. Congress passes bill, President signs bill into law, providing memorial sponsor 7 years in which to begin construction of memorial in Area II. 8. Memorial sponsor organizes the structure of the entity that will establish the memorial and beings planning. 9. The memorial sponsor may submit to the Secretary a request to be authorized to consider sites in Area I. The Secretary seeks the advice of NCMAC to determine whether the memorial warrants placement in Area I. Based on the advice of NCMAC, the secretary notifies Congress of a determination that the subject is of preeminent and lasting historical significance so that Congress can consider passage of legislation authorizing an Area I location for enactment by the President. 10. Memorial sponsor works with NPS staff to identify potential Area II sites (may include Area I if authorized) and prepare alternative site study and accompany preliminary environmental analysis. 11. Memorial sponsor, for sites within Area II, or Area I if authorized, submits alternative site study and accompanying preliminary environmental analysis to NPS for approval of preferred site and consultation with NCMAC. 12. NPS submits recommended site and environmental document to the National Capital Planning Commission (NCPC) and the Commission of Fine Arts (CFA) for approval. NPS initiates Section 106 consultation on its recommendation of site with the State Historic Preservation Officer (SHPO). 13. After site approval by NCPC and CFA and in consultation with the SHPO, the design process begins in accordance with any approved design guidelines. 14. Memorial sponsors select a designer or initiate a design competition. 15. Memorial sponsor selects preferred design concept and meets with NPS to discuss issues that design may present. After possible refinements, sponsor submits the design concept and draft environmental assessment to the NPS. 16. NPS reviews design concept and, upon concurrence, submits to NCPC and CFA with appropriate environmental document for approval. 17. Memorial sponsor, in close coordination with NPS, refines preliminary design concept on the basis of NCPC, CFA, and SHPO comments and submits preliminary design to NPS who, upon approval, submits it to NCPC and CFA for approval. 18. Memorial sponsor, in close coordination with NPS, refines preliminary design on the basis of comments and submits final design to NPS, who upon approval, submits it to NCPC and CFA for approval. 19. Memorial design team completes final drawings and specifications in close coordination with NPS. 20. Memorial sponsor completes fund-raising. 21. Memorial sponsor submits final drawing and specifications, cost estimate and evidence of funds on hand plus 10 percent cash payment of design and construction costs for maintenance to NPS. 22. NPS issues a construction permit on behalf of the Secretary of the Interior which constitutes final approval by the Secretary and the start of construction. 23. Memorial Sponsor begins construction and preparation of operation, maintenance, and preservation plans for the memorial. 24. Memorial is dedicated and transferred to NPS for management with accompanying as-built operation, maintenance, and preservation plans. Appendix C. District of Columbia Map with Area Designations Appendix D. Entities Responsible for Memorials in the District of Columbia The process established by the Commemorative Works Act (CWA) to create a commemorative work in the District of Columbia involves the National Capital Memorial Advisory Commission, the U.S. Commission of Fine Arts, the National Capital Planning Commission, the District of Columbia Historic Preservation Office, and sometimes the American Battle Monuments Commission. Each entity is highlighted below. National Capital Memorial Advisory Commission The National Capital Memorial Advisory Commission was created in 2001 to "advise the Secretary of the Interior and the Administrator of General Services (as appropriate) on policy and procedures for establishment of, and proposals to establish, commemorative works in the District of Columbia and its environs and on other matters concerning commemorative works in the Nation's Capital as the Commission considers appropriate." The commission is comprised of eight members and meets at least two times a year to "examine … each memorial proposal for conformance to the Commemorative Works Act, and make … recommendations to the Secretary and the Administrator and to Members and Committees of Congress. The Commission also serves as a source of information for persons seeking to establish memorials in Washington, DC and its environs." U.S. Commission of Fine Arts In 1910, Representative Samuel McCall introduced a bill, H.R. 19962, to create a commission on fine arts. Reported by the Committee on the Library, the House debated the bill on February 9. During the debate, Representative McCall explained why a permanent entity was needed to govern art within the District of Columbia. We have had a very haphazard development of art in the city of Washington. We have had our streets and our squares filled up by art objects that are not always art. We have had commissions appointed—temporary, sporadic commissions—one commission to operate upon one statue and another commission to operate upon another, and the result is that we have had no uniform or well thought out development. Speaking against the creation of the commission, Representative James Tawney argued that creation of a Commission of Fine Arts amounted to an abdication of power over matters in the District of Columbia. I believe that the Congress of the United States should reserve some of its legislative functions, some of its legislative power, and not delegate it to commissions or to any other body. We are responsible to the people for legislation, and can not escape that responsibility by the appointment of commissions. …We have control by virtue of the law over the District of Columbia. When Congress authorizes the construction of a public building and fixes the location of that building and requires its erections within the authority and the appropriation made therefore, or the limit of cost, I do not believe that there is any body of men, or any man, or any executive officer, I care not how high in authority he maybe, who should have the power, or unlawfully exercise executive power, to defeat the will of Congress as express in the law it enacts. Following debate, H.R. 19962 passed the House and was referred to the Senate. The Senate debated the bill on May 2 and 3, 1910. During debate, the Senate amended the bill to give the commission the authority to "advise generally upon questions of art when required to do so by the President, or by any committee of either House of Congress" and specified commission staffing. The Senate passed the bill, as amended on May 3, and the House disagreed with the Senate amendments and requested a conference. The conference committee issued its report on May 9, Congress approved the bill, and President William Howard Taft signed the bill on May 17, 1910. Pursuant to the act, the Commission of Fine Arts was initially charged with providing "advise upon the location of statues, fountains, and monuments in the public squares, streets, and parks in the District of Columbia, and upon the selection of models for statues, fountains, and monuments erected under the authority of the United States and upon the selection of artists for the execution of the same." Comprised of seven "well-qualified judges of the fine arts, appointed by the President," the commission's duties have subsequently been expanded to include "the selection of models for statues, fountains, and monuments erected under the authority of the Federal Government; the selection of artists to carry out [the creation of statues, fountains, and monuments]; and questions of art generally when required to do so by the President or a committee of Congress." The commission does not have authority over Capitol or Library of Congress buildings. National Capital Planning Commission In 1924, Congress established the National Capital Park and Planning Commission to implement the McMillan Plan for the District of Columbia (see Figure 2 ). Pursuant to the act of June 6, 1924, the commission was to "preserve the flow of water in Rock Creek, to prevent pollution of Rock Creek and the Potomac and Anacostia Rivers, to preserve forests and natural scenery in and about Washington, and to provide for the comprehensive systematic, and continuous development of the park, parkway, and playground system of the National Capital." In 1952, Congress, in the National Capital Planning Act, changed the commission's name to the National Capital Planning Commission. The act also expanded the commission's geographic boundaries and recognized the creation of the national capital region in Maryland and Virginia. In the House report accompanying the bill, the Committee on the District of Columbia emphasized the new regional mission of the commission. The bill denominates and authorizes the Commission to be the central planning agency for the Federal and District Governments within the National Capital region (the District and its environs) and to be the official representative of the aforesaid governments for collaboration with the Regional Planning Council.… The bill includes additional subjects, such as viaducts, subways, major thoroughfares, monuments and memorials , public reservations, or property such as airports, parking areas, institutions, open spaces, public utilities and surveys for transportation, redevelopment of obsolescent, blighted or slum areas, and specifically adds the all-important subject of density or distribution of population [emphasis added]. Currently, the commission consists of 12 members. Three members are appointed by the President, including the chair. Two of the three members appointed by the President must reside in Virginia and Maryland, respectively. The Mayor of the District of Columbia appoints two members who must be residents of the District. In addition, a number of regional officials serve as ex-officio members. These include the Mayor of Washington, DC, the chair the Council of the District of Columbia; heads of executive branch agencies with significant land holdings in the District; and leaders of the U.S. House and Senate committees with District oversight responsibilities. In addition to providing guidance and approval at multiple steps of the monument and memorial creation process in the District of Columbia, the NCPC also operates under the authority of other laws for planning within the National Capital Region. These include the National Capital Planning Act, Height of Buildings Act of 1910, District of Columbia Zoning Act, Foreign Missions Act, International Center Act, National Historic Preservation Act, National Environmental Policy Act, District of Columbia Home Rule Act, and the Capper-Crampton Act. State Historic Preservation Office for the District of Columbia Created pursuant to the National Historic Preservation Act of 1966, State Historic Preservation Officers "administer the national historic preservation program at the State level, review National Register of Historic Places nominations, maintain data on historic properties that have been identified but not yet nominated, and consult with Federal agencies." While not a statutory part of the memorial process, the National Capital Planning Commission recommends consultation with the State Historic Preservation Office for the District of Columbia as part of the design approval process. American Battle Monuments Commission The American Battle Monuments Commission was originally created in 1923 to "prepare plans and estimates for the erection of suitable memorials to mark and commemorate the services of the American forces in Europe and erect memorials therein at such places as the commission shall determine, including works of architecture and art in the American cemeteries in Europe." Generally, the commission has statutory authority to design, construct, operate and maintain permanent American cemeteries in foreign countries; establish and maintain U.S. military memorials, monuments and markers where American armed forces have served overseas since April 6, 1917; and control "the design and construction of permanent U.S. military monuments and markers by other U.S. citizens and organizations, both public and private, and encouraging their maintenance." In limited circumstances, the commission has also been tasked with creating memorials within the United States. For example, the commission was statutorily authorized to create the World War II Memorial in the District of Columbia.

In 1783, the Continental Congress authorized the first memorial in American history, an equestrian statue to honor George Washington that was to be constructed by the "best artist" in Europe. Since that time, Congress has authorized more than 100 commemorative works in the District of Columbia. Even with multiple authorized works, however, no specific process existed for the creation of commemorative works for almost two centuries. While Congress has long been responsible for authorizing memorials on federal land, the process for approving site locations, memorial design plans, and funding was historically haphazard. At times, Congress was involved in the entire design and building process. In other instances, that authority was delegated to executive branch officials, federal commissions were created, or Congress directly authorized a sponsor group to establish a memorial. In 1986, in an effort to create a statutory process for the creation, design, and construction of commemorative works in the District of Columbia, Congress debated and passed the Commemorative Works Act (CWA). The CWA codified congressional procedure for authorizing commemorative works when federal land is administered by the National Park Service or the General Services Administration. The act delegated responsibility for overseeing design, construction, and maintenance to the Secretary of the Interior or the Administrator of the General Services Administration, and several other federal entities, including the National Capital Planning Commission, the Commission of Fine Arts, and the National Capital Memorial Advisory Commission. Additionally, the CWA restricts placement of commemorative works to certain areas of the District of Columbia based on the subject's historic importance. These areas include the Reserve (i.e., the National Mall), where no new commemorative works are permitted; Area I, where new commemorative works must be of preeminent historical and lasting significance to the United States; and Area II, which is reserved for subjects of lasting historical significance to the American people. The act further stipulates that the Secretary of the Interior or the Administrator of the General Services Administration provide recommendations to Congress on the placement of works within Area I. Pursuant to the CWA, the National Park Service and the National Capital Planning Commission outlined a 24-step process to guide the creation of a commemorative work in the District of Columbia. The guidelines include initiation of a memorial, authorizing legislation, site selection and approval, fundraising, design approval, construction, and memorial dedication. Once a commemorative work is authorized, Congress may continue its involvement in the process in two ways. First, because the CWA provides a seven-year authorization for all commemorative works (with an administrative extension available), Congress is sometimes asked to extend a memorial sponsor group's authority beyond the initial period. Second, in some circumstances, Congress is asked to provide appropriations to assist a sponsor group's fundraising. In the past, appropriations for commemorative works have been in the form of both direct appropriations and matching funds. This report does not address memorials outside the District of Columbia.

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The Senate Finance Committee approved a measure, America's Healthy Future Act of 2009, on October 13, 2009. S. 1796 , based on that approved measure, was ordered reported on October 19. Included in the committee report accompanying S. 1796 was preliminary analysis conducted by the Congressional Budget Office (CBO) on October 7 regarding the potential impact of the Chairman's Mark. CBO projected that the Mark legislation would reduce federal deficits by $81 billion over a 10-year period (2010-2019), and would insure 94% of the non-elderly, legally present U.S. population by 2019. This report summarizes the key provisions affecting private health insurance in Titles I and VI of S. 1796 , American's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Title I of the bill focuses on restructuring the private health insurance market, setting minimum standards for health benefits, and providing financial assistance to certain individuals and, in some cases, small employers. Overall, the bill includes the following provisions: Individuals would be required to maintain health insurance, and certain employers with more than 50 employees would be required to either provide insurance or pay a tax, with some exceptions. Several market reforms would be made, such as modified community rating and guaranteed issue and insurance renewal. Both the individual mandate and any employer requirements would be linked to essential health benefits coverage. Qualifying coverage would include: qualified health benefits plans (QHBPs) offered in or out of an exchange; new group or individual coverage that meets or exceeds minimum health benefits; grandfathered employment based plans; grandfathered nongroup plans; and other coverage, such as Medicare and Medicaid. Either a state would establish separate exchanges to offer individual versus small group coverage, or the Secretary of Health and Human Services (hereafter referred to as the "Secretary" or "HHS Secretary" unless noted otherwise) would contract with a nongovernmental entity to establish and operate exchanges in states that did not establish them. Exchanges would not be insurers but provide eligible individuals and small businesses with access to private plans in a comparable way. Certain individuals with incomes below 400% of the federal poverty level could qualify for credits toward their premium costs and subsidies towards their cost-sharing. This financial assistance would be available only through exchanges. States would be provided the flexibility to establish basic plans for low-income individuals not eligible for Medicaid. Existing plans offered by employers as well as plans offered in the individual market (the nongroup market) would be grandfathered. However, existing small group plans would have to meet the applicable private market reforms by July 1, 2013. New plans could also be sold in both the individual and group market outside of an exchange, but only those new plans that meet the minimum requirements specified in the bill would satisfy the requirements for individuals and employers. Title VI includes a number of provisions to raise revenues to pay for expanded health insurance coverage. The revenue provisions include excise taxes and annual fees on health insurers, as well as limitations on executive compensation of insurance companies. In addition, a number of revenue provisions limit contributions to tax-advantaged accounts (i.e., flexible spending accounts and health savings accounts) and other itemized deductions used for health care expenses. This report begins by providing background information on key aspects of the private health insurance market as it exists currently. This information is useful in setting the stage for understanding how and where S. 1796 would reform health insurance. This report summarizes key provisions affecting private health insurance in Titles I and VI of America's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Although most of the provisions would be effective beginning in July 1, 2013, the table in the Appendix shows the timeline for implementing provisions effective prior to that date. Although the description that follows segments the private health insurance provisions into various categories, these provisions are interrelated and interdependent. For example, the bill includes a number of provisions to alter how current private health insurance markets function, primarily for individuals who purchase coverage directly from an insurer or through a small employer. S. 1796 would require that insurers not exclude potential enrollees or charge them premiums based on pre-existing health conditions. In a system where individuals voluntarily choose whether to obtain health insurance, however, individuals may choose to enroll only when they become sick. This can lead to a situation known as "adverse selection," which may result in higher premiums and greater uninsurance. When permitted, insurers often guard against adverse selection by adopting policies such as underwriting health insurance policies based on individual health status and excluding coverage for pre-existing conditions. If reform eliminates many of the tools insurers use to guard against adverse selection, America's Health Insurance Plans (AHIP), the association that represents health insurers, has stated that all individuals must be required to have coverage ("individual mandate"), so that not just the sick enroll. Furthermore, some individuals currently forgo health insurance because they cannot afford the premiums. If individuals are required to obtain health insurance, one could argue that adequate premium subsidies must be provided by the government and/or employers to make practical the individual mandate to obtain health insurance, which is in turn arguably necessary to make the market reforms possible. In addition, premium subsidies without cost-sharing subsidies may provide individuals with health insurance that they cannot afford to use. So, while the descriptions below discuss various provisions separately, the removal of one from the bill could be deleterious to the implementation of the others. The private health insurance provisions are presented under the following topics, with the primary CRS contact listed for each: Individual mandate and employer requirements: the mandate for individuals to maintain health insurance and any requirements for employers. [[author name scrubbed], [phone number scrubbed]] Private health insurance market reforms. [[author name scrubbed], [phone number scrubbed]] Exchange [Chris Peterson, [phone number scrubbed]], through which the following two items can only be offered: Health Care Cooperatives. [[author name scrubbed], [phone number scrubbed]] Premium subsidies. [Chris Peterson, [phone number scrubbed]] Title VI: Select Revenue Provisions Relating to Private Health Insurance [[author name scrubbed], [phone number scrubbed]] Americans obtain health insurance in different settings and through a variety of methods. People may get health coverage in the private sector or through a publicly funded program, such as Medicare or Medicaid. In 2008, 60% of the U.S. population had employment-based health insurance. Employers choosing to offer health coverage may either purchase insurance or choose to self-fund health benefits for their employees. Other individuals obtained coverage on their own in the nongroup market. However, there is no federal law that either requires individuals to have health insurance or requires employers to offer health insurance. Approximately 46 million individuals (15% of the U.S. population) were estimated to be uninsured in 2008. Individuals and employers choosing to purchase health insurance in the private market fit into one of the three segments of the market, depending on their situation—the large group (large employer) market, the small group market, and the nongroup market. More than 96% of large employers offer coverage. Large employers are generally able to obtain lower premiums for a given health insurance package than small employers and individuals seeking nongroup coverage. This is partly because larger employers have a larger "risk pool" of enrollees that makes the expected costs of care more predictable. Employers generally offer large subsidies toward health insurance, thus making it more attractive for both the healthier and the sicker workers to enter the pool. So, not only is the risk pool large in size, but it is also contains diverse risks. States have experimented with ways to create a single site where individuals and small employers could compare different insurance plans, obtain coverage, and sometimes pool risk. Although most of these past experiments failed (e.g., California's PacAdvantage ), other states have learned from these experiences and have fashioned potentially more sustainable models (e.g., Massachusetts' Connector ). There are private-sector companies that also serve the role of making various health insurance plans easier to compare for individuals and small groups (e.g., eHealthInsurance), available in most, but not all, states because of variation in states' regulations. Less than half of all small employers (less than 50 employees) offer health insurance coverage; such employers cite cost as the primary reason for not offering health benefits. One of the main reasons is a small group's limited ability to spread risk across a small pool. Insurers generally consider small firms to be less stable than larger pools, as one or two employees moving in or out of the pool (or developing an illness) would have a greater impact on the risk pool than they would in large firms. Other factors that impact a small employer's ability to provide health insurance include certain disadvantages small firms have in comparison with their larger counterparts: small groups are more likely to be medically underwritten, have relatively little market power to negotiate benefits and rates with insurance carriers, and generally lack economies of scale. Allowing these firms to purchase insurance through a larger pool, such as an Association, Gateway or an Exchange, could lower premiums for those with high-cost employees. Depending on the applicable state laws, individuals who purchase health insurance in the nongroup market may be rejected or face premiums that reflect their health status, which can make premiums lower for the healthy but higher for the sick. Even when these individuals obtain coverage, there may be coverage exclusions for certain conditions. Reforms affecting premiums ratings would likely increase premiums for some, while lowering premiums for others, depending on their age, health, behaviors, and other factors. States are the primary regulators of the private health insurance market, though some federal regulation applies, mostly affecting employer-sponsored health insurance (ESI). The federal Health Insurance Portability and Accountability Act (HIPAA) requires that coverage sold to small groups (2-50 employees) must be sold on a guaranteed issue basis. That is, the issuer must accept every small employer that applies for coverage. All states require issuers to offer policies to firms with 2-50 workers on a guaranteed issue basis, in compliance with HIPAA. As of January 2009 in the small group market, 13 states also require issuers to offer policies on a guaranteed issue basis to self-employed "groups of one." And as of December 2008 in the individual market, 15 states require issuers to offer some or all of their insurance products on a guaranteed issue basis to non-HIPAA eligible individuals. Most states currently impose premium rating rules on insurance carriers in the small group and individual markets. The spectrum of existing state rating limitations ranges from pure community rating to adjusted (or modified) community rating, to rate bands, to no restrictions. Under pure community rating, all enrollees in a plan pay the same premium, regardless of their health, age or any other factor related to insurance risk. As of December 2008, only two states (New Jersey and New York) use pure community rating in their nongroup markets, and only New York imposes pure community rating rules in the small group market. Adjusted community rating prohibits issuers from pricing health insurance policies based on health factors, but allows it for other key factors such as age or gender. Rate bands allow premium variation based on health, but such variation is limited according to a range specified by the state. Rate bands are typically expressed as a percentage above and below the index rate (i.e., the rate that would be charged to a standard population if the plan is prohibited from rating based on health factors). Federal law requires that group health plans and health insurance issuers offering group health coverage must limit the period of time when coverage for pre-existing health conditions may be excluded. As of January 2009 in the small group market, 21 states had pre-existing condition exclusion rules that provided consumer protection above the federal standard. And as of December 2008 in the individual market, 42 states limit the period of time when coverage for pre-existing health conditions may be excluded for certain enrollees in that market. Moreover, while there are a handful of federal benefit mandates for health insurance that apply to group coverage, there are more than 2,000 cumulative benefit mandates imposed by the states. One issue receiving congressional attention is whether a publicly sponsored health insurance plan should be offered as part of the insurance market reform. Some proponents of a public option see it as potentially less expensive than private alternatives, as it would not need to generate profits or pay brokers to enroll individuals and might have lower administrative costs. Some proponents argue that offering a public plan could provide additional choice and may increase competition, since the public plan might require lower provider payments and thus charge lower premiums. Some opponents question whether these advantages would make the plan a fair competitor, or rather provide the government with an unfair advantage in setting prices, in authorizing legislation, or in future amendments. Ultimately, opponents are concerned that these advantages might drive private plans from the market. Health insurance is provided by organizations that are either for-profit or non-profit in terms of their tax status. Some studies have suggested that non-profits perform better in key areas such as quality. For example, a study published in the Journal of the American Medical Association (JAMA) in 1999 found that non-profit health maintenance organizations (HMOs) scored higher on all 14 Healthplan Employer Data and Information Set (HEDIS®) quality measures studied. These results were generally replicated in a study published in 2006 of 272 health plans conducted by researchers at the University of California at Berkeley and the National Committee for Quality Assurance (NCQA). Health insurance co-operatives, a subset of non-profit plans, have performed particularly well as detailed in recent case studies of Group Health Cooperative of Seattle (GHC) and HealthPartners of Minnesota. As of 2008, 47% of the enrollment in private health plans was in non-profit health insurance organizations. However, there are relatively few health insurance co-operative organizations in the United States. Some Congressional attention has been focused on options to incentivize the creation of new health insurance co-operatives. Advocates of this position argue that co-operatives invest retained earnings back into the plan or return the dollar to the membership, thus resulting in lower premiums, lower cost-sharing, expanded benefits, and innovations such as wellness programs, chronic disease management, and integrated care. Opponents of the proposal assert that co-operatives have not been successful in most of the country and that evidence is lacking that co-operatives would make health insurance more affordable. S. 1796 would establish new health insurance plans and define existing ones in the private market applicable to Title I. New health plans include the following: In the individual and small group markets, any new health plan must meet the specified requirements to be a "qualified health benefits plan" (QHBP). QHBPs must comply with new federal standards related to market reforms (e.g., guaranteed issue) and essential benefit requirements, and state rules including licensure requirements. Any plan offered through the Exchange (described below) must be a QHBP. A "qualified basic health plan" would be a plan established and maintained by the state under which only eligible individuals may enroll. Such a plan would provide coverage equal to at least the essential benefits package (described below), and have a medical loss ratio of at least 85%. The Senate Finance bill defines several terms related to health insurance applicable to Title I, including: "Health benefits plan" refers to health insurance coverage and a group health plan, not including self-insured plans and multiple employer welfare arrangements (MEWAs). "Offeror" refers to the plan sponsor in the case of a group health plan and health insurance coverage, or the employer in the case of a plan jointly offered by one or more employers and one or more employee organizations in which the employer is the primary financing source. Essential health benefits coverage (i.e., coverage required to fulfill the individual mandate) is defined as coverage under a QHBP, a grandfathered health benefits plan, eligible employer-sponsored plans, Medicare part A, Medicaid, coverage for members of the Armed Forces and their dependents (including Tricare), certain veteran's health care program coverage, Federal Employees Health Benefits Program (FEHBP), and as determined by the HHS Secretary and Secretary of Labor, any other health benefits coverage such as a State health benefits risk pool or coverage while incarcerated. S. 1796 would include a mandate for most individuals age 18 and over to have health insurance beginning July 1, 2013, or to pay a penalty for noncompliance. Individuals would be required to maintain essential health benefits coverage for themselves and their dependents. Most individuals who do not maintain essential health benefits coverage for themselves and their dependents would be required to pay a penalty. The penalty would be phased-in—$200 in 2014, $400 in 2015, $600 in 2016, reaching $750 in 2017. In any given year, there would be a limit of no more than two times the penalty amount in total for the taxpayer and any dependents. The penalty amount would be adjusted for inflation, beginning with taxable years after 2017. Members of Congress and congressional staff would be qualified to enroll in a QHBP in the individual market offered through an exchange in the state in which they reside. Any employer contribution made on their behalf could only be paid to the offeror of the QHBP in the which they were enrolled in the exchange. Employer contributions for Members of Congress and congressional staff could not be made to a plan offered through the Federal Employees Health benefit program (FEHBP). Some individuals would be provided with subsidies to help pay for their premiums and cost-sharing. (A complete description of who would be eligible and the amount of subsidies is found in the section on Individual Eligibility for Premium Credits and Cost-sharing Subsidies). Others would be exempt from the individual mandate, including those without coverage for less than 90 days, Indians (as defined in the Indian Health Care Improvement Act), those with qualifying religious exemptions, those in a health care sharing ministry, undocumented aliens, individuals whose adjusted gross income did not exceed 100% of the federal poverty level (FPL), or any individual who the Secretary of Labor determines to have suffered a hardship with respect to the capability to obtain coverage under a QHBP. Additionally, individuals whose required contribution for a calendar year exceeds 8% of household income would be exempt from the mandate. For tax years after 2013, the 8% would be adjusted by the Secretary to reflect the excess rate of premium growth and the rate of income growth for the period. S. 1796 would not mandate employers to provide employees with coverage, however employers with more than 50 full-time employees (defined as working on average at least 30 hours per week) who did not provide coverage could be required to pay a penalty for certain employees. For those employers that chose to offer health insurance, the following rules would apply: Current employment-based plans would be grandfathered. Small employers could offer full-time employees and their dependents coverage in a QHBP. Large employers could offer full-time employees the opportunity to enroll in a group health plan, as long as the plan met requirements relating to annual and lifetime limits, annual limits on cost-sharing, and provided preventive items and services with cost-sharing only as allowed. An employer would not be treated as meeting the employer requirements for an employee, if (1) the employee is eligible for a premium credit because the employee's required contribution exceeds 10% of the employee's household income or (2) the plan's share of the total allowed costs of benefits provided under the plan is less than 65% of the costs (this requirement would not apply to QHBPs). Employers would not have to provide coverage for seasonal workers. Employers would be required to file a return providing the name of each individual for whom they provide essential health benefits coverage, the number of months of coverage, and any other information required by the Secretary. They would also be required to provide notice to employees about the existence of the exchange, including a description of the services provided by the exchange. A firm with more than 50 employees that chose not to offer health insurance could be subject to a penalty if any of its full-time employees were enrolled in a QHBP for which a premium credit or cost-sharing subsidy is allowed or paid for, for that employee. The penalty assessed to the employer for each such employee would be equal to the sum of the average annual credit and the average annual cost-sharing subsidy. However, the total penalty for an employer would be limited to $400 times the average number of the firm's employees. For example, consider an employer who did not offer health coverage and had 100 employees of which 30 full-time employees qualified for credits or subsidies through an exchange plan. If the penalty amount set by the Secretary of HHS for that year is $3,000 per employee, the total penalty for the firm would be $90,000 (30 x $3,000). Since the maximum amount an employer must pay per year is limited to the number of employees multiplied by $400, which in this case is $40,000 (100 x $400), the employer must pay only $40,000 (the lesser of $40,000 and the $90,000 calculated tax). After 2013, the $400 amount would be indexed by a premium adjustment percentage for the calendar year. Certain small businesses would be eligible for a tax credit toward their share of the cost of health insurance coverage. In 2011 and 2012, the credit could cover up to 35% of a qualified employer's share of health insurance coverage. Beginning in 2013, a qualified small employer purchasing insurance through the exchange could receive a tax credit for two years that covers up to 50% of the employer's contribution. Small businesses with 10 or fewer full-time employees and with average taxable wages of $20,000 or less could claim the full credit amount. This credit would be phased out as average employee compensation increased from $20,000 to $40,000 and as the number of full-time employees increased from 10 to 25. Employees would be counted if they received at least $5,000 in compensation, but the credit would not apply toward insurance for employees whose compensation exceeded $80,000 (highly compensated employees). Adjustments would be made for inflation after 2010. Full-time employees would be calculated by dividing the total hours worked by all employees during the tax year by 2,080 (with a maximum of 2,080 hours for any one employee). Seasonal workers would be exempt from this calculation. Non-profit organizations with 25 or fewer employees would also be eligible to receive tax credits if they meet the same requirements. These organizations would be eligible for a 25 percent credit from 2011–2013 and a 35 percent credit in 2013 and thereafter. The credit would not be available to self-employed individuals. The Senate Finance bill would also reduce the administrative costs for small businesses who provided cafeteria plans (Section 125 plans). A cafeteria plan is a salary reduction arrangement that allows workers to fund accounts for health care expenses (e.g., copayments, deductibles and non-covered services) on a pre-tax basis. S. 1796 would simplify nondiscrimination testing requirements for cafeteria plans established by small businesses. Nondiscrimination testing measures whether an employer disproportionately favors highly compensated employees within the cafeteria plan. The bill would not require nondiscrimination testing by small businesses if they meet certain safe harbor requirements. Under the bill, small employers would have to either provide a uniform percentage of compensation to all employees (not less than 2%) or contribute an amount equal to the greater of: 6% of the employee's compensation for the year or twice the amount of the salary reduction contribution of each employee. S. 1796 would establish new federal standards applicable to private health insurance plans. These standards would primarily affect private health insurance in the individual market and the small group (small employer) market. These standards would impose new requirements on states related to the allocation of insurance risk, modify the current state-based regulatory system applicable to private plans, and require coverage for specified categories of benefits. Before 2015, states would have the option to define "small employers" either as those with (1) 100 or fewer employees, or (2) 50 or fewer employees. Beginning in 2015, small employers would be defined as those with 100 or fewer employees. Large employers would be affected by some provisions. After 2009, health insurance offered in the large and small group markets (excluding grandfathered plans and qualified health benefits plans) would be prohibited from imposing "unreasonable annual or lifetime limits" on plan enrollees. After June 30, 2013, health plans offered in the large group market could not charge cost-sharing for preventive services and would be required to adhere to the annual out-of-pocket limits applicable to high deductible health plans (HDHPs) as defined under the health savings account (HSA) section of the Internal Revenue Code (IRC). Employers with more than 200 employees that offer coverage would be required to automatically enroll new employees in a plan unless the employee opted out. S. 1796 would require that all new health benefits plans offered in the individual and small group market be qualified health benefit plans (QHBPs) that meet the insurance rating reforms and essential benefits package requirements specified in the bill (described below). A QHBP would be issued certification or recognized by the state that it meets the requirements relating to market reforms and health insurance affordability. Additionally, the offeror of the plan would be licensed by the state and comply with other requirements established by the Secretary or the state. QHBPs would be required to provide coverage for essential benefits and to charge the same premium regardless of whether the plan is purchased through an exchange (described below), the offeror, or an insurance agent. QHBPs also would be prohibited from excluding coverage for pre-existing conditions and would be required to offer coverage in the individual and small group markets on a guaranteed issue and guaranteed renewal basis. S. 1796 would apply new federal health insurance standards to new, generally available health plans in the individual and small group markets. Among the market reforms are provisions that would do the following: Prohibit qualified health benefits plans (QHBPs) from excluding coverage for pre-existing health conditions, or imposing limits on coverage based on health status-related factors. (A "pre-existing health condition" is a medical condition that was present before the date of enrollment for health coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before such date.) Require QHBPs to offer coverage on a guaranteed issue and guaranteed renewal basis. ("Guaranteed issue" in health insurance is the requirement that an issuer accept every applicant for health coverage. "Guaranteed renewal" in health insurance is the requirement on an issuer to renew group coverage at the option of the plan sponsor (e.g., employer) or nongroup coverage at the option of the enrollee. Guaranteed issue and renewal alone would not guarantee that the insurance offered was affordable.) Require health benefits plans, offered in a rating area established by states, to determine premiums using adjusted community rating rules. ("Adjusted, or modified, community rating" prohibits issuers from pricing health insurance policies based on health factors, but allows it for other key characteristics such as age or gender.) Under S. 1796 , premiums would only be allowed to vary according to specified ratios for the following risk factors: family enrollment (Individual, 1:1; Adult with child, 1.8:1, Two adults, 2:1, and Family, 3:1); age (by no more than a 4:1 ratio across age rating bands established by the Secretary), and tobacco use (by no more than 1.5:1 ratio). Require health benefits plans to provide an outline of the plan's coverage that meets uniformity standards adopted by the Secretary. Such standards would ensure that the outline both accurately describes the coverage offered by the plan, and is presented in a uniform format. S. 1796 would include provisions which take into account the variation of insurance risk among plan enrollees and across health plans. Such provisions would: Require individual and small group issuers that offer a QHBP through an exchange (described below) to consider all enrollees of that plan as members of a single risk pool. ("Pooling" refers to the insurance industry practice of pooling the insurance risk of individuals or groups in order to determine premiums.) Give states the option to merge the individual and small group markets for the purposes of applying the pooling requirements. Require each state to adopt a risk-adjustment model, established by the Secretary, to apply risk adjustment to QHBPs and grandfathered plans in the individual and small group markets. ("Risk adjustment" refers to a mechanism that adjusts payments to health plans to take into account the risk that each plan is bearing based on its enrollee population.) Require each state to establish a reinsurance program no later than July 1, 2013. ("Reinsurance" typically is thought of as insurance for insurers. When issuing policies, an insurer faces the risk that the premiums it collects will not be sufficient to cover its expenses and generate profit. For a health insurer, an unusually high health care claims could lead to significant financial loss. Reinsurance shifts the risk of covering such high expenses from the primary insurer to a reinsurer.) Require all plan offerors to contribute to a temporary reinsurance program for individual policies that is administered by a non-profit reinsurance entity. Require the Secretary to establish and administer temporary risk corridors, under which payments to QHBPs in the individual and small group markets would be made according to applicable risk corridor rules. ("Risk corridors" refer to a mechanism which adjusts payments to plans according to a formula based on each plan's actual, allowed expenses in relation to a target amount. If a plan's expenses exceed a certain percentage above the target, the plan's payment is increased. Likewise, if a plan's expenses exceed a certain percentage below the target, the plan's payment is decreased.) Require the Secretary to establish one or more temporary high risk pools that offer coverage with no coverage exclusions for pre-existing health conditions. High risk pools would provide coverage for the essential benefits package (described below), and provide the bronze level of coverage (described under the Exchange section). Require the Secretary to create, within 90 days after enactment, a temporary reinsurance program to assist participating employment-based plans with the cost of providing health benefits to eligible retirees who are 55 and older and their dependents. Funding would not exceed $5 billion. The Secretary would reimburse the plan for 80% of the portion of a claim above $15,000 and below $90,000 (adjusted annually for inflation). Amounts paid to the plan would be used to lower costs directly to participants in the form of premiums, co-payments, and other out-of-pocket costs, but could be not used to reduce the costs of an employer maintaining the plan. The Senate Finance bill would also require states to (1) implement regulations or standards that effectuate the reforms applicable to the private individual and small group markets; (2) establish one or more exchanges including a small business exchange; (3) require QHBPs to provide an internal claims appeal process; and (4) establish an external review process. In addition, S. 1796 would allow states to (1) establish programs to allow for the automatic enrollment of individual and employees in QHBPs; (2) establish or continue any health insurance requirements that offer greater protections to consumers than the new federal standards specified in this bill; and (3) apply for a waiver of any and all private market requirements and the individual mandate. The Senate Finance bill also would allow QHBPs to be subject to the health insurance laws and regulations of one state while operating in multiple states. Plans could continue to offer coverage in a grandfathered plan in both the individual and group market. Enrollment would be limited to those who were currently enrolled, their dependents, or for grandfathered employer-sponsored insurance to new employees and their dependents. Beginning July 1, 2013, the insurance reform requirements of this bill (relating to the requirements in the small group market, such as a prohibition of pre-existing condition exclusions) would apply to grandfathered plans in the small group market. If a state is phasing in those requirements for QHBPs, the phase-in would apply in the same manner to grandfathered plans. Additionally, health insurance coverage in the individual market (in effect before enactment) that is actuarially equivalent to a catastrophic plan for young individuals would be treated as a grandfathered plan. The Secretary would specify the benefits included in the "essential benefits package" that qualified health benefits plans would be required to cover. Those benefits would include at least the following general categories: hospitalization; outpatient hospital and clinic services, including emergency department services; professional services of physicians and other health professionals; medical and surgical care; such services, equipment, and supplies incident to the services of a physician's or a health professional's delivery of care in institutional settings, physician offices, patients' homes or place of residence, or other settings as appropriate; prescription drugs; rehabilitative and habilitative services; mental health and substance use disorder services, including behavioral health treatment; preventive services, including those services recommended with a grade of A or B by the U.S. Preventive Services Task Force and those vaccines recommended for use by the Advisory Committee on Immunization Practices; maternity benefits; and well baby and well child care and oral health, vision, hearing services, equipment, and supplies for children under 21 years of age. Essential benefits package coverage would be prohibited from imposing any annual or lifetime limits. No cost-sharing would be allowed for preventive services. For all other services included in the essential benefits package, cost-sharing could not exceed the minimum deductible and would have to meet the out-of-pocket limits applicable to high deductible health plans (HDHPs) as defined under the health savings account (HSA) section of the IRC. By July 1, 2012, the Senate Finance bill would require the Secretary to specify the covered treatments, items, and services within each of the categories listed above, and update such benefits annually thereafter. The Secretary would ensure that the scope of the essential benefits package is not more extensive (as certified by the Chief Actuary of the Centers for Medicare and Medicaid Services) than the scope of benefits under a typical employer-provided health plan. Each state would be required to ensure that at least one plan offered in the exchange is actuarially equivalent to the standard Blue Cross Blue Shield plan offered to Federal employees. S. 1796 would require insurers in the individual or small group market to offer QHBPs that include the essential benefits package and that provide coverage at one of the following tiers of coverage: bronze, silver, gold, or platinum. This requirement on insurers in the individual and small group market would apply regardless of whether or not the plan is offered through an exchange. For each coverage tier, the Senate Finance bill specifies an actuarial value (i.e., the average percentage of total covered costs in the essential benefits package paid for by the plan for a given population), as shown in Figure 1 . An insurer that offers coverage in any of these tiers would be permitted to offer a separate plan in that tier that covers only those (1) who are under age 21, or (2) who are 21 or older but are the dependent of another person. Besides these four tiers, S. 1796 also would permit some additional plan options. A catastrophic plan would be permitted for young adults (those under age 26 before the plan year begins) and for those exempt from the individual mandate because no affordable coverage is available. The catastrophic plan could have no cost-sharing for preventive services, but for all other expenses would have a deductible in 2013 equal to the largest annual out-of-pocket maximum permitted for QHBPs, which is based on the limitations for HSA-qualified HDHPs. There is no existing Federal law providing direct on-going program financing to the States for health insurance coverage of low-income individuals not eligible for Medicaid either under standard criteria or via waivers. However, S. 1796 would establish a program that is modeled after the Basic Health (BH) Plan program administered and financed by the Washington State Health Care Authority (HCA). BH started as a pilot program established by the Washington State ''Health Care Access Act of 1987." The Washington State HCA contracts with private health plans to implement the BH program. In turn, the private plans contract with health care providers for services under the BH benefits plan. Currently the following five private insurers participate: Columbia United Providers, Community Health Plan of Washington, Group Health Cooperative, Kaiser Permanente, and Molina. Choice of plans is made at the county level. Not every participating plan is available in every county. S. 1796 would require the Secretary to establish a program where a state or a regional compact of states would establish one or more qualified basic health plans ("basic plan") to provide at least an essential benefits package to eligible individuals rather than offering coverage to them through an exchange. The Secretary would be required to certify that the state's basic plan has premiums and cost-sharing that does not exceed the costs under QHBPs within the state, and that the benefits provided under the qualified basic health plan covers the items and services required under an essential benefits package. The Senate Finance bill would also require states to establish a competitive process to enter into contracts with coverage providers under the plan. Contract negotiations would include payment rates, premiums, cost-sharing, and extra benefits. The competitive process would also require consideration of contracting with managed care systems or with systems that offer as many of the attributes of managed care as feasible in the local health care market. The bill would also mandate consideration in the competitive process of establishment of specific performance measures that focus on quality of care and improved outcomes, in addition to requiring providers to report measures and standards. These data would have to be made available to enrollees. Under the bill, if the Secretary determines that a state meets the requirements of the program, then the Secretary would provide funds to participating states in order to provide affordable health care coverage through private health care systems under contract. A state's Basic Health Plan funding level would be based on the Secretary's estimates of 85 percent of the value of individual tax credits and cost sharing subsidies that otherwise would have been made for enrollment in QHBPs offered through an exchange. This amount would be calculated on a per enrollee basis. Funds distributed to the states would be provided to independent trusts and would be used by the states only to reduce the premiums and cost sharing for eligible enrolled individuals. If states do not implement the reforms to the individual and small group markets described above by July 1, 2013, then the Secretary would implement and enforce those requirements. States that implemented the reforms would also be required to establish an exchange by July 1, 2013, through which individuals and small employers could obtain QHBPs—otherwise, the Secretary would enter into a contract with a "nongovernmental entity to establish and operate the exchanges within the state." ( S. 1796 also would permit the creation of "interim exchanges" prior to July 1, 2013, discussed in the Appendix .) Exchanges would be similar in many respects to existing entities like the Massachusetts Connector and eHealthInsurance. Exchanges would not be insurers but would provide eligible individuals and small businesses with access to insurers' plans in a comparable way (in the same way, for example, that Travelocity or Expedia are not airlines but provide access to available flights and fares in a comparable way). The Senate Finance bill calls for the creation of separate exchanges in each state for individuals versus small employers ("a Small Business Health Options Program … [or] SHOP exchange'"). A state would be permitted to merge them into a single exchange, "but only if the exchange has separate resources to assist individuals and employers." An exchange could be permitted to operate in multiple states, if each state agrees to the operation of the exchange and if the Secretary approves. All plans offered by insurers in the individual and small groups markets would have to be offered through an exchange, but could also be offered outside an exchange. Insurers would have to offer plans in the silver and gold tiers, but could also offer plans in the bronze and platinum tiers. Insurers could also offer through an exchange the catastrophic and child-only plans described in the Tiers section above. The exchange could also include dental-only plans. The Secretary would enter into an agreement with each state to specify which of the following functions would be done by the Secretary, the state, or the exchange: provide for the state to establish procedures to certify, recertify and decertify QHBPs; establish an outreach plan, call centers, internet portals, and a system to rate exchange plans; determine whether applying individuals and employers are eligible to participate in the exchange; establish and carry out a process which provides for enrollment in person, by mail, by telephone (call center), or electronically (internet portal)—including through local hospitals and schools, state motor vehicle offices, local Social Security offices, locations operated by Indian tribes and tribal organizations, and other locations specified by the exchange; provide open enrollment periods from March 1 through May 31 (with some exceptions), beginning in 2013; establish uniform enrollment forms, standardized marketing requirements, and a standardized format for presenting options among exchange plans; provide for a calculator to determine the actual cost of coverage to individuals after taking into account any premium credits and cost-sharing subsidies; and certify whether individuals are exempt from the individual mandate excise tax because there is no affordable QHBP through the exchange or the through individual's employer, and transfer the list of such individuals to the Treasury Secretary. The HHS and Treasury Secretaries would have responsibility for advance determination of premium credits and cost-sharing subsidies. The HHS Secretary would designate an office to provide technical assistance to states for SHOP exchanges. The Secretary would pay states "the amount the Secretary reasonably estimates to be the unreimbursed start-up costs for any exchange." The Secretary could not make payment for exchanges' ongoing operations; that funding would be from assessments on QHBPs set by exchanges. The Secretary would also establish procedures under which a state would be required to allow insurance agents or brokers to enroll individuals in an exchange plan and to assist them in applying for premium credits and cost-sharing subsidies. Each state would establish rate schedules for broker commissions paid by exchange plans. Individuals could enroll in a plan through their state's exchange if they are (a) residing in a state that established an exchange, (b) not incarcerated, except individuals in custody pending the disposition of charges, and (c) are lawful residents. Undocumented aliens would be prohibited from obtaining coverage through an exchange. Only small employers may opt to offer coverage to their workers through an exchange. Before 2015, states would have the option to define "small employers" either as those with (1) 100 or fewer employees, or (2) 50 or fewer employees. Beginning in 2015, small employers would be defined as those with 100 or fewer employees. Beginning in 2017, states could allow large employers to obtain coverage through an exchange (but could not be required to do so). Participating employers could limit the choice of exchange plans available to their employees; plan choice could be limited to a particular benefit level (tier) or even to a single plan. As previously mentioned, Members of Congress and congressional staff would be eligible to obtain coverage through an exchange. Indeed, the only way they could obtain their employer's contribution toward premiums would be to enroll in an exchange plan. Otherwise, they would be responsible for 100% of the premium (unless their income was low enough to qualify for premium credits). Some individuals would be eligible for premium credits (i.e., subsidies) toward their required purchase of health insurance, based on income. However, even when individuals have health insurance, they may be unable to afford the cost-sharing (deductible and copayments) required to obtain health care. Thus subsidies may also be necessary to lower the cost-sharing. Under S. 1796 , those eligible for premium credits would also be eligible for cost-sharing subsidies. Both premium credits and cost-sharing subsidies would only be available for silver plans sold through an exchange, including both the private plans and public option. Beginning January 1, 2013, qualifying individuals could receive advanceable, refundable tax credits toward the purchase of an exchange plan. Individuals above 400% of the federal poverty level (FPL) would not be eligible for credits. Qualifying individuals between 300% and 400% FPL would have to pay no more than 12% of their incomes in premiums. For qualifying individuals with income between 133% (100% after 2013) and 300% FPL, the percent of income they would have to pay toward premiums would rise in a straight line from 2% of income to 12% of income, as illustrated in the solid line of Figure 2 and Table 1 below. For a family of three in the 48 contiguous states in 2009, 100% FPL is $18,310, and 400% FPL is $73,240. The premium credit amount would be based on the second lowest cost silver plan available to the individual in an exchange. Individuals who enrolled in more expensive plans would have to pay any additional amount. However, the cost-sharing subsidies would only be available to credit-eligible individuals enrolled in a silver plan. Although the Medicaid provisions of S. 1796 are generally beyond the scope of this report, eligibility for Medicaid as expanded under S. 1796 interacts with the bill's provisions regarding premium credits and cost-sharing subsidies. From 2011 to 2013, states could expand Medicaid to all non-elderly, non-pregnant individuals (i.e., childless adults and certain parents, except for those ineligible based on certain noncitizenship status) who are otherwise ineligible for Medicaid up to 133% FPL. Beginning in 2014, states would be required to extend Medicaid to these individuals. Thus, all non-elderly citizens up to 133% FPL would be eligible for Medicaid. S. 1796 would not change noncitizens' eligibility for Medicaid. Thus, for example, in 2013, legal permanent residents (LPRs) who are below 100% FPL could be ineligible for Medicaid and would also be ineligible for premium credits. However, beginning in 2014, lawfully present taxpayers below 100% FPL who are not eligible for Medicaid would be eligible for premium credits. Besides the previously mentioned eligibility criteria, individuals would also generally be ineligible for credits if they were eligible for an employer-sponsored plan, Medicare, Medicaid, coverage related to military service, FEHBP, and other coverage recognized by the Secretary. An individual eligible for, but not enrolled in, an employer-sponsored plan could still be eligible for subsidies if the employee's contribution to premiums exceeded 10% of household income or if the plan covered less than 65% of total allowed costs. Those who qualified for premium credits and were enrolled in an exchange plan at the silver tier would also be eligible for assistance in paying any required cost-sharing for their health services. As previously mentioned, exchange plans would be required to limit out-of-pocket costs based on high deductible health plans (HDHPs) that qualify individuals for health savings accounts (HSAs). For 2009, the out-of-pocket maximum for HSA-qualified HDHPs is $5,800 for single coverage and $11,600 for family coverage. As shown in Table 2 , the cost-sharing subsidies would further reduce those out-of-pocket maximums by two-thirds for qualifying individuals between 100% and 200% FPL, by one-half for qualifying individuals between 201% and 300% FPL, and by one-third for qualifying individuals between 301% and 400% FPL. Additional cost-sharing subsidies (i.e., reductions in copayments, deductibles, etc.), if necessary, would be provided to ensure that the plan cost-sharing was equivalent to the platinum tier for qualifying individuals between 100% and 150% FPL, was equivalent to the gold tier for qualifying individuals between 151% and 200% FPL, but was not more than the gold tier for qualifying individuals between 201% and 400% FPL. The Secretary would make periodic payments to insurers (potentially using capitated, risk-adjusted payments) for the cost-sharing subsidies of their qualified enrollees. However, subsidy amounts could also be reduced to ensure S. 1796 does not increase the federal deficit. S. 1796 would provide incentives for the creation of health insurance co-operatives. The bill provides these incentives primarily through the distribution of $6 billion in funding under the Consumer Operated and Oriented Plan (CO-OP) program. The Secretary would use the authorized funds to foster the creation of non-profit member-run health insurance companies that offer qualified health benefits that serve eligible individuals in one or more states. CO-OP grantees would compete in the reformed individual and small group insurance markets on a level regulatory playing field. Federal funds would be distributed as loans for start-up costs and grants for meeting solvency requirements. S. 1796 would direct the Secretary to make grant and loan awards after taking into account the recommendations of an advisory board. The Secretary would make grant and loan awards giving priority to applicants that offer qualified health benefits on a statewide basis, use an integrated care model, and have significant private support. The Secretary would ensure that there is sufficient funding to establish at least one qualified non-profit health insurance issuer in each state and the District of Columbia. If no health insurance issuer applies within a state, the Secretary would use funds for the program to award grants to encourage the establishment of qualified issuers within the state or the expansion of an issuer from another state to the state with no applicants. Grantees would enter into an agreement with the Secretary to follow the provisions of S. 1796 and any regulations promulgated by the Secretary. The agreement would include prohibitions for the use of loan or grant funds for "carrying on propaganda," attempting to influence legislation, or marketing. S. 1796 would define a qualified nonprofit health insurance issuer as an organization meeting the following requirements: It must be organized as a non-profit, member corporation under State law; It must not be an existing organization that provides insurance as of July 16, 2009, and must not be an affiliate or successor of any such organization; Substantially all of its activities must consist of the issuance of qualified health benefit plans in the individual and small group markets in each state in which it is licensed to issue such plans; It must not be sponsored by a state, county, or local government, or any government instrumentality; Its governing documents incorporate ethics and conflict of interest standards protecting against insurance industry involvement and interference; Governance of the organization must be subject to a majority vote of its members; It must operate with a strong consumer focus, including timeliness, responsiveness, and accountability to members in accordance with regulations to be promulgated by the Secretary of HHS; It must be in compliance with all the other requirements that other qualified health benefits plans must meet in any state, including solvency and licensure requirements, rules on payments to providers, rules on network adequacy, rates and form filing rules, and any applicable state premium assessments. Additionally, the organization would be required to coordinate with state insurance reforms described in Sec.2225(a)(2)(A); and Any profits made would be required to be used to lower premiums, improve benefits, or other programs intended to improve the quality of health care delivered to members. S. 1796 would permit organizations participating in the CO–OP program to enter into collective purchasing arrangements for services and items that increase administrative and other cost efficiencies, especially to facilitate start-up of the entities, including claims administration, general administrative services, health information technology, and actuarial services. S. 1796 would permit establishment of a purchasing council to execute these collective purchasing agreements. The council would be explicitly prohibited from setting payment rates for health care facilities and providers. There would not be any representatives of Federal, state, or local government or any employee or affiliate of an existing private insurer on the council. The Secretary of HHS would be prohibited from participation in any negotiations between qualified health insurance issuers or a private purchasing council and any health care facilities, providers or drug manufacturer. The Secretary would also be prohibited from establishing or maintaining a price structure or interfering in any way with the competitive nature of providing health benefits through the program. Under S. 1796 , an organization receiving a grant or loan under the CO–OP program would qualify for exemption from Federal income tax only with respect to periods for which the organization is in compliance with the requirements of the CO–OP program and with the terms of any CO–OP grant or loan agreement to which such organization is a party. CO–OP organizations would also be subject to organizational and operational requirements applicable to certain non-profits under tax law, including the prohibitions on net earnings benefiting any private shareholder or individual, on substantial involvement in political activities, and on lobbying activities. CO–OP grantees would be required to file an application for exempt status with the Internal Revenue Service and would be subject to annual information reporting requirements. In addition, CO–OP grantees would be required to disclose on their annual information return the amount of reserves required by each state in which it operates (''solvency requirement'') and the amount of reserves on hand. Under S. 1796 , a health benefits plan would not be required to provide coverage of either elective abortions or abortions that could be paid for with funds appropriated to the Department of Health and Human Services ("HHS"). Under current law, funds appropriated to HHS may be used to pay for an abortion if a pregnancy is the result of an act of rape or incest, or if a woman suffers from a physical disorder, physical injury, or physical illness that would endanger her life if an abortion is not performed. S. 1796 indicates that the offeror of a health benefits plan would determine whether the plan would provide coverage of either type of abortion as part of its essential benefits package for the plan year. S. 1796 would require the Secretary of HHS to ensure that in any exchange, at least one qualified health benefits plan provides coverage of both elective abortions and abortions for which funds appropriated to HHS are permitted. In addition, the Secretary would be required to ensure that in any exchange, at least one qualified health benefits plan does not provide coverage of elective abortions. If a state has one exchange covering both the individual and small group markets, the Secretary would have to provide the aforementioned assurances with respect to each market. A qualified health benefits plan would be treated as not providing coverage of elective abortions if it did not provide either type of abortion. The offeror of a qualified health benefits plan that provides coverage of elective abortions could not use any amount attributable to a premium assistance credit or any cost-sharing subsidy to pay for such services. In addition, the offeror would be required to segregate from the aforementioned amount an amount equal to the actuarial value of providing elective abortions for all enrollees, as estimated by the Secretary. The Secretary would be required to estimate, on an average actuarial basis, the basic per enrollee, per month cost of including coverage of elective abortions. In making that estimate, the Secretary could take into account the impact of including such coverage on overall costs, but could not consider any cost reduction estimated to result from providing such abortions, such as prenatal care. The Secretary would be required to estimate the costs as if coverage were included for the entire covered population, but the costs could not be estimated at less than $1 per enrollee, per month. Under S. 1796 , a qualified health benefits plan could not discriminate against any individual health care provider or health care facility because of its willingness or unwillingness to provide, pay for, provide coverage of, or refer for abortions. In addition, state laws regarding the prohibition or requirement of coverage or funding for abortions, and state laws involving abortion-related procedural requirements would not be preempted. Federal conscience protection and abortion-related antidiscrimination laws would also not be affected by S. 1796 . Finally, the rights and obligations of employees and employers under Title VII of the Civil Rights Act of 1964 would not be affected by the measure. The Senate Finance bill includes a number of provisions in Title VI that would raise revenues in order to pay for expanded health insurance coverage. The revenue provisions would include excise taxes and limitations on employer deductions that would impact health insurers, health plan sponsors and administrators. In addition, there are a number of revenue provisions that would affect workers through modifications to current tax-advantaged accounts and deductions used for health care spending and coverage. Table 3 shows those revenue provisions directly related to private health insurance, their effective dates and estimates by the Joint Committee on Taxation (JCT) of the revenues each provision will raise over a 10-year period. According to the JCT, these provisions are expected to raise $304 billion in revenues over a 10-year period. S. 1796 would impose excise taxes on health insurers and health plan administrators. Specifically, two provisions would impose the following taxes directly on health insurers and plan administrators: an excise tax on high-cost employer-sponsored health insurance, and an annual fee on health insurance providers. In addition, S. 1796 would limit the deductibility of compensation for health insurance executives. The bill also would affect employers who currently provide retiree health insurance and would limit their ability to deduct federal subsides for retiree prescription drug coverage from their taxable income. S. 1796 would impose an excise tax of 40% on health insurance coverage that exceeds certain thresholds in 2013. The thresholds are $8,000 for single coverage and $21,000 for family coverage, and would be indexed by growth in the Consumer Price Index (CPI) plus 1% in subsequent years. Taxpayers who are retired and age 55 and older, and workers engaged in high risk professions would be subject to higher thresholds ($9,850 for single coverage and $26,000 for family coverage in 2013). In addition, for individuals residing in high-cost states the thresholds would be phased in between 2013 and 2016. Specifically, they would be 20% above the proposed levels in 2013, 10% above in 2014, and 5% above in 2015. Health insurance coverage subject to the excise tax is broadly defined to include not only the employer and employee premium payments for health insurance (including self-insured plans), but also premiums paid by the employee and the employer for dental and vision. In addition, tax-advantaged accounts such as flexible spending accounts (FSAs), health savings accounts (HSAs) and health reimbursement accounts (HRAs) are also specified as health insurance coverage and subject to the excise tax. For these tax-advantaged accounts, the plan administrator (which is often the employer) would be subject to the excise tax. The excise tax would be levied on each of these components (i.e. health insurance, dental and vision, FSAs, etc.) based on their share of the total for health insurance coverage. This share would then be applied to the amount of the total contribution that exceeds the applicable threshold to determine the excise tax imposed on each component. S. 1796 would impose additional reporting requirement on employers providing health insurance coverage. Specifically, under the proposal, employers would be responsible for: determining the aggregate amount of health insurance coverage subject to the excise tax, estimating the share of the tax allocated to the insurer and the plan administrator, reporting these amounts to the insurer, plan administrator and the Internal Revenue Service, and reporting the total value of health insurance coverage subject to the excise tax on the worker's W2 form. Employers who under-report the amount of the excise tax to be paid by insurers and plan administrators would be subject to a penalty. The amount of the excise tax would not be deductible from federal income taxes. The Joint Committee on Taxation (JCT) has estimated that the excise tax would raise $201 billion in revenues from 2010 to 2019 and would be levied on nearly one-third of health plans by 2019. In addition to an excise tax on high cost plans, S. 1796 would also impose a fee on all health insurers based on their market share. The fee would be applied to net premiums written and would be imposed beginning in 2010. The fee would not apply to self-insured plans or federal, state or government entities. However, it would apply to companies or organizations that underwrite these government-funded insurance (i.e., Medicaid managed care plans, Federal Employee Health Benefit Plans [FEHBP]). According to the JCT, this fee is expected to raise $60.4 billion over a 10-year period (see Table 3 ). The Senate Finance bill would limit the amount of executive compensation that is deductible by health insurers. Specifically, health insurance providers where at least 25% of their gross premium income is derived from health insurance plans that meet the minimum creditable coverage requirements (i.e., covered health insurance provider) would not be able to deduct compensation above $500,000 per year. This income threshold would include deferred compensation. This provision would be effective for compensation paid in taxable years beginning after 2012 with respect to services performed after 2009. According to the JCT, this limitation on executive compensation would raise $600 million over a 10-year period (see Table 3 ). Under current law, employers providing prescription drug coverage to retirees that meet federal standards are eligible for subsidy payments from the federal government. These qualified retiree prescription drug plan subsidies are excludible from the employer's gross income for the purposes of regular income tax and alternative minimum tax calculations. The employer is also allowed to claim a business deduction for retiree prescription drug expenses even though they also receive the federal subsidy to cover a portion of those expenses. S. 1796 would require employers to coordinate the subsidy and the deduction for retiree prescription drug coverage. In this provision, the amount allowable as a deduction for retiree prescription drug coverage would be reduced by the amount of the federal subsidy received. According to the JCT, this provision would raise $5.4 billion over a 10-year period (see Table 3 ). There are a number of tax-advantaged accounts and tax deductions for health care spending and coverage that would be affected by the revenue provisions in Title VI of S. 1796 . S. 1796 includes a number of provisions that directly and indirectly would affect tax-advantaged accounts to help workers pay for their health care expenses. Under current law FSAs, HSAs, HRAs and Medical Saving Accounts (MSAs) all allow workers under varying circumstances to exclude a certain portion of qualified medical expenses from income taxes. Under current law, health FSAs are employer-established benefit plans that reimburse employees for specified health care expenses (e.g., deductibles, co-payments, and non-covered expenses) as they are incurred on a pre-tax basis. About one-third of workers in 2007 have access to an FSA. Under current law, it is at the discretion of each employer to set their limits on FSA contributions. In 2008, the average FSA contribution was $1,350. S. 1796 would limit the amount of annual FSA contributions to $2,500 per FSA beginning in 2011. According to the JCT, this provision would raise $14.6 billion over 10 years (see Table 3 ). HSAs are also tax-advantaged accounts that allow individuals to fund unreimbursed medical expenses (deductibles, copayments, and services not covered by insurance) on a pre-tax basis. Eligible individuals can establish and fund accounts when they have a qualifying high deductible health plan and no other health plan (with some exceptions). Unlike FSAs, HSAs may be rolled over and the funds accumulated over time. Distributions from an HSA that are used for qualified medical expenses are not included in taxable income. Distributions from an HSA that are not used for qualified medical expenses are taxable as ordinary income and, under current law, an additional 10% penalty tax. S. 1796 would raise this penalty on non-qualified distributions to 20% of the disbursed amount. According to the JCT, this provision would raise $1.3 billion over 10 years (see Table 3 ). In addition to the specific provisions in S. 1796 that would directly modify these tax-advantaged plans, this proposal would also modify the definition of qualified medical expenses. Under current law qualified medical expenses for FSAs, HSAs, and HRAs can include over-the-counter medications. S. 1796 would restrict this practice and excludes over-the counter prescriptions (except those prescribed by a physician) as a qualified medical expense. According to the JCT, this provision would increase revenues by $5.4 billion over 10 years (see Table 3 ). Currently, taxpayers who itemize their deductions may deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI). Medical expenses include health insurance premiums paid by the taxpayer, but also can include certain transportation and lodging expenses related to medical care as well as qualified long-term care costs, and long-term care premiums that do not exceed a certain amount. About 7% of tax returns for tax year 2007 reported a deduction for medical expenses. Taxpayers with adjusted gross income below $50,000 accounted for 52% of those taking this itemized deduction for medical expenses. S. 1796 would increase the threshold to 10% of AGI for taxpayers who are under age 65 which would limit the amount of medical expenses that can be deducted. Taxpayers over age 65 would still be subject to the 7.5% limit under current law. According to the JCT, this provision would raise revenues by $15.2 billion over 10 years (see Table 3 ).

This report summarizes key provisions affecting private health insurance in S. 1796, America's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Title I of the bill imposes new requirements on individuals, employers, and health plans; restructures the private health insurance market; sets minimum standards for health benefits; and provides financial assistance to certain individuals and, in some cases, small employers. Title VI of the bill include a number of new provisions to raise revenues to pay for health care reform. These provisions include excise taxes, annual fees on health insurers, and limits on tax deductions for out-of-pocket health care expenses. In general, the Senate Finance bill would require adult individuals to maintain health insurance, with some exceptions. Employers would not be required to provide health insurance, although certain employers with more than 50 full-time employees who did not provide insurance could be required to pay a tax, under certain circumstances. Several insurance market reforms would be made, such as modified community rating and guaranteed issue and renewal. Both the individual mandates and the employer requirements would be linked to essential health benefits coverage. Essential health benefits coverage would include (1) coverage under a qualified health benefits plan (QHBP); (2) new group or individual coverage that meets or exceeds minimum health benefits; (3) grandfathered employment-based plans; (4) grandfathered nongroup plans; and (5) other coverage, such as Medicare and Medicaid. Individual and small group coverage under qualified health benefits plans would be allowed to be offered through non-profit, member-run health insurance companies. Such non-profit insurers would be eligible for grants and loans distributed through the new Consumer Operated and Oriented Plan (CO-OP) program. QHBP exchanges would offer a choice of private plans for coverage in the individual and small group markets. Based on income, certain individuals could qualify for a credit toward their premium costs and a subsidy for their cost-sharing; the credits and subsidies would be available only through an exchange. States would have the flexibility to establish basic health plans for low-income individuals not eligible for Medicaid. Existing plans would be grandfathered; however, once the bill is fully implemented, the private market reforms applicable to the small group market would also apply to grandfathered small group plans. New plans would be allowed to be offered in the individual and group markets outside of the Exchange, but only those new plans that meet the minimum requirements specified in the bill would satisfy the requirements on individuals and employers.

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In an effort to expand the options for health coverage, 35 states have established high risk health insurance pools. These programs target individuals who cannot obtain or afford health insurance in the private market, primarily due to preexisting health conditions. High risk pools (HRPs) generally cover people who have sought health coverage in the individual (nongroup) market, but have been denied coverage, received quotes from insurers that are higher than the premiums offered by the high risk pools, or received offers from insurers that permanently exclude coverage of preexisting health conditions. Many states also use their high risk pools to comply with the portability and guaranteed availability provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-191 ). For eligible individuals moving from the group to nongroup market, HIPAA requires state-licensed health insurers to make coverage available to such individuals, and prohibits exclusion of coverage for preexisting conditions. To enforce these rules, states are given a choice. They may either enforce the HIPAA individual market guarantees ("federal fallback"), or establish an "acceptable alternative state mechanism," such as a high risk health insurance pool. In general, state high risk pools tend to enroll a small percentage of the uninsured. For example, approximately 200,000 individuals were enrolled in the 34 high risk pools in operation in 2008. In contrast, the Government Accountability Office (GAO) estimated that nearly 4 million additional persons were potentially eligible for enrollment. However, such limited enrollment reflects, in part, the narrow focus of these pools: individuals with preexisting health conditions, who do not have access to public or group health insurance, and seek coverage in the private, non-group market. In addition to state-established high risk pools, the 111 th Congress passed the Patient Protection and Affordable Care Act (PPACA), which President Obama signed into law ( P.L. 111-148 ) on March 23, 2010. PPACA, as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program, prior to 2014, to provide health insurance coverage to certain individuals with preexisting health conditions who have been uninsured for six or more months. This report will focus on the original, state-established high risk pools. High risk pools fill a niche in the health insurance system—a patchwork system of private markets and public programs designed to meet the needs of different types of health care consumers. In the private health insurance market, most people get health coverage through the group market. This market provides health benefits to groups of people that are drawn together by an employer or other organization, such as a trade union. Such groups are generally formed for some purpose other than obtaining insurance, like employment. While most Americans receive their health coverage through the workplace—as a current employee, a dependent of an employee, or a retiree—some individuals do not have access to employer-sponsored insurance (ESI). They may be workers who do not qualify for an offer of health benefits from their employer (e.g., because the workers have part-time or seasonal employment status), or they may work for a company that does not provide health insurance at all, or they may be unemployed. Public programs also are a source of health coverage, but individuals and families must meet eligibility requirements in order to qualify for benefits. Individuals who cannot access ESI and are not eligible for public programs may seek health insurance in the nongroup (individual) market. Applicants to the individual insurance market must go through robust medical underwriting—the process by which an insurer considers information about an applicant and determines (1) whether to offer an insurance policy in the first place, and (2) the terms of that policy (e.g., the monthly premium). The information that a health insurer considers may include personal characteristics, such as an individual's health conditions, family medical history, and other relevant factors. Though uncommon, the insurance carrier may ask an applicant to undergo a physical exam, or provide medical specimens. In the group market, insurers forgo underwriting in the traditional sense, that is, reviewing each person's demographics and medical history. Instead, an insurer would consider the overall characteristics of the group, and calculate a premium for a set of benefits that would be charged to each person in the group, regardless of their individual health status. (For very small groups, insurers may individually underwrite policies, if permitted by law.) Federal and state laws restrict somewhat insurers' ability to reject applications or design coverage based on health factors in the nongroup market. Nonetheless, some applicants are rejected from the individual market altogether, others may receive insurance offers with riders that exclude coverage for a specific health condition or body part, or others may be charged premiums that are higher than those in the group market for similar coverage. Rigorous underwriting results in an enrollee population in the individual market that is fairly healthy (three out of four enrollees report that their health is excellent or very good ), thereby excluding persons with moderate to severe health conditions from this private market. High risk pools were designed to assist such individuals who—because of their health conditions—have very few options for private health coverage. High risk pools appeal to policymakers who prefer an incremental approach to coverage expansion and reliance on current state oversight of health insurance. Supporters of HRPs contend that states can use their existing regulatory infrastructure, as well as their knowledge of health care markets, to efficiently insure previously uninsurable individuals. Supporters also contend that the private, nongroup market will benefit. They reason that by removing high risk persons from the individual market and placing them in publicly subsidized insurance pools, coverage in the individual market will become more affordable. They argue that better risk spreading helps to stabilize the market, promote competition, and retain insurance carriers—earning the support of such organizations. Moreover, HRPs function as a safety net for the nongroup market by assuring that individuals have access to health insurance as long as they are able and willing to pay for it. Others contend that high risk pools are generally too small and underfunded to meet the needs of the majority of persons who cannot access health insurance in the private market. By design, HRPs experience losses, but federal attempts to subsidize these losses have been limited. Premiums combined with other cost-sharing requirements can often make the coverage offered by these pools unaffordable. Moreover, most state HRPs exclude coverage for preexisting conditions for six months or more. As a result, some researchers remain skeptical that high risk pools will be able to substantially reduce the number of uninsured, particularly among those with serious medical conditions. With respect to reducing the number of people without health coverage, consumer groups generally advocate for expansion of the federal role in providing coverage, whether through existing public programs or broader health care reform, not unlike some of the private market reforms included under PPACA. While state high risk pools have existed since the mid-1970s, congressional support of state pools began in the 1990s. The enactment of HIPAA during the 104 th Congress specified state HRPs as acceptable mechanisms for complying with the group-to-individual market requirements. The 107 th Congress passed the Trade Act of 2002 ( P.L. 107-210 ), which authorized a new federal program to provide grants to state high risk pools and made appropriations for FY2003 and FY2004. With expiration of the authorizing legislation for the grant program to states, the 109 th Congress reauthorized the program through FY2010 and made appropriations for FY2006. The 110 th Congress passed legislation in December 2007 and the 111 th Congress passed legislation in March and December 2009 to provide additional appropriations to state high risk pools. (See detailed discussion under " Federal Grants to State High Risk Pools " section.) Currently, 35 states have high risk health insurance pools. States have a great deal of discretion regarding the establishment and operation of these pools, including covered benefits, eligibility requirements, pre-existing condition exclusion periods, and funding sources. State high risk pools usually are operated through state-established nonprofit organizations. While private insurance companies typically are responsible for daily administrative duties (along with pool administrative staff), traditional high risk pools bear the insurance risk. Boards oversee the governance of HRPs and usually consist of representatives from insurance companies, consumer groups, health care providers, and state agencies. In order to limit health insurance premiums for persons with costly medical conditions, all states cap high risk pool premiums (most are specified in statute). Almost all states have caps between 150% and 200% of standard risk rates. High risk pools generally operate at a loss, "because it isn't feasible to pool a group of individuals known to have major health problems and expect their premium contributions to cover the entire cost." Thus, many state pools tap other sources of funding to cover their operating expenses. States may augment premium collection with one or more of the following sources: assessments on insurers, in some instances combined with offsetting tax credits; general revenue; and other state sources. Almost all states with HRPs assess a fee on insurance carriers and health maintenance organizations; two states place an assessment on hospitals. Many state HRPs also receive grants from the federal government (see discussion under " Federal Grants to State High Risk Pools "). Although health benefits provided through high risk pools vary across plans and states, they generally reflect coverage that is available in the private nongroup market. State pools usually offer more than one plan from which enrollees may choose. Deductibles and other cost-sharing requirements vary from state to state. Nearly all state HRPs have at least one plan with lifetime maximums on benefits (based on a dollar limit), except for Indiana and New Mexico. In contrast, most pools do not apply annual maximums on benefits, except for California, Louisiana, Tennessee, Utah, and West Virginia. In addition, most state HRPs exclude coverage for preexisting health conditions for 6-12 months. States establish the eligibility criteria for high risk pools. As noted, many states allow HIPAA-eligible persons to enroll in their HRPs. HIPAA eligibles are persons who did not have or are losing coverage and seeking it in the individual market. They must meet the following requirements: (1) have at least 18 months of "creditable coverage" (specified in statute) without a significant break in that coverage (63 or more days); (2) most recent coverage must have been through a group health plan; (3) exhausted federal or state continuation coverage; (4) not eligible for Medicaid or Medicare; and (5) not have any other health insurance. For HIPAA eligibles, high risk pools guarantee the availability of health insurance and prohibit exclusion of coverage for preexisting conditions. High risk pools also are designed to address the insurance needs of non-HIPAA-eligible persons with costly medical conditions. A number of states provide for presumptive eligibility, allowing individuals to become automatically eligible for HRPs if they have a certain medical condition specified under state law. In addition to HIPAA eligibles and persons with specific conditions, many states allow individuals who have experienced coverage denials, coverage restrictions, or premium increases to enroll in high risk pools. Lastly, some states allow persons who receive the Health Coverage Tax Credit to enroll in their high risk pools. High risk pool participation varies significantly across states, with average enrollment ranging from a high of 27,187 participants in Minnesota to a low of 265 enrollees in Florida in December 2009. Among state HRPs, the enrollment distribution clusters toward the low end. To illustrate, two-thirds of state pools had participation below 4,000 individuals (23 states). In contrast, only seven states had more than 10,000 participants. Given that state high risk pools typically operate at a loss (see discussion above), the federal government has provided financial assistance to states during the past several years. Congress established a grant program, administered by the Centers for Medicare and Medicaid Services (CMS), to provide seed grants to states that did not already have high risk pools but wanted to establish them, and operational and bonus grants to existing state pools. Once Congress appropriates funding for these grants, CMS announces the funding opportunity and collects and reviews applications. A state may receive up to $1 million in seed grant funding; operational grant amounts are determined by formula. (Not all states with existing HRPs receive grants.) With enactment of the Trade Act of 2002 ( P.L. 107-210 ), the federal government provided funding to state high risk pools for the first time. The Trade Act authorized and appropriated $20 million in the form of seed grants. Each qualifying state could receive up to $1 million to support the creation and implementation of a high risk pool. In 2003, CMS awarded seed grants to six states: Maryland ($1 million), New Hampshire ($1 million), Ohio ($150,000), South Dakota ($1 million), Utah ($52,618), and West Virginia ($1 million). The Trade Act also authorized and appropriated $80 million to be split evenly over FY2003 and FY2004 to defray some of the operating losses experienced by states with existing high risk pools. Each operational grant could cover up to 50% of a pool's operating losses for the year. To qualify, each state must have established a high risk pool that restricts premiums to no more than 150% of the premium for standard risk rates in the state, offers a choice of two or more coverage options, and has in effect a mechanism designed to ensure continued funding of losses incurred after the end of FY2004. However, states may still be able to determine, within federal standards, how much to charge enrollees in out-of-pocket costs, what benefits to include under the plans, how long coverage for preexisting conditions may be excluded, and whom among otherwise uninsurable individuals will be eligible. Table 1 shows which states received operational grants for FY2003 and FY2004, and the funding levels. Nineteen states were awarded operational grants in FY2003; 22 states in FY2004. With expiration of authorizing legislation for the grant program, the House passed H.R. 4519 , the State High Risk Pool Funding Extension Act of 2006, on December 17, 2005. H.R. 4519 reauthorized federal grants to state high risk pools through FY2010, and changed the funding formula used for such grants. The formula for operational grants was changed to the following: 40% to all qualifying states in equal amounts, 30% based on state proportion of uninsured population among all qualifying states, and 30% based on state proportion of the high risk pool population. H.R. 4519 also allowed operational grants to cover up to 100% of pool losses and authorized the following amounts for FY2006: $15 million for seed grants and $75 million for operational and bonus grants. The Senate passed H.R. 4519 without amendment on February 1, 2006, and President Bush signed it into law ( P.L. 109-172 ) on February 10, 2006. As part of the budget reconciliation process, the Senate passed S. 1932 , the Deficit Reduction Act of 2005 (DRA) conference agreement. DRA included provisions that would provide specific appropriations for the grants authorized under H.R. 4519 . Section 6202 of the Senate measure amended the Public Health Service Act to provide $90 million in appropriations for grants to states for FY2006. DRA provided $75 million for operational grants and $15 million for seed grants. The grants are distributed according to existing statutory requirements. This measure also included conforming language on enactment of H.R. 4519 . Pursuant to H.Res. 653 , the House agreed to the Senate-amended bill on February 1, 2006. On February 8, 2006, President Bush signed DRA into law ( P.L. 109-171 ). The appropriations provided under DRA were used to extend federal funding for this program. On September 30, 2006, CMS awarded seed grants to five states that wanted either to establish high risk pools or conduct feasibility studies: California ($150,000), New York ($150,000), North Carolina ($150,000), Tennessee ($1 million), and Vermont ($1 million). That same year, CMS awarded grants to 31 states that experienced operational losses in 2005. Of those 31 states, 25 also received bonus grants, exhausting the entire appropriations for operational and bonus grants. Table 2 shows which states received operational and bonus grants. Because the funding for seed grants was not exhausted with the 2006 awards, CMS awarded five seed grants in 2007. The states that received these grants were the District of Columbia ($150,000), Florida ($150,000), Georgia ($150,000), North Carolina ($850,000), and Rhode Island ($150,000). Pursuant to the Consolidated Appropriations Act of 2008 ( P.L. 110-161 ), Congress made additional funding available for grants to state high risk pools. CMS issued a grant notification letter to states on May 1, 2008. It stated that a total of $49,127,000 would be split to fund operational grants (two-thirds of the appropriated amount) and bonus grants (remaining one-third). Applications were due by June 9, 2008. On July 21, 2008, CMS announced that 30 states received grants totaling $49, 126,500. Table 3 shows which states received grants and the combined grant amounts. The Omnibus Appropriations Act of 2009 ( P.L. 111-8 ) provided $75,000,000 for grants to state high risk pools. CMS announced the availability of these grants in May 2009. On September 30, 2009, CMS awarded operational grants to 31 states and bonus grants to 28 states (see Table 4 ). Furthermore, the Consolidated Appropriations Act of 2010 ( P.L. 111-117 ) provided $55,000,000 in additional appropriations for high risk pools. The 111 th Congress passed the Patient Protection and Affordable Care Act (PPACA), which President Obama signed into law ( P.L. 111-148 ) on March 23, 2010. PPACA, as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program, prior to 2014, to provide health insurance coverage to certain individuals with preexisting health conditions who have been uninsured for six or more months. States can run the program or elect to have the Department of Health and Human Services (HHS) operate the program in their states. The majority of states (29 states and DC) contracted to operate their own HRPs. HHS administers the HRPs in 21 states, under the Pre-Existing Condition Insurance Plan (PCIP) name.

In an effort to expand the options for health coverage, 35 states have established high risk health insurance pools. These programs target individuals who cannot obtain or afford health insurance in the private market, primarily because of preexisting health conditions. Also, many states use their high risk pools to comply with the portability and guaranteed availability provisions of the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191). In general, state high risk pools tend to enroll a small percentage of the uninsured. In December 2009, approximately 208,000 individuals were enrolled in high risk pools. State-established nonprofit organizations typically run these pools, with private insurance companies handling day-to-day operations, along with plan administrative staff. Although benefit packages vary across states and plans, they generally reflect health benefits that are available in the private insurance market. The majority of high risk pools cap premiums between 150% to 200% of market rates, and pools are subsidized through insurer assessments and other funding mechanisms. The Trade Act of 2002 (P.L. 107-210) appropriated a total of $100 million for FY2003-FY2004. With the expiration of authorizing legislation for federal funding of state pools, the 109th Congress took up this issue. The House passed H.R. 4519, the State High Risk Pool Funding Extension Act of 2006, which reauthorized federal grants to state high risk pools through FY2010, and changed the funding formula used for such grants. The act authorized $15 million for seed grants and $75 million for operational and bonus grants for FY2006. The Senate passed H.R. 4519 without amendment, and it was signed into law (P.L. 109-172) on February 10, 2006. As part of the budget reconciliation process, the Senate passed S. 1932, the Deficit Reduction Act of 2005 (DRA) conference agreement, which provided appropriations for the grants authorized under H.R. 4519. The measure also included conforming language on enactment of H.R. 4519. The House agreed to the Senate-amended DRA bill, and it was signed into law (P.L. 109-171) on February 8, 2006. The Centers for Medicare and Medicaid Services (CMS) awarded grants to 31 states that experienced operational losses in 2005. Of those 31 states, 25 also received bonus grants. In 2006, CMS awarded seed grants to five states, and to another five states in 2007. The 110th Congress took up the issue of extending the federal grant program by making funding available pursuant to the Consolidated Appropriations Act of 2008 (P.L. 110-161). The grant funding totaled $49,127,000. In July 2008, CMS announced that 30 states received operational and bonus grants totaling $49,126,500. The 111th Congress provided $75 million in appropriations for grants to state high risk pools under the Omnibus Appropriations Act of 2009 (P.L. 111-8). On September 30, 2009, CMS awarded operational grants to 31 states and bonus grants to 28 states. Furthermore, the Consolidated Appropriations Act of 2010 (P.L. 111-117) provided $55 million in additional appropriations for high risk pools. In addition to state-established high risk pools, the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program to provide health insurance coverage for certain uninsured individuals with preexisting health conditions. This report will be updated periodically.

govreport

The Civil Reserve Air Fleet (CRAF) was created by President Truman in 1951. As a result, the Departments of Commerce (DOC) and Defense (DOD) formulated a contingency plan to meet the nation's airlift needs in times of crisis. When the Department of Transportation (DOT) was created, it assumed DOC's role in the CRAF program, and today, DOD and DOT work together to manage the CRAF program. This report provides background, analyzes current issues, and summarizes recent legislation for the CRAF. The CRAF supports DOD airlift requirements in emergencies when the need for airlift exceeds the capacity of DOD's organic airlift fleet. While DOD strategic airlift aircraft are designed to carry outsized and oversized cargo, CRAF air carriers are primarily expected to transport passengers and cargo pallets. All CRAF participants must be U.S. carriers fully certified by the Federal Aviation Administration (FAA), and meet the stringent standards of the Federal Aviation Regulations pertaining to commercial airlines (Part 121). To join CRAF, a carrier must commit at least 30% of its CRAF-capable passenger fleet, and 15% of its CRAF-capable cargo fleet. Aircraft committed must be U.S. registered and air carriers must also commit and maintain at least four complete crews for each aircraft in CRAF. Air Mobility Command (AMC) analysts implement a number of surveillance initiatives to monitor the carrier's safety record, operations and maintenance status, contract performance, financial condition and management initiatives, summarizing significant trends in a comprehensive review every six months. These initiatives are supplemented by an open flow of information on all contract carriers between AMC and the FAA through established liaison officers. The CRAF has three main segments: international, national, and aeromedical evacuation. The international segment is further divided into the long-range and short-range sections, while the national segment is divided into the domestic and Alaskan sections. Assignment of aircraft to a segment depends on the nature of the requirement and the aircraft performance characteristics needed. The long-range international section consists commercial airliners capable of transoceanic operations. Medium-sized passenger and cargo aircraft make up the short-range international section supporting near offshore airlift requirements. The aircraft in the Alaskan section provide airlift within U.S. Pacific Command's area of responsibility, specific to Alaska needs. The domestic section is designed to satisfy increased DOD airlift requirements in the United States during an emergency. The aeromedical evacuation segment assists in the evacuation of casualties from operational theaters to hospitals in the continental United States. Kits containing litter stanchions, litters, and other aeromedical equipment are used to convert civil Boeing 767 passenger aircraft into air ambulances. The airlines contractually pledge aircraft to the various segments of CRAF, ready for activation when needed. To provide incentives for civil carriers to commit aircraft to the CRAF program and to assure the United States of adequate airlift reserves, the government makes peacetime airlift business available to civilian airlines that obligate aircraft to the CRAF through the International Airlift Services. For FY2007, the guaranteed portion of DOD's CRAF contract was $379 million, while AMC expected to award $2.1 billion in additional business that were not guaranteed. The Air Force announced $2.2 billion in CRAF contracts had been let in FY2005. DOD let contracts worth $3.8 billion between FY1998 and FY2002: 1998, $646 million; 1999, $710 million; 2000, $629 million; 2001, $572 million; and 2002, $1,280 million. Three stages of incremental activation allow for tailoring an airlift force suitable for the contingency at hand. The stages of activation are as follows: Stage I —minor regional crises. Stage II —major theater war. Stage III —periods of national mobilization. The commander, U.S. Transportation Command (TRANSCOM), with approval of the Secretary of Defense, is the activation authority for all three stages of CRAF. During a crisis, if the Air Force Air Mobility Command (AMC) has a need for additional aircraft, it would request the TRANSCOM commander to take steps to activate the appropriate CRAF stage. Each stage of the CRAF activation is only used to the extent necessary to provide the amount of civil augmentation airlift needed by DOD. When notified of call-up, the carrier response time to have its aircraft ready for a CRAF mission is 24 to 48 hours after the mission is assigned by AMC. The air carriers continue to operate and maintain the aircraft with their resources; however, AMC controls the aircraft missions. CRAF has been formally activated on two separate occasions over the program's 57-year history. The first instance occurred for Operations Desert Shield/Storm from August 18, 1990, through May 24, 1991, and included long-range international passenger and cargo segments up to Stage II. During Operation Desert Storm, CRAF airlines executed 5,460 missions transporting 726,000 passengers and 230,000 tons of cargo at a cost of $1.4 billion. The second activation, during Operation Iraqi Freedom, lasted from February 8, 2003 through June 18, 2003, and included the long-range international passenger segment up to Stage 1—long-range cargo requirements were met organically or with voluntary commercial contracts. As of March 2008, 35 carriers with 1,262 aircraft were enrolled in the CRAF. This includes 1,172 aircraft in the international segment (905 long-range and 267 short-range), 40 aircraft in the national segment, and 50 aircraft in the aeromedical evacuation segments. Table 1 summarizes current CRAF members: CRAF presents benefits and opportunities for both the DOD and the U.S. airline industry—by all accounts it appears to be a symbiotic relationship. Yet, as circumstances change, pressures and diverging interests may emerge that could bring changes to CRAF. The primary benefit that CRAF imparts to DOD is its relatively low cost when compared to procuring and maintaining a larger organic fleet. For example, a 1996 Government Accountability Office (GAO) report noted that CRAF "provides up to half of the nation's strategic airlift capability without the government having to buy additional aircraft, pay personnel costs, or maintain the aircraft during peacetime" —all factors that remain relevant today. While CRAF is relatively inexpensive, some may point out that commercial aircraft have operational limitations when compared to DOD's organic airlift fleet. For example, commercial aircraft cannot carry outsized cargo, conduct special missions such as airdrop, or support special operations forces. Also, commercial aircraft tend to congest airfields because of longer ground times resulting from a lack of roll on/roll off capability and reduced ramp maneuverability. Further, potential hostile fire effectively deters civilian crews from entering combat zones. However, commercial aircraft typically have longer range, and are optimized to efficiently transport passengers and cargo pallets. GAO references the use of CRAF during Operation Desert Storm to illustrate CRAF's cost advantages: The use of CRAF aircraft during an activation is not free—DOD pays rates based on weighted average carrier costs—but the cost is minimal in comparison to the costs of acquiring and supporting aircraft, paying and training aircrew, and other expenses of maintaining standby military airlift capability. AMC paid the carriers about $1.5 billion for using their aircraft during the operation. Purchasing additional military aircraft to provide similar capability would cost from $15 to $50 billion, according to Air Force officials, depending on assumptions used for aircraft replacement cost. A RAND study ( Finding the Right Mix of Military and Civil Airlift, Issues and Implications ) also includes a discussion of the cost-effectiveness of CRAF: For a very small cost, the DOD has had on call a very substantial airlift capacity. Replacing CRAF's 1992 Stage II capability with military-style transports would have cost the DOD about $1 billion annually (1992 dollars) over the past several decades. Replacing the Stage III capability would have cost about $3 billion annually. The RAND analysis points out that to have adequate airlift for a major crisis, DOD maintains a military airlift fleet with a total capacity four to five times greater than the average daily use. Costs associated with acquiring and maintaining this excess airlift capability must be routinely incurred, even if the full capacity is rarely used. As DOD's procurement and operations and maintenance accounts come under increasing pressure, it may appear attractive to increase the size of CRAF in lieu of procuring and operating a certain fraction of the Air Force strategic airlift fleet. Recent events may suggest that a growing use of commercial aircraft for every-day DOD needs is already in evidence. In January 2005, for example, it was reported that commercial airlines moved twice as many U.S. troops overseas as they moved in January 2004. Contracting with air carriers to commit their aircraft to wartime needs is cheaper, in a sense, than purchasing and operating additional Air Force cargo aircraft. However, CRAF is not free, and it costs more once activated. RAND points out that: Although holding reserve capacity in the CRAF is far more cost effective than holding the reserve in the military airlift fleet, the government has a financial incentive to use its own resources (for which it has already committed funds) in a crisis to the extent that they are conveniently available, rather than give additional business to CRAF carriers. CRAF is not the only means by which DOD transports troops by civil aircraft. Through the General Services Administration (GSA), the U.S. government negotiates and lets contracts to commercial airlines to fly government employees on official U.S. government business. Federal employees, including DOD civilian and military personnel, traveling on government business are obliged to fly with these contracted airlines at the official government rate. DOD also charters commercial aircraft to satisfy peacetime mobility needs. In July 2006 the U.S. Central Command had initiated a pilot program—"Commercial and Government Air Program"—to enlist commercial air cargo carriers to deliver military supplies into Afghanistan and Iraq. The pilot program is hoped to deliver up to 20% of DOD cargo to the region and to save DOD approximately $9 million per month. DOD hopes to dramatically reduce its flight costs by creating competition among carriers for the work, and by leveraging excess cargo capacity on regularly scheduled commercial flights. This trial program could be viewed as something of an alternative to CRAF, or an indication that more CRAF would be welcome. The increased scope and pace of military operations following the terrorist attacks of September 11, 2001, have increased the Air Force's mobility needs and made commercial air carriers a more prominent component of this capability. Potential changes in DOD's strategic airlift requirements and air mobility force structure may affect the CRAF program. DOD periodically examines the state of its current air mobility fleet and quantifies future airlift requirements to determine whether current force structure is sufficient to meet the President's national security strategy. DOD's most recent air mobility requirements study, Mobility Capability Study (MCS), was completed in December 2005. However, during congressional testimony, General Arthur L. Lichte, Commander of the Air Force's Air Mobility Command, pointed to changes that have occurred since the MCS was completed that include the increase of 92,000 ground forces, the repositioning of DOD force structure overseas, and the growth of the Army's Future Combat System. Further, DOD has reduced the number of C-5 Galaxies planned for upgrade with new engines and other enhancements that were expected to bolster capability of the C-5 fleet to levels required by MCS-2005. As a result, General Lichte stated that the current program of record for the Air Force's strategic airlift fleet of C-5s and C-17s falls short of the organic strategic airlift capability of 33.95 million ton miles day (MTM/D) requirement. The MCS called for the same level of CRAF contribution to total airlift capabilities (20.5 million ton miles per day of the overall 54.5 million ton miles per day objective) as required in the prior study. However, DOD's projected use of CRAF to fulfill total airlift needs has increased from roughly 12 MTM/D in the late 1980s to roughly 20 MTM/D in 2005. Further, this increase in capacity has occurred gradually, and many view DOD's requirement for CRAF as being stable over this 19-year span. As Figure 1 indicates, commercial aircraft committed to CRAF exceed DOD requirements. Thus, any foreseeable increases in CRAF requirements are unlikely to result in shortfalls of commercial aircraft committed to CRAF. Some favor acquisition of additional C-17s to meet potential current and future strategic airlift requirement shortfalls. For example, in March 2008, General Norton A. Schwartz, Commander of U.S. Transportation Command, stated that based on the C-5 Reliability Enhancement and Re-engining Program being reduced and recertified by DOD, he believes DOD needs a fleet of 111 C-5s and 205 C-17s. Further, the Air Force's FY2009 Unfunded Priority List contained a request for 15 additional C-17s. In contrast, the Administration's FY2009 budget request did not contain funding for new C-17s, nor did it request funding to close the C-17 production line. However, during congressional testimony, Gen. Schwartz cautioned that too large of an organic airlift fleet could potentially hurt the CRAF program in the future when he stated, One of the things that you hold me accountable for is sort of maintaining the balance between the organic fleet and the commercial capability. And as I mentioned in my opening remarks, I caution about overbuilding the organic fleet; because if that occurs, it can competes in peace time with that preference cargo, the incentives that we offer our commercial partners. And so that's one of the reasons that I believe 205 is the right number of C-17s. Because Air Force budget limitations make additional large-scale procurement of C-17s difficult to fund, some have suggested the design of a commercial version of the C-17 aircraft (BC-17) that might become part of the CRAF fleet. However, is there sufficient market for these aircraft to be commercially viable? In May of 2007, Boeing's C-17 Program Manager, Dave Bowman, stated, "we have several customers with money that have given us requests for proposals." Some industry studies suggest that a commercial market for up to 10 C-17s may exist for use in heavy industry, mining, or similar endeavors, while Boeing believes there is market potential of "upwards of 100 aircraft." On the other hand, at present, there are no orders for a commercial variant of the C-17. Acquisition decisions regarding KC-X, the Air Force's next generation tanker program, may also affect future DOD CRAF needs and use. Both competitors for the KC-X program, the Northrop Grumman KC-30 based on the Airbus 330-200 and the KC-767 based on Boeing's 767-200, could add airlift capability compared to the KC-135s they are envisioned to replace. Table 2 summarizes the airlift capabilities of the KC-135 and potential KC-X replacements. Like their commercial counterparts, potential KC-X tankers will have limited oversized cargo capability, but a significant capability to transport passengers and cargo pallets. Thus, as the Air Force's KC-X tanker fleet potentially grows, DOD's day-to-day need for commercial airlift that participants in the CRAF program provide could potentially be reduced. However, because most tankers could be needed to perform air refueling during a potential crisis, DOD would likely still rely on the CRAF program to meet surges in airlift demand. On February 29, 2008, the Air Force awarded the KC-X contract to Northrop Grumman. The initial $12.1 billion KC-X contract provides for the purchase the first 68 KC-45s of the anticipated 179 aircraft. On March 11, 2008, Boeing protested the Air Force's decision to the Government Accountability Office (GAO). GAO has 100 days to evaluate the protest. All major passenger and cargo carriers participate in CRAF. This strong participation can be inferred to reflect broad support for CRAF. The program is voluntary, and it appears logical that if the airlines didn't find participation to be in their interest, they would not participate. Every indication suggests that U.S. air carriers value CRAF and want to participate. Table 3 illustrates the growth in CRAF participation over the last 10 years. Following the terrorist attacks of September 11, 2001, many U.S. commercial air carriers struggled because of a lack of business and other factors. Today, rising fuel prices continue to pose a threat to the commercial airline industry. As economic and financial conditions for commercial air carriers potentially worsen, the benefit of CRAF for the commercial sector has been increasingly discussed. It may be that if economic conditions remain difficult, pressure may build on DOD to use more commercial airlift, not necessarily to satisfy DOD needs, but to support the private sector. Also, some, including the DOT, have proposed changes to Federal Aviation Administration (FAA) regulations that might potentially lead to increased foreign investment in U.S. airlines, including those that participate in CRAF. While some support the additional capital that foreign investment could bring to the airline industry, others oppose the concept of allowing foreign corporations to yield increased influence over a sector of the U.S. economy that makes a significant contribution to our nation's defense. This section provides a summary of recent legislation regarding the Department of Defense's (DOD's) Civil Reserve Air Fleet (CRAF) program. The FY2008 National Defense Authorization Act (NDAA) contained three provisions that affected the CRAF ( P.L. 110-181 ). First, Section 356 called for a comprehensive and independent assessment of CRAF. This assessment is designed to examine current and long-range issues associated with CRAF and make specific recommendations for preserving and improving the program. The FY2008 NDAA required a report to be delivered to congressional defense committee no later than April 2008. An excerpt of Section 356 is provided at Appendix A . Second, Section 378 of the FY2008 NDAA extended authorization of the Aviation Insurance Program (AIP) from March 30, 2008, to December 30, 2103. As part of the AIP, the FAA offers a non-premium insurance program to air carriers that participate in the CRAF. The Congressional Budget Office estimated "that extending the CRAF program through 2013 would have no significant budgetary impact." Third, Section 1046 called for a DOD study on the size and mix of the airlift force to specifically include how the CRAF could potentially affect DOD's airlift fleet requirements. This report is expected to be completed by January 2009. An excerpt of Section 1046 is provided at Appendix B . Many expect this study to inform force structure decisions regarding the optimal mix of DOD's organic air mobility fleets and the CRAF. In FY2007, the Senate version of the FY2007 NDAA contained a provision (sec. 1052) that would allow the Department of Defense to guarantee higher minimum levels of business to U.S. Civil Reserve Air Fleet carriers than are currently authorized by law. However, the provision was not adopted in the final legislation ( P.L. 109-364 ). Section 131 of the FY2006 NDAA contained a provision that required DOD to conduct an analysis of inter-theater airlift capabilities to include the impact of the CRAF on DOD's inter-theater airlift force structure requirements ( P.L. 109-163 ). Appendix A. FY2008 National Defense Authorization Act ( P.L. 110-181 ), Section 356 Section 356 of the Conference Report ( H.Rept. 110-477 , December 6, 2007) to H.R. 1585 stated the following: SEC. 356. INDEPENDENT ASSESSMENT OF CIVIL RESERVE AIR FLEET VIABILITY (a) Independent Assessment Required- The Secretary of Defense shall provide for an independent assessment of the viability of the Civil Reserve Air Fleet to be conducted by a federally-funded research and development center selected by the Secretary. (b) Contents of Assessment- The assessment required by subsection (a) shall include each of the following: (1) An assessment of the Civil Reserve Air Fleet as of the date of the enactment of this Act, including an assessment of— (A) the level of increased use of commercial assets to fulfill Department of Defense transportation requirements as a result of the increased global mobility requirements in response to the terrorist attacks of September 11, 2001; (B) the extent of charter air carrier participation in fulfilling increased Department of Defense transportation requirements as a result of the increased global mobility requirements in response to the terrorist attacks of September 11, 2001; (C) any policy of the Secretary of Defense to limit the percentage of income a single air carrier participating in the Civil Reserve Air Fleet may earn under contracts with the Secretary during any calendar year and the effects of such policy on the air carrier industry in peacetime and during periods during which the Armed Forces are deployed in support of a contingency operation for which the Civil Reserve Air Fleet is not activated; and (D) any risks to the charter air carrier industry as a result of the expansion of the industry in response to contingency operations resulting in increased demand by the Department of Defense. (2) A strategic assessment of the viability of the Civil Reserve Air Fleet that compares such viability as of the date of the enactment of this Act with the projected viability of the Civil Reserve Air Fleet 5, 10, and 15 years after the date of the enactment of this Act, including for activations at each of stages 1, 2, and 3— (A) an examination of the requirements of the Department of Defense for the Civil Reserve Air Fleet for the support of operational and contingency plans, including any anticipated changes in the Department's organic airlift capacity, logistics concepts, and personnel and training requirements; (B) an assessment of air carrier participation in the Civil Reserve Air Fleet; and (C) a comparison between the requirements of the Department described in subparagraph (A) and air carrier participation described in subparagraph (B). (3) An examination of any perceived barriers to Civil Reserve Air Fleet viability, including— (A) the operational planning system of the Civil Reserve Air Fleet; (B) the reward system of the Civil Reserve Air Fleet; (C) the long-term affordability of the Aviation War Risk Insurance Program; (D) the effect on United States air carriers operating overseas routes during periods of Civil Reserve Air Fleet activation; (E) increased foreign ownership of United States air carriers; (F) increased operational costs during activation as a result of hazardous duty pay, routing delays, and inefficiencies in cargo handling by the Department of Defense; (G) the effect of policy initiatives by the Secretary of Transportation to encourage international code sharing and alliances; and (H) the effect of limitations imposed by the Secretary of Defense to limit commercial shipping options for certain routes and package sizes. (4) Recommendations for improving the Civil Reserve Air Fleet program, including an assessment of potential incentives for increasing participation in the Civil Reserve Air Fleet program, including establishing a minimum annual purchase amount during peacetime. (c) Submission to Congress- Upon the completion of the assessment required under subsection (a) and by not later than April 1, 2008, the Secretary shall submit to the congressional defense committees a report on the assessment. (d) Comptroller General Report- Not later than 90 days after the report is submitted under subsection (c), the Comptroller General shall conduct a review of the assessment required under subsection (a). Appendix B. FY2008 National Defense Authorization Act ( P.L. 110-181 ), Section 1046 Section 1046 of the Conference Report ( H.Rept. 110-477 , December 6, 2007) to H.R. 1585 stated the following: SEC. 1046. STUDY ON SIZE AND MIX OF AIRLIFT FORCE. (a) Study Required- The Secretary of Defense shall conduct a requirements-based study on alternatives for the proper size and mix of fixed-wing intratheater and intertheater airlift assets to meet the National Military Strategy for each of the following timeframes: fiscal year 2012, 2018, and 2024. The study shall— (1) focus on organic and commercially programmed airlift capabilities; (2) analyze the full-spectrum lifecycle costs of the various alternatives for organic models of each of the following aircraft: C-5A/B/C/M, C-17A, KC-X, KC-10, KC-135R, C-130E/H/J, Joint Cargo Aircraft; and (3) incorporate the augmentation capability, viability, and feasibility of the Civil Reserve Air Fleet during activation stages I, II, and III. (b) Use of FFRDC- The Secretary shall select, to carry out the study required by subsection (a), a federally funded research and development center that has experience and expertise in conducting similar studies. (c) Study Plan- The study required by subsection (a) shall be carried out under a study plan. The study plan shall be developed as follows: (1) The center selected under subsection (b) shall develop the study plan and shall, not later than 60 days after the date of enactment of this Act, submit the study plan to the congressional defense committees, the Secretary, and the Comptroller General of the United States. (2) The Comptroller General shall review the study plan to determine whether it is complete and objective, and whether it has any flaws or weaknesses in scope or methodology, and shall, not later than 30 days after receiving the study plan, submit to the Secretary and the center a report that contains the results of that review and provides any recommendations that the Comptroller General considers appropriate for improvements to the study plan. (3) The center shall modify the study plan to incorporate the recommendations under paragraph (2) and shall, not later than 45 days after receiving that report, submit to the Secretary and the congressional defense committees a report on those modifications. The report shall describe each modification and, if the modifications do not incorporate one or more of the recommendations, shall explain the reasons for not doing so. (d) Elements of Study Plan- The study plan required by subsection (c) shall address, at minimum, the following: (1) A description of lift requirements and operating profiles for airlift aircraft required to meet the National Military Strategy, including assumptions regarding the following: (A) Current and future military combat and support missions. (B) The planned force structure growth of the military services. (C) Potential changes in lift requirements, including the deployment of the Future Combat Systems by the Army. (D) New capability in airlift to be provided by the KC(X) aircraft and the expected utilization of such capability, including its use in intratheater lift. (E) The utilization of intertheater lift aircraft in intratheater combat mission support roles. (F) The availability and application of Civil Reserve Air Fleet assets in future military scenarios. (G) Air mobility requirements associated with the Global Rebasing Initiative of the Department of Defense. (H) Air mobility requirements in support of worldwide peacekeeping and humanitarian missions. (I) Air mobility requirements in support of homeland defense and national emergencies. (J) The viability and capability of the Civil Reserve Air Fleet to augment organic forces in both friendly and hostile environments. (K) An assessment of the Civil Reserve Air Fleet to adequately augment the organic fleet as it relates to commercial inventory management restructuring in response to future commercial markets, streamlining of operations, efficiency measures, or downsizing of the participant. (2) An evaluation of the state of the current airlift fleet of the Air Force, including assessments of the following: (A) The extent to which the increased use of airlift aircraft in on-going operations is affecting the programmed service life of the aircraft of that fleet. (B) The adequacy of the current airlift force, including whether or not a minimum of 299 strategic airlift aircraft for the Air Force is sufficient to support future expeditionary combat and non-combat missions, as well as domestic and training mission demands consistent with the requirements of meeting the National Military Strategy. (C) The optimal mix of C-5 and C-17 aircraft for the strategic airlift fleet of the Air Force, to include the following: (i) The cost-effectiveness of modernizing various iterations of the C-5A and C-5B/C aircraft fleet versus procuring additional C-17 aircraft. (ii) The military capability, operational availability, usefulness, and service life of the C-5A/B/C/M aircraft and the C-17 aircraft. Such an assessment shall examine appropriate metrics, such as aircraft availability rates, departure rates, and mission capable rates, in each of the following cases: (I) Completion of the Avionics Modernization Program and the Reliability Enhancement and Re-engining Program. (II) Partial completion of the Avionics Modernization Program and the Reliability Enhancement and Re-engining Program, with partial completion of either such program being considered the point at which the continued execution of each program is no longer supported by the cost-effectiveness analysis. (iii) At what specific fleet inventory for each organic aircraft, to include air refueling aircraft used in the airlift role, would it impede the ability of Civil Reserve Air Fleet participants to remain a viable augmentation option. (D) An analysis and assessment of the lessons that may be learned from the experience of the Air Force in restarting the production line for the C-5 aircraft after having closed the line for several years, and recommendations for the actions that the Department of Defense should take to ensure that the production line for the C-17 aircraft could be restarted if necessary, including— (i) an analysis of the methods that were used and costs that were incurred in closing and re-opening the production line for the C-5 aircraft; (ii) an assessment of the methods and actions that should be employed and the expected costs and risks of closing and re-opening the production line for the C-17 aircraft in view of that experience. Such analysis and assessment should deal with issues such as production work force, production facilities, tooling, industrial base suppliers, contractor logistics support versus organic maintenance, and diminished manufacturing sources. (E) Assessing the military capability, operational availability, usefulness, service life and optimal mix of intra-theater airlift aircraft, to include— (i) the cost-effectiveness of procuring the Joint Cargo Aircraft versus procuring additional C-130J or refurbishing C-130E/H platforms to meet intra-theater airlift requirements of the combatant commander and component commands; and (ii) the cost-effectiveness of procuring additional C-17 aircraft versus procuring additional C-130J platforms or refurbishing C-130E/H platforms to meet intra-theater airlift requirements of the combatant commander and component commands. (3) Each analysis required by paragraph (2) shall include— (A) a description of the assumptions and sensitivity analysis utilized in the study regarding aircraft performances and cargo loading factors; and (B) a comprehensive statement of the data and assumptions utilized in making the program life cycle cost estimates and a comparison of cost and risk associated with the optimally mixed fleet of airlift aircraft versus the program of record airlift aircraft fleet. (e) Utilization of Other Studies- The study required by subsection (a) shall build upon the results of the 2005 Mobility Capabilities Studies, the on-going Intra-theater Airlift Fleet Mix Analysis, the Intra-theater Lift Capabilities Study, the Joint Future Theater Airlift Capabilities Analysis, and other appropriate studies and analyses, such as Fleet Viability Board Reports or special aircraft assessments. The study shall also include any testing data collected on modernization, recapitalization, and upgrade efforts of current organic aircraft. (f) Collaboration With United States Transportation Command- In conducting the study required by subsection (a) and preparing the report required by subsection (c)(3), the center shall collaborate with the commander of the United States Transportation Command. (g) Collaboration With Cost Analysis Improvement Group- In conducting the study required by subsection (a) and constructing the analysis required by subsection (a)(2), the center shall collaborate with the Cost Analysis Improvement Group of the Department of Defense. (h) Report- Not later than January 10, 2009, the center selected under subsection (b) shall submit to the Secretary and the congressional defense committees a report on the study required by subsection (a). The report shall be submitted in unclassified form, but shall include a classified annex.

The Civil Reserve Air Fleet (CRAF) was created by executive order in 1951. As a result, the Departments of Commerce (DOC) and Defense (DOD) formulated a contingency plan to meet the nation's airlift needs in times of crisis. When the Department of Transportation (DOT) was created, it assumed DOC's role in the CRAF program, and today, DOD and DOT work together to manage the CRAF program. The CRAF supports DOD airlift requirements in emergencies when the need for airlift exceeds the capability of the military aircraft fleet. All CRAF participants must be U.S. carriers fully certified by the Federal Aviation Administration, and meet the stringent standards of Federal Aviation Regulations pertaining to commercial airlines. The CRAF has three main segments: international, national, and aeromedical evacuation. The international segment is further divided into the long-range and short-range sections and the national segment into the domestic and Alaskan sections. Assignment of aircraft to a segment depends on the nature of the requirement and the performance characteristics needed. The commercial airlines contractually pledge aircraft to the various segments of CRAF, ready for activation when needed. To provide incentives for civil carriers to commit aircraft to the CRAF program and to assure the United States of adequate airlift reserves, the government makes peacetime airlift business available to civilian airlines that obligate aircraft to the CRAF. DOD offers business through the International Airlift Services. CRAF presents benefits and opportunities for both DOD and U.S. airlines. By all accounts it appears to be a symbiotic relationship. Yet, as circumstances change, pressures and diverging interests may emerge that could bring changes to CRAF. A number of factors may be considered when examining the future size, character and role of CRAF. These factors include cost, other potential government / commercial arrangements, potential change in DOD requirement for CRAF, and industrial base or financial assistance to U.S. air carriers. This report will be updated as events warrant.

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The National Telecommunications and Information Administration (NTIA) is an agency in the U.S. Department of Commerce (DOC) that serves as the executive branch's principal advisory office on domestic and international telecommunications and information technology policies. The NTIA frequently works with other executive branch agencies to develop and present the Administration's position on key policy matters. It represents the executive branch in both domestic and international telecommunications and information policy activities. Policy areas in which NTIA acts as the representative of the Administration include international negotiations regarding global agreements on spectrum management and domestic use of spectrum resources by federal agencies. In recent years, one of the responsibilities of NTIA has been to oversee the transfer of some radio frequencies from the federal domain to the commercial domain. Many of these frequencies have subsequently been auctioned to the commercial sector and the proceeds paid into the U.S. Treasury. The NTIA administers some grants programs, including—at present—the Broadband Technology Opportunities Program (BTOP) and the Public Safety Interoperable Communications (PSIC) grant program. As required by the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ), the NTIA is in the process of establishing requirements for a $135 million grant program to help states plan for participation in a new, nationwide public safety broadband network. To deploy the new network, the act established the First Responder Network Authority, or FirstNet, within the NTIA and assigned the agency various responsibilities to support FirstNet. The NTIA fulfills many responsibilities for different constituencies. Its role in federal spectrum management includes acting as a facilitator and mediator in negotiations among the various federal agencies regarding usage, priority access, causes of interference, and other radio spectrum questions. As the agency responsible for managing spectrum used by federal agencies, the NTIA often works in consultation with the Federal Communications Commission (FCC) on matters concerning spectrum access, technology, and policy. The FCC regulates private sector, state, local, and tribal spectrum use. Because many spectrum issues are international in scope and negotiated through treaty-making, the NTIA and the FCC collaborate with the Department of State in representing American interests. NTIA leads and participates in interagency efforts to develop Internet policy. It plays a lead role in the DOC's Internet Policy Task Force. The NTIA and the National Institute of Standards (NIST) have adjoining facilities on the Department of Commerce campus in Boulder, CO, where they collaborate on research projects with each other and with other federal agencies, such as the FCC. The NTIA works with the Rural Utilities Service in coordinating loans and grants made through BTOP and with the Department of Homeland Security (DHS) in overseeing grants made through the PSIC grants program. NTIA collaborates with NIST, DHS, and the FCC in providing expertise and guidance to public safety agencies who are using PSIC or BTOP funds to build new wireless networks for broadband communications. NTIA policies and programs are administered through The Office of Spectrum Management (OSM), which formulates and establishes plans and policies that ensure the effective, efficient, and equitable use of the spectrum both nationally and internationally. Through the development of long range spectrum plans, the OSM works to address future federal government spectrum requirements, including public safety operations and the coordination and registration of federal government satellite networks. The OSM also handles the frequency assignment needs of the federal agencies and provides spectrum certification for new federal agency radio communication systems. The Office of Policy Analysis and Development (OPAD), which is the domestic policy division of NTIA. OPAD supports NTIA's role as principal adviser to the Executive Branch and the Secretary of Commerce on telecommunications and information policies by conducting research and analysis and preparing policy recommendations. The Office of International Affairs (OIA), which develops and implements policies to enhance U.S. companies' ability to compete globally in the information technology and communications (ICT) sectors. In consultation with other U.S. agencies and the U.S. private sector, OIA participates in international and regional fora to promote policies that open ICT markets and encourage competition. The Institute for Telecommunication Sciences (ITS), which is the research and engineering laboratory of NTIA. ITS provides technical support to NTIA in advancing telecommunications and information infrastructure development, enhancing domestic competition, improving U.S. telecommunications trade opportunities, and promoting more efficient and effective use of the radio spectrum. The Office of Telecommunications and Information Applications (OTIA), which administers grant programs that further the deployment and use of technology in America, and the advancement of other national priorities. Many decisions regarding the use of federal spectrum are also made through the Interdepartmental Radio Access Committee, IRAC. IRAC membership comprises representatives of all branches of the U.S. military and a number of federal department agencies affected by spectrum management decisions. Enacted legislation for FY2012 has provided $45.6 million to the NTIA for salaries and expenses, an increase over the previous year of 9.6% but 18.4% less than requested by the Administration. The Administration had requested $55.8 million for Salaries and Expenses for FY2012, an increase of $14.3 million over FY2011-enacted appropriations of $41.6 million. The Administration request represented a significant increase over the $21.8 million requested for Salaries and Expenses for FY2011 and the $19.999 million appropriated for that category in FY2010. The increase is largely attributable to the costs of administration and oversight of the $4.4 billion Recovery Act program for broadband technologies and deployment mapping, as required by the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ). Total requests for all oversight programs administered by the NTIA totaled $32.3 million for FY2012. In addition, the Administration requested new funding for the NTIA of $1.7 million to support efforts to foster new wireless broadband technologies and of $1.0 million for its Internet Innovation initiative to address Internet-based privacy principles. In the past, the OTIA has awarded grants from the Public Telecommunications Facilities Program, which was terminated by Congress in FY2011. This program has helped public broadcasting stations and other organizations construct facilities to bring educational and cultural programs to the American public. Funding for the program, Public Telecommunications Facilities, Planning and Construction (PTFPC), was not reauthorized and has been discontinued. For FY2013, the Administration proposes $46.9 million for NTIA salaries and expenses. This is an increase of 2.9% over the enacted FY2012 budget amount of $45.6 million. An FY2013 Continuing Resolution ( P.L. 112-175 ) for appropriations is in effect until March 27, 2013. The Administration and Congress have taken steps to increase the amount of radio frequency spectrum available for mobile services such as access to the Internet. The increasingly popular smart phones and tablets require greater spectrum capacity (broadband) than the services of earlier generations of cell phones. Proposals from policy makers to use federal spectrum to provide commercial mobile broadband services include: Clearing federal users from designated frequencies for transfer to the commercial sector through a competitive bidding system. Sharing federal frequencies with specific commercial users. Improving the efficiency of federal spectrum use and management. Using emerging technologies for network management to allow multiple users to share spectrum as needed. The NTIA supports the Administration's policy goal of increasing spectrum capacity for mobile broadband by 500 MHz. To this purpose, NTIA, with input from the Policy and Plans Steering Group (PPSG), has produced a 10-year plan and timetable that identifies bands of spectrum that might be available for commercial wireless broadband service. As part of its planning efforts, the NTIA prepared a "Fast Track Evaluation" of spectrum that might be made available in the near future. Specific recommendations were to make available 15 MHz of spectrum from frequencies between 1695 MHz and 1710 MHz, and 100 MHz of spectrum within bands from 3550 MHz to 3650 MHz. The fast track evaluation also recommended studying two 20 MHz bands to be identified within 4200-4400 MHz for possible repurposing, and placement for consideration of this proposal on the agenda of the World Radio Conference (WRC-2015) scheduled for 2015-2016. The NTIA also lead an evaluation process regarding commercial use of 95MHz of spectrum in the 1755-1850 MHz band, currently used by federal agencies. These frequencies are valued for commercial use in part because they are among those designated for international harmonization of advanced wireless technology. Harmonization enables important economies of scale in the production of wireless mobile equipment by providing global markets for standardized products. Federal users are completing the transfer of spectrum to commercial license-holders in the 1710-1755 MHz band, also designated for harmonization. Working through the PPSG, the NTIA studied federal spectrum use by more than 20 agencies with over 3,100 separate frequency assignments in the 1755-1850 MHz band. After evaluating the multiple steps involved in transferring current uses and users to other frequency locations, the NTIA concluded that it would cost $18,098 million to clear federal users from all 95 MHz of the band. Based on this assessment, the report included recommendations for seeking ways for federal and commercial users to share many of the frequencies, although some frequencies were identified to be cleared for auction to the private sector. The assumptions for the estimates of the cost were challenged in a congressional hearing, leading to a request to the General Accountability Office (GAO) to examine the process. The GAO provided testimony at the hearing regarding its preliminary findings on spectrum sharing. The most recent legislative action to provide more spectrum for commercial services were provisions included in Title VI of the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ). The act has updated existing and specified new procedures for spectrum to be reallocated from federal government to commercial use. Under the act, the NTIA is required to work with the FCC to identify specific bands for auction. The NTIA will also be responsible for collecting auction proceeds and making distributions from a Public Safety Trust Fund that remains in effect through FY2022. Most of the proceeds from auctions of licenses in designated spectrum as specified in the act are to be deposited directly into the Public Safety Trust Fund, with these proceeds appropriated for purposes defined in the act. The act has also given the NTIA responsibilities to create and support FirstNet in planning, building, and managing a new, nationwide, broadband network for public safety communications. The act requires the NTIA, in consultation with FirstNet, to establish grant program requirements for a State and Local Implementation Fund. The NTIA is also to facilitate payments to states that participate in the deployment of the network. Separately, the NTIA will administer grants and spectrum access for states that do not participate directly in the national network and that receive permission from the FCC to build the state's part of the FirstNet network. In compliance with the act's deadline for setting up the Fund, the NTIA has published initial programmatic requirements under which it will award grants. The act has addressed how spectrum resources might be repurposed from federal to commercial use through auction or sharing, and how the cost of such reassignment would be defined and compensated, among other provisions. Although spectrum sharing to facilitate the transition from federal to commercial use is supported in the act's provisions, the NTIA has been required to give priority to reallocation options that assign spectrum for exclusive, non-federal uses through competitive bidding. The act has required the establishment of a Technical Panel within the NTIA to review transition plans that each federal agency must prepare in accordance with provisions in the act. The Technical Panel is required to have three members qualified as a radio engineer or technical expert. The Director of the Office of Management and Budget, the Assistant Secretary of Commerce for Communications and Information, and the Chairman of the FCC have been required to appoint one member each. A full discussion and interpretation of provisions of the act as regards the technical panel and related procedural requirements such as dispute resolution have been published by the NTIA as part of the rulemaking process. The Institute for Telecommunication Sciences, located in Boulder, CO, is the research and engineering arm of NTIA. ITS provides core telecommunications research and engineering services to promote: enhanced domestic competition and new technology deployment; advanced telecommunications and information services; foreign trade opportunities for American telecommunication firms; and more efficient use of spectrum. Current areas of focus include: Research, development, testing, and evaluation to foster nationwide public safety communications interoperability; Test and Demonstration Networks to facilitate accelerated development of standards for emerging communications devices; Analysis and resolution of interference issues; and Development and testing of secure federal electronic record repositories. There are a number of works in progress that could benefit public safety communications. One example is the development and acceptance of international standards for public safety communications. Like the commercial sector, public safety could benefit from global economies of scale if there are international standards. ITS and NIST are providing important leadership in developing global standards for public safety. Spectrum allocation and assignment is not uniquely domestic. Some spectrum allocations are governed by international treaty. Additionally, there is a trend to harmonize spectrum allocations for commercial use across countries through international agreements. Harmonization of radio frequencies is achieved by designating specific bands for the same category of use worldwide. With harmonization, consumers and businesses are able to benefit from the convenience and efficiency of having common frequencies for similar uses, thus promoting development of a seamless, global communications market. Spectrum allocation at the national level, therefore, is sometimes coordinated with international spectrum allocation agreements. The Advanced Wireless Services (AWS) auction in the United States, completed in 2006, was the conclusion of a process initiated by an agreement for international harmonization of spectrum bands. The International Telecommunications Union (ITU), the lead United Nations agency for information and communication technologies, has been vested with responsibility to ensure interference-free operations of wireless communication through implementation of international agreements. The ITU adopts an international table of frequency allocations that shows agreed spectrum uses worldwide, and includes—directly or indirectly—conditions for the use of the allocated spectrum. There are 39 internationally defined wireless services that include broadcasting, meteorological satellite, and mobile services. There is also a domestic table for each country. The United States Table of Allocations is maintained by NTIA. The World Radio Conference (WRC), held approximately every four years, is the primary forum for negotiating international treaties on spectrum use. Each WRC provides an opportunity to revise the International Radio Regulations and International Table of Frequency Allocations in response to changes in technology and other factors. Modifications to rules from one WRC to the next are part of an ongoing process of technical review and negotiations. Separate tracks of preparations to develop the U.S. positions on WRC agenda items are handled by the FCC and the NTIA. The Office of Spectrum Management of NTIA, in consultation with federal agencies, reviews the WRC agenda and prepares its comments for the U.S. position. NTIA and the FCC solicit input from the private sector and create working groups to address specific agenda items. NTIA and the FCC submit recommendations to the Department of State. The Department of State coordinates and mediates the development of the U.S. position for each WRC and leads the U.S. delegation at each conference. All three agencies use committees and other means to interact with the private sector. Preparation for each WRC is a collaborative process that includes opportunities for affected parties to comment on and participate in the formation of U.S. policy. The U.S. delegation to each WRC includes representatives from the federal government and the private sector. Each WRC delegation is led by an Ambassador appointed for that purpose by the President. The most recent conference (WRC-12) concluded on February 17, 2012, with the signing of a new treaty covering accords on technical and regulatory matters and other issues. As is customary, the preliminary agenda for the next WRC meeting was approved during WRC-12. WRC-15 will be held in 2015-2016.

The National Telecommunications and Information Administration (NTIA), an agency of the Department of Commerce, is the executive branch's principal advisory office on domestic and international telecommunications and information policies. Its mandate is to provide greater access for all Americans to telecommunications services, support U.S. attempts to open foreign markets, advise on international telecommunications negotiations, and fund research for new technologies and their applications. NTIA also manages the distribution of funds for several key grant programs. Its role in federal spectrum management includes acting as a facilitator and mediator in negotiations among the various federal agencies regarding usage, priority access, causes of interference, and other radio spectrum questions. The 112th Congress, with the passage of the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96), in February 2012, has given the NTIA new responsibilities in spectrum management and the support of public safety initiatives.

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The Energy Policy Act of 2005 ( P.L. 109-58 ), signed by President Bush on August 8, 2005,was the first omnibus energy legislation enacted in more than a decade. Major provisions include taxincentives for domestic energy production and energy efficiency, a mandate to double the nation'suse of biofuels, faster procedures for energy production on federal lands, and authorization ofnumerous federal energy research and development programs. This report describes the electricityprovisions. Sec. 1201. Short title. This title may be cited asthe "Electric Reliability Act of 2005." Summary of Provisions. This subtitle is intendedto provide federal jurisdiction over activities that are required to support reliability of the U.S. bulkpower system. Clarifying the Federal Energy Regulatory Commission's (FERC) authority toestablish and regulate an electric reliability organization (ERO) is intended to improve reliability asrestructuring of the U.S. bulk power system proceeds. Electric Reliability Standards (Sec. 1211). Thissection requires FERC to promulgate rules within 180 days of enactment to create a FERC-certifiedERO. The North American Electric Reliability Council (NERC) currently has responsibility forreliability of the bulk power system. NERC has established reliability guidelines but has noenforcement authority. Before enactment of P.L. 109-58 , the Federal Power Act (1) gave FERC jurisdiction overunbundled transmission and authority to regulate wholesale rates; however, no authority wasprovided to regulate reliability. Under this section, the ERO will develop and enforce reliabilitystandards for the bulk power system, including cybersecurity protection. All ERO standards will beapproved by FERC. Under this title, the ERO can impose penalties on a user, owner, or operator ofa bulk power system that violates any FERC-approved reliability standard. In addition, FERC canorder compliance with a reliability standard and can impose a penalty if FERC finds that a user,owner, or operator of a bulk power system has engaged in or is about to engage in a violation of areliability standard. This provision does not give an ERO or FERC authorization to orderconstruction of additional generation or transmission capacity. This provision also requires that FERC establish a regional advisory body if requested by atleast two-thirds of the states within a region that have more than half of their electric load servedwithin that region. The advisory body will be composed of one member from each participating statein the region, appointed by the governor of each state, and is able to provide advice to the ERO orFERC on reliability standards, proposed regional entities, proposed fees, and any otherresponsibilities requested by FERC. The entire reliability provision does not apply to Alaska orHawaii. The state of New York is authorized to develop rules that would result in greater reliabilityfor New York, as long as those rules do not result in lower reliability for neighboring states. If the penalties employed by the ERO are not successful, then FERC has the authority toenforce penalties for entities that do not comply with reliability standards. Establishing this newrelationship between FERC and the ERO could have the potential to improve coordination betweenmarket functions and reliability functions. Siting of Interstate Electric Transmission Facilities (Sec.1221). The Secretary of Energy is required to conduct a study of electrictransmission congestion every three years. Based on the findings, the Secretary of Energy maydesignate a geographic area as being congested. Under certain conditions, FERC is authorized toissue construction permits. Under new Section 216(d) of the Federal Power Act (FPA), affectedstates, federal agencies, Indian tribes, property owners, and other interested parties will have anopportunity to present their views and recommendations with respect to the need for, and impact of,a proposed construction permit. However, there is no requirement for a specific comment period. New FPA Section 216(e) will allow permit holders to petition in U.S. District Court to acquirerights-of-way through the exercise of the right of eminent domain. Any exercise of eminent domainauthority would be considered to be takings of private property for which just compensation is due. New FPA Section 216(g) does not state whether property owners would be required to reimbursecompensation if the rights-of-way were transferred back to the owner. An applicant for federal authorization to site transmission facilities on federal lands couldrequest that the Department of Energy be the lead agency to coordinate environmental review andother federal authorization. Once a completed application is submitted, all related environmentalreviews are required to be completed within one year unless another federal law makes thatimpossible. FPA Section 216(h) gives the Department of Energy (DOE) new authority to prepareenvironmental documents and appears to give DOE additional decision-making authority forrights-of-way and siting on federal lands. This would appear to give DOE input into the decisionprocess for creating rights-of-way. Review under Section 503 of the Federal Land Policy andManagement Act (2) couldbe streamlined by relying on prior analyses. If a federal agency has denied an authorization requiredby a transmission or distribution facility, the denial could be appealed by the applicant or relevantstate to the President. The President is required to issue a decision within 90 days of the appeal'sfiling. With congressional approval, states may enter into interstate compacts for the purposes ofsiting transmission facilities and the Secretary of Energy could provide technical assistance. Thissection does not apply to the Electric Reliability Council of Texas (ERCOT). Third-Party Finance (Sec. 1222). The WesternArea Power Administration (WAPA) and the Southwestern Power Administration (SWPA) are ableeither to continue to design, develop, construct, operate, maintain, or own transmission facilitieswithin their regions or to participate with other entities for the same purposes if the Secretary ofEnergy designates the area as a National Interest Electric Transmission Corridor and if the facilitywill reduce congestion or is needed to accommodate projected increases in demand for transmissioncapacity. The project is required to be consistent with the needs identified by the appropriateRegional Transmission Organization or Independent System Operator. Under certain circumstances,the Secretary of Energy, acting through WAPA and/or SWPA, may design, develop, construct,operate, maintain, or own an electric power transmission facility in the WAPA and SWPA region. No more than $100 million from third-party financing may be used during fiscal years 2006 through2015. Before enactment, the enabling statutes for power marketing administrations could haverestricted third-party financing, construction, operation, and maintenance of transmissionfacilities. (3) Advanced Transmission Technologies (Sec.1223). FERC is directed to encourage deployment of advanced transmissiontechnologies. Advanced Power System Technology Incentive Program (Sec.1224). A program is established to provide incentive payments to owners oroperators of advanced power generation systems. Subject to the availability of funds, 1.8 cents perkilowatt-hour will be paid to the owner or operator of a qualifying advanced power systemtechnology facility. For facilities that the Secretary of Homeland Security and the Secretary ofEnergy determine are "qualifying security and assured power facilities," an additional 0.7 cents perkilowatt-hour will be paid to the owner or operator of such a facility. Under the incentive program,the first 10,000,000 kilowatt-hours produced in any facility in a fiscal year are eligible for theincentives. Eligible systems include advanced fuel cells, turbines, or hybrid power systems. ForFY2006 through FY2012, an annual appropriation of $10 million is authorized. Open Nondiscriminatory Access (Sec. 1231). FERC is authorized to require, by rule or order, unregulated transmitting utilities (power marketingadministrations, state entities, and rural electric cooperatives) to charge rates comparable to whatthey charge themselves and require that the terms and conditions of the sales be comparable to thoserequired of other utilities. Before enactment of P.L. 109-58 , under the Federal Power Act (Section201(f)), federal power marketing administrations, state entities, and rural electric cooperatives werenot subject to FERC's rate-making. Under this provision, exemptions are established for utilitiesselling less than 4 million megawatt-hours of electricity per year, for distribution utilities, and forutilities that own or operate transmission facilities that are not necessary to facilitate a nationwideinterconnected transmission system. This exemption can be revoked to maintain transmission systemreliability. FERC is not authorized to order states or municipalities to take action under this sectionif such action would constitute a private use under Section 141 of the Internal Revenue Code of1986. FERC may remand transmission rates to an unregulated transmitting utility if the rates do notcomply with this section. FERC is not authorized to order an unregulated transmitting utility to joina Regional Transmission Organization or other FERC-approved independent transmissionorganization. (This section is often referred to as "FERC-lite.") Federal Utility Participation in Regional TransmissionOrganizations (Sec. 1232). Federal utilities (power marketing administrations orthe Tennessee Valley Authority) are authorized to participate in regional transmission organizations.A law allowing federal utilities to study formation and operation of a regional transmissionorganization is repealed (16 U.S.C. 824n). Native Load Service Obligation (Sec. 1233). Thissection amends the Federal Power Act to clarify that a load-serving entity is entitled to use itstransmission facilities or firm transmission rights to serve its existing customers before it is obligatedto make its transmission capacity available for other uses. FERC is not able to change any approvedallocation of transmission rights by an Regional Transmission Organization (RTO) or IndependentSystem Operator (ISO) approved prior to January 1, 2005. A government entity that ownstransmission facilities used predominantly to support its own water pumping facilities is providedprotections for transmission service to such facilities comparable to protections provided toload-serving entities. This section does not apply to ERCOT and does apply to load-serving entitieslocated within the service area of the Tennessee Valley Authority. Within one year of enactment,FERC is required to issue a rule or order on long-term transmission rights and organized markets. Section 201 of the Federal Power Act gives FERC jurisdiction over "the transmission ofelectric energy in interstate commerce and the sale of such energy at wholesale in interstatecommerce." Section 205 of the Federal Power Act prohibits utilities from granting "undue preferenceor advantage to any person or subject any person to any undue prejudice or disadvantage" (16 U.S.C.824). The new language of this section is intended to clarify that reserving transmission for existingcustomers (native load) is not considered unduly discriminatory. Study on the Benefits of Economic Dispatch (Sec.1234). The Secretary of Energy, in consultation with the states, is required to issuean annual report to Congress and the states on the current status of economic dispatch. Economicdispatch is defined as "the operation of generation facilities to produce energy at the lowest cost toreliably serve consumers, recognizing any operational limits of generation and transmissionfacilities." Protection of Transmission Contracts in the Pacific Northwest(Sec. 1235). FERC does not have the authority to require electric utilities in thePacific Northwest to convert firm transmission rights to tradable or financial rights. The area of thePacific Northwest is the region defined in Section 3 of the Pacific Northwest Electric PowerPlanning and Conservation Act (16 U.S.C.839a) or a portion of a state included in the geographicarea proposed for a Regional Transmission Organization in FERC Docket No. RT01-35. Sense of Congress Regarding Locational Installed CapacityMechanism (Sec. 1236). It is the sense of Congress that FERC should carefullyconsider the objections of the states to a proposed locational installed capacity mechanism in NewEngland. The objections include that a locational installed capacity mechanism would not provideadequate assurance that necessary electric generation capacity or reliability will be provided and itwould impose a high cost on consumers. Transmission Infrastructure Investment (Sec.1241). Within one year of enactment, FERC is required to establish a rule to createincentive-based, including performance-based, transmission rates. The rule is to promote reliable andeconomically efficient electric transmission and generation, provide for a return on equity thatattracts new investment in transmission, encourage use of technologies that increase the transfercapacity of existing transmission facilities, and allow for the recovery of all prudently incurred coststhat are necessary to comply with mandatory reliability standards and those that would result fromtransmission siting and construction on a National Interest Electric Transmission Corridor. FERCis directed to implement incentive rate-making for utilities that join a Regional TransmissionOrganization. Funding New Interconnection and Transmission Upgrades (Sec.1242). FERC may approve a participant funding plan for new transmission or fornew generator interconnection if the plan results in rates that are just and reasonable, not undulydiscriminatory or preferential, and otherwise consistent with sections 205 and 206 of the FederalPower Act. Net Metering and Additional Standards (Sec.1251). For states that have not considered implementation and adoption of netmetering standards, within two years of enactment, state regulatory authorities are required to beginconsidering whether to implement net metering. This process must be completed within three yearsof enactment. Net metering service is defined as service to an electric consumer under which electricenergy generated by that electric consumer from an eligible on-site generating facility (e.g., solar orsmall generator) and delivered to local distribution facilities may be used to offset electric energyprovided by the electric utility to the electric consumer during the applicable billing period. Duringthe same time frame, states must consider whether to implement a standard to require electricutilities to develop a plan to minimize dependence on one fuel source. In addition, states mustconsider whether to implement a requirement that electric utilities develop and implement a 10-yearplan to increase the efficiency of fossil fuel generation. Smart Metering (Sec. 1252). For states that havenot considered implementation and adoption of a smart metering standard, state regulatoryauthorities are required issue a decision within 18 months of enactment on whether to implement astandard for time-based rate schedules for electric utility customers. Customers using time-based rateschedules must be provided with a time-based meter capable of allowing utility customer to receivethe time-based rate. This section amends the Public Utility Regulatory Policies Act of 1978 (5) (PURPA) and requires theSecretary of Energy to provide consumer education on advanced metering and communicationstechnologies, to identify and address barriers to adoption of demand response programs, and to issuea report to Congress not later than 180 days after enactment that identifies and quantifies the benefitsof demand response. The Secretary of Energy must provide technical assistance to regionalorganizations to identify demand response potential and to develop demand response programs torespond to peak demand or emergency needs. FERC is directed to issue an annual report, by region,to assess demand response resources. Cogeneration and Small Power Production Purchase and SaleRequirements (Sec. 1253). Section 210 of PURPA required utilities to purchasepower from qualifying facilities and small power producers at a rate based on the utilities' avoidedcost, the cost they would have incurred to generate the additional power themselves, as determinedby utility regulators. (6) Thissection repeals the mandatory purchase requirement under Section 210 of PURPA for new contractsif FERC finds that a competitive electricity market exists and a qualifying facility has access toindependently administered, auction-based, day-ahead, real-time wholesale markets and long-termwholesale markets. Qualifying facilities also need to have access to transmission andinterconnection services provided by a FERC-approved regional transmission entity that providesnondiscriminatory treatment for all customers. Ownership limitations under PURPA are repealed. Background and Analysis. The oil embargoes of the1970s created concerns about the security of the nation's electricity supply and led to enactment ofthe Public Utility Regulatory Policies Act of 1978. For the first time, utilities were required topurchase power from outside sources, or "qualifying facilities." The purchase price was set at theutilities' avoided cost. PURPA was established in part to augment electric utility generation withmore efficiently produced electricity and to provide equitable rates to electric consumers. In addition to PURPA, the Fuel Use Act of 1978 (FUA) helped qualifying facilities (QFs)become established. (7) Under FUA, utilities were not permitted to use natural gas to fuel new generating facilities. QFs,which are by definition not utilities, were able to take advantage of then-abundant natural gas as wellas new generating technology, such as combined-cycle plants that use hot gases from combustionturbines to generate additional power. These technologies lowered the financial threshold forentrance into the electricity generation business and shortened the lead time for constructing newplants. FUA was repealed in 1987, but by that time, QFs and small power producers had gained aportion of the total electricity supply. This influx of QF power challenged the cost-based rates that previously guided wholesaletransactions. Before implementation of PURPA, FERC approved wholesale interstate electricitytransactions based on the seller's costs to generate and transmit the power. Because nonutilitygenerators typically do not have enough market power to influence the rates they charge, FERCbegan approving certain wholesale transactions whose rates were a result of a competitive biddingprocess. These rates are called market-based rates. This first incremental change to traditional electricity regulation started a movement towarda market-oriented approach to electricity supply. Following the enactment of PURPA, two basicissues stimulated calls for further change: whether to encourage nonutility generation and whetherto permit utilities to diversify into nonregulated activities. The Energy Policy Act of 1992 (EPACT) (8) removed several regulatory barriers for entry into electricitygeneration to increase competition of electricity supply. However, EPACT does not permit FERCto mandate that utilities transmit exempt wholesale generator (EWG) power to retail consumers(commonly called "retail wheeling" or "retail competition"), an activity that remains under thejurisdiction of state public utility commissions. PURPA began to shift more regulatoryresponsibilities to the federal government, and EPACT continued that shift away from the states bycreating new options for utilities and regulators to meet electricity demand. Proponents of the PURPA repeal -- primarily investor-owned utilities (IOUs) located in theNortheast and in California -- argued that their state regulators' "misguided" implementation ofPURPA in the early 1980s had forced them to pay contractually high prices for power they did notneed. They argued that, given the current environment for cost-conscious competition, PURPA wasoutdated. Investor-owned utility interests strongly supported the repeal of Section 210 of PURPA,contending that PURPA's mandatory purchase obligation was anticompetitive andanticonsumer. (9) Opponents of mandatory purchase requirement repeal (independent power producers,industrial power customers, most segments of the natural gas industry, the renewable energyindustry, and environmental groups) had many reasons to support PURPA as it stood. Mainly, theirargument was that PURPA introduced competition in the electric generating sector and, at the sametime, helped promote wider use of cleaner, alternative fuels to generate electricity. Since theelectric-generating sector is not yet fully competitive, they argued, repealing PURPA would decreasecompetition and impede the development of the renewable energy industry. Additionally, opponentsof the PURPA repeal argued that it would result in less competition and greater utility monopolycontrol over the electric industry. Some state regulators had expressed concern that repealingSection 210 would prevent them from deciding matters currently under their jurisdiction. Interconnection (Sec. 1254). Each stateregulatory authority, if it has not already done so, and each nonregulated utility must considerestablishing an interconnection standard for on-site generating facilities that request to be connectedto the local distribution facilities. Interconnection services will be offered according to the Instituteof Electrical and Electronics Engineers (IEEE) Standard 1547 for Interconnecting DistributedResources with Electric Power Systems. Consideration of the standard is to commence not later thanone year after enactment and be completed not later than two years after the date of enactment. Short Title (Sec. 1261). This subtitle is to becited as the "Public Utility Holding Company Act of 2005." Definitions (Sec. 1262). This section establishesdefinitions for the following terms: affiliate, associate company, commission, company, electricutility company, exempt wholesale generator and foreign utility company, gas utility company,holding company, holding company system, jurisdictional rates, natural gas company, person, publicutility, public-utility company, state commission, subsidiary company, and voting security. Repeal of the Public Utility Holding Company Act of 1935 (Sec.1263). The Public Utility Holding Company Act of 1935 (PUHCA) is repealed. Background and Analysis. In general, PUHCA setforth the structure of holding companies by prohibiting all holding companies that were more thantwice removed from the operating subsidiaries. It also federally regulated holding companies ofinvestor-owned utilities and provided for Securities and Exchange Commission (SEC) regulationof mergers and diversification proposals. Registered holding companies of subsidiaries wererequired to have SEC approval prior to issuing securities; all loans in intercompany financialtransactions were regulated by the SEC. A holding company could have been exempt from PUHCAif its business operations and those of its subsidiaries occurred within one state or with a contiguousstate. Historically, electricity service was defined as a natural monopoly, meaning that the industryhas (1) an inherent tendency toward declining long-term costs, (2) high threshold investment, and(3) technological conditions that limit the number of potential entrants. In addition, many regulatorshave considered unified control of generation, transmission, and distribution as the most efficientmeans of providing service. As a result, most people (about 75%) are currently served by a verticallyintegrated, investor-owned utility. As the electric utility industry has evolved, however, there has been a growing belief that thehistoric classification of electric utilities as natural monopolies has been overtaken by events and thatmarket forces can and should replace some of the traditional economic regulatory structure. Forexample, the existence of utilities that do not own all of their generating facilities, primarilycooperatives and publicly owned utilities, has provided evidence that vertical integration has notbeen necessary for providing efficient electric service. Moreover, recent changes in electric utilityregulation and improved technologies have allowed additional generating capacity to be providedby independent firms rather than utilities. The Public Utility Holding Company Act and the Federal Power Act of 1935 (Title I andTitle II of the Public Utility Act) established a regime of regulating electric utilities that gave specificand separate powers to the states and the federal government. A regulatory bargain was madebetween the government and utilities. In exchange for an exclusive franchise service territory,utilities must provide electricity to all users at reasonable, regulated rates. State regulatory commissions address intrastate utility activities, including wholesale andretail rate-making. State authority currently tends to be as broad and as varied as the states arediverse. At the least, a state public utility commission will have authority over retail rates, and oftenover investment and debt. At the other end of the spectrum, the state regulatory body will overseemany facets of utility operation. Despite this diversity, the essential mission of the state regulatorin states that have not restructured is the establishment of retail electric prices. This is accomplishedthrough an adversarial hearing process. The central issues in such cases are the total amount ofmoney the utility will be permitted to collect and how the burden of the revenue requirement willbe distributed among the various customer classes (residential, commercial, and industrial). Under the FPA, federal economic regulation addresses wholesale transactions and rates forelectric power flowing in interstate commerce. Federal regulation follows state regulation and ispremised on the need to fill the regulatory vacuum resulting from the constitutional inability of statesto regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation islimited and conceived to supplement state regulation. FERC has the principal functions at thefederal level for the economic regulation of the electric utility industry, including financialtransactions, wholesale rate regulation, transactions involving transmission of unbundled retailelectricity, interconnection and wheeling of wholesale electricity, and ensuring adequate and reliableservice. Before enactment of P.L. 109-58 , in order to prevent a recurrence of the abusive practicesof the 1920s (e.g., cross-subsidization, self-dealing, pyramiding), SEC regulated utilities' corporatestructure and business ventures under PUHCA. The electric utility industry has been in the process of transformation. During the past twodecades, there has been a major change in direction concerning generation. First, improvedtechnologies have reduced the cost of generating electricity as well as the size of generating facilities. Prior preference for large-scale -- often nuclear or coal-fired -- powerplants has been supplanted bya preference for small-scale production facilities that can be brought on-line more quickly andcheaply, with fewer regulatory impediments. Second, technological advances have lowered the entrybarrier to electricity generation and permitted nonutility entities to build profitable facilities. One argument for additional PUHCA change was made by electric utilities that wanted tofurther diversify their assets. Under PUHCA, a holding company could acquire securities or utilityassets only if the SEC found that such a purchase would improve the economic efficiency andservice of an integrated public utility system. It was argued that reform to allow diversification wouldimprove the risk profile of electric utilities in much the same way as in other businesses: the risk ofany one investment is diluted by the risk associated with all investments. Utilities also argued thatdiversification would lead to better use of underutilized resources (due to the seasonal nature ofelectric demand). Utility holding companies that were exempt from SEC regulation argued thatPUHCA discouraged diversification because the SEC could have repealed their exempt status ifexemption would be "detrimental to the public interest." (11) State regulators expressed concerns that increased diversification could lead to abuses,including cross-subsidization -- a regulated company subsidizing an unregulated affiliate. Cross-subsidization was a major argument against the creation of exempt wholesale generators(EWGs) and reemerged as an argument against further PUHCA change. In the case of electric andgas companies, nonutility ventures that are undertaken as a result of diversification may benefit fromthe regulated utilities' allowed rate of return. Moneymaking nonutility enterprises would contributeto the overall financial health of a holding company. However, unsuccessful ventures could harmthe entire holding company, including utility subsidiaries. In this situation, opponents feared thatutilities would not be penalized for failure in terms of reduced access to new capital, because theycould increase retail rates. Several consumer and environmental public interest groups, as well as state legislators,expressed concerns about the PUHCA repeal. Such groups argued that the repeal could onlyexacerbate market power abuses in what they viewed as a monopolistic industry where truecompetition does not yet exist. Federal Access to Books and Records (Sec.1264). Holding companies and their affiliates are required to make available toFERC books and records of affiliate transactions that FERC determines are relevant to costs incurredby a public utility or natural gas company within the holding company system to protect ratepayerswith respect to FERC jurisdictional rates. Federal officials are required to maintain confidentialityof such books and records. Before enactment, registered holding companies and subsidiarycompanies were required to preserve accounts, cost-accounting procedures, correspondence,memoranda, papers, and books that the SEC deemed necessary or appropriate in the public interestor for the protection of investors and consumers. State Access to Books and Records (Sec. 1265). A jurisdictional state commission may make a reasonably detailed written request to a holdingcompany or any associate company for access to specific books and records. The states mustsafeguard against unwarranted disclosure to the public of any trade secrets or sensitive commercialinformation. Response to such a request is mandatory. Compliance with this section is enforceablein U.S. District Court. This section does not apply to an entity that is considered to be a holdingcompany solely by reason of ownership of one or more qualifying facilities. Before enactment, the Federal Power Act allowed state commissions to examine the books,accounts, memoranda, contracts, and records of a jurisdictional electric utility company, an exemptwholesale generator that sells to such electric utility, and an electric utility company or holdingcompany that is an associate company or affiliate of an exempt wholesale generator. In issuing suchan order for information, a state commission was not required to specify which books, accounts,memoranda, contracts, and records it was requesting. Exemption Authority (Sec. 1266). FERC isdirected to promulgate rules within 90 days from the effective date of this section to exemptqualifying facilities, exempt wholesale generators, and foreign utilities from the federal access tobooks and records provision (Section 1264). FERC is also required to exempt books, accounts,memoranda, and other records that are not relevant to the jurisdictional rates of a public utility ornatural gas company. Any class of transactions that is not relevant to the jurisdictional rates of apublic utility or natural gas company is also exempt. Affiliate Transactions (Sec. 1267). FERC retainsthe authority to prevent cross-subsidization and to assure that jurisdictional rates are just andreasonable. FERC and state commissions retain jurisdiction to determine whether associate companyactivities could be recovered in rates. Before enactment of the new energy law, the Federal PowerAct required that jurisdictional rates were just and reasonable and prohibitedcross-subsidization. (12) Applicability (Sec. 1268). Except as specificallynoted, this subtitle does not apply to the U.S. government, a state, or any political subdivision of thestate, or foreign governmental authority operating outside the United States. Effect on Other Regulations (Sec. 1269). FERCor state commissions are not precluded from exercising their jurisdiction under otherwise applicablelaws to protect utility customers. Enforcement (Sec. 1270). FERC is given theauthority to enforce provisions under sections 306-317 of the Federal Power Act. Before enactment,the Securities and Exchange Commission had the authority to investigate and enforce provisions ofthe Public Utility Holding Company Act of 1935. Savings Provisions (Sec. 1271). Persons maycontinue to participate in legal activities in which they have been engaged or are authorized toengage in on the effective date of this act. This subtitle would not limit the authority of FERC underthe Federal Power Act or the Natural Gas Act. (13) Tax treatment for exchanges of stock or securities under section1081 of the Internal Revenue Service Code, Nonrecognition of Gain or Loss on Exchanges orDistributions in Obedience to Orders of the SEC , is not affected due to the repeal of PUHCA. Implementation (Sec. 1272). Not later than fourmonths after enactment, FERC is required to promulgate regulations necessary to implement thissubtitle (excluding section 1265, which relates to state access to books and records) and submit toCongress recommendations for technical or conforming amendments to federal law necessary tocarry out this subtitle. Transfer of Resources (Sec. 1273). The Securitiesand Exchange Commission is required to transfer all applicable books and records to FERC. Effective Date (Sec. 1274). Six months afterenactment, this subtitle will take effect. This effective date does not apply to Section 1282(implementation). If any FERC rule-making that modifies the standards of conduct governingentities that own, operate, or control facilities for transmission of electricity in interstate commerceor transportation of natural gas in interstate commerce takes effect prior to the effective date of thissection, any action taken by a public utility company or utility holding company to comply with theFERC requirements will not subject these companies to any regulatory requirement under PUHCA. Service Allocation (Sec. 1275). FERC is requiredto review and authorize cost allocations for nonpower goods or administrative or managementservices provided by an associate company that was organized specifically for the purpose ofproviding such goods or services. This section does not preclude FERC or state commissions fromexercising their jurisdiction under other applicable laws with respect to review or authorization ofany costs. FERC is required to issue rules within four months of enactment to exempt from thesection any company and holding company system if operations are confined substantially to a singlestate. Authorization of Appropriations (Sec. 1276). Necessary funds to carry out this subtitle are authorized to be appropriated. Conforming Amendments to the Federal Power Act (Sec.1277). The Federal Power Act is amended to reflect the changes to the PublicUtility Holding Company Act of 1935. Electricity Market Transparency (Sec. 1281). FERC is directed to facilitate price transparency in wholesale electric markets. FERC may prescriberules to provide on a timely basis information about the availability and prices of wholesale electricenergy and transmission service to FERC, state commissions, buyers and sellers of wholesale electricenergy, users of transmission services, and the public. FERC is directed to rely on existing pricepublishers and providers of trade processing services the maximum extent possible. However,FERC may establish an electronic information system if it determines that existing price informationis not adequate. Any rules promulgated by FERC will exempt from disclosure any information thatwould be detrimental to the operation of an effective market or jeopardize system security. Within180 days of enactment, FERC must enter into a memorandum of understanding (MOU) with theCommodity Futures Trading Commission to ensure coordination of information requests to markets. Entities with a de minimis market presence are not required to comply with the reportingrequirements of the section. No one will be subject to civil penalties for any violation of thereporting requirements that occur more than three years before the date on which the person hasprovided notice of the proposed penalty. This would not apply to entities that have engaged infraudulent market manipulation activities. The section does not apply to the area of the ElectricReliability Council Texas. False Statements (Sec. 1282). The Federal PowerAct is amended to expressly prohibit any entity from willingly and knowingly reporting falseinformation to a federal agency relating to the price of electricity sold at wholesale or the availabilityof transmission capacity. Existing mail fraud laws, in part, apply to use of the mail for the purpose of executing, orattempting to execute, a scheme or artifice to defraud, or for obtaining money or property by falseor fraudulent pretenses, representations, or promises. Wire fraud statutes cover use of wire, radio,or television communication in interstate or foreign commerce to transmit or to cause to betransmitted, any writings, science, signals, pictures, or sounds for the purpose of executing a schemeor artifice to defraud, or to obtain money or property by means of false or fraudulent pretenses,representations, or promises. Market Manipulation (Sec. 1283). Amends theFederal Power Act to expressly prohibit any entity, in connection with the purchase or sale of FERCjurisdictional electric energy or transmission services, from directly or indirectly using anymanipulative or deceptive device or contrivance. Enforcement (Sec. 1284). The Federal Power Actis amended to allow electric utilities to file complaints with FERC and to allow complaints to befiled against transmitting utilities. Criminal and civil penalties under the Federal Power Act areincreased. Criminal penalties may not exceed $1 million and/or five years' imprisonment. Inaddition, a fine of $25,000 may be imposed. A civil penalty not exceeding $1 million per day perviolation may be assessed for violations of sections 211, 212, 213, or 214 of the Federal Power Act. Before enactment of the new energy law, criminal penalties could not have exceeded $5,000 and/ortwo years' imprisonment. An additional fine of $500 could have been imposed. A civil penalty notexceeding $10,000 per day per violation could have been assessed for violations of sections 211,212, 213, or 214 of the Federal Power Act. Refund Effective Date (Sec. 1285). Section206(b) of the Federal Power Act is amended to allow the effective date for refunds to begin at thetime of the filing of a complaint with FERC, but not later than five months after such a filing. IfFERC does not make its decision within the time frame provided, FERC would be required to stateits reasons for not acting in the provided time frame for the decision. Refund Authority (Sec. 1286). Any entity thatis not a public utility (including an entity referred to under Section 201(f) of the Federal Power Act)and enters into a short-term sale of electricity is subject to the FERC refund authority. A short-termsale includes any agreement to the sale of electric energy at wholesale that is for a period of 31 daysor less. This section does not apply to electric cooperatives or any entity that sells less than 8 millionmegawatt-hours of electricity per year. FERC is given refund authority over voluntary short-termsales of electricity by Bonneville Power Administration if the rates charged are unjust andunreasonable. FERC is given authority over all power marketing administrations and the TennesseeValley Authority to order refunds to achieve just and reasonable rates. Before enactment, Section201(f) of the Federal Power Act exempted government entities from FERC rate regulation. Consumer Privacy and Unfair Trade Practices (Sec.1287). The Federal Trade Commission is authorized to issue rules to prohibit slamming and cramming . Slamming occurs when an electric utility switches a customer's electricprovider without the consumer's knowledge. Cramming occurs when an electric utility addsadditional services and charges to a customer's account without permission of the customer. If theFederal Trade Commission determines that a state's regulations provide equivalent or greaterprotection, then the state regulations would apply in lieu of regulations issued by the Federal TradeCommission. Authority of Court to Prohibit Individuals from Serving AsOfficers, Directors, and Energy Traders (Sec. 1288). The court is allowed toprohibit any person who is found to have violated Section 221 of the Federal Power Act (Prohibitionon Filing False Information) from acting as an officer or director of an electric utility or engagingin the business of purchasing or selling FERC jurisdictional electric energy or transmission services. Merger Review Reform (Sec. 1289). The FederalPower Act is amended to give FERC approval authority over the acquisition of securities and the merger, sale, lease, or disposition of facilities under FERC's jurisdiction with a value in excess of$10 million. FERC is required to give state public utility commissions and governors reasonablenotice in writing of the acquisition of securities and the merger, sale, lease, or disposition offacilities under FERC's jurisdiction. FERC must approve the proposed change of control,acquisition, disposition, or consolidation if it finds that the proposed transaction is consistent withthe public interest and will not result in cross-subsidization of a nonutility associate company or thepledge or encumbrance of utility assets for the benefit of an associate company, unless it is consistentwith the public interest. If FERC does not act within 180 days of an application, the application willbe deemed granted unless FERC finds that further consideration is required. This section takes effectsix months after enactment. Before enactment, under section 203(a) of the Federal Power Act,FERC review of asset transfers applied to transactions valued at $50,000 or more. Relief for Extraordinary Violations (Sec. 1290). This section applies to contracts for wholesale electricity within the Western Interconnection priorto June 20, 2001, for which FERC has found that the wholesale power sellers manipulated thatelectricity market, resulting in unjust and unreasonable rates, and FERC has revoked the seller'sauthority to sell at market-based rates. For these contracts, FERC may determine whether terminationpayments for power not delivered by the seller are unlawful on the grounds that the contract is unjustand unreasonable or contrary to the public interest. This applies only to cases still pending beforeFERC and not previously settled. Definitions (Sec. 1291). The definitions forelectric utility and transmitting utility under the Federal Power Act are amended. Definitions for thefollowing terms are added to the Federal Power Act: electric cooperative, regional transmissionorganization, independent system operator, and transmission organization. Section 201(f) of the Federal Power Act is amended to add that, in addition to a politicalsubdivision of a state, an electric cooperative that receives financing under the Rural ElectrificationAct of 1936 or an electric cooperative that sells less than 4,000,000 MW-hours of electricity per yearis not subject to FERC rate regulation. Conforming Amendments (Sec. 1295). TheFederal Power Act is amended to conform with this section. Economic Dispatch (Sec. 1298). FERC isdirected to convene regional boards to study "security constrained economic dispatch." A memberof FERC will chair each regional joint board, composed of a representative from each state. Withinone year of enactment, FERC is required to submit a report to Congress on the recommendations ofthe joint regional boards. This section does not define "security constrained economic dispatch," butit generally means a dispatch system that ensures that all normal and contingency limits of the systemare simultaneously met under a base case with one contingency: the loss of a critical network element(n-1 security analysis). Effect of Electrical Contaminants Unreliability of EnergyProduction Systems (Sec. 1822). Within 180 days after enactment, the Secretaryof Energy will enter into a contract with the National Academy of Sciences (Academy), under whichthe Academy will determine the effect that electrical contaminants may have on the reliability ofenergy production systems, including nuclear energy. Final Action on Refunds for Excessive Charges (Sec.1824). FERC is directed to complete its investigation into the unjust andunreasonable charges incurred by California during the 2000-2001 electricity crisis. A report toCongress will be submitted by December 31, 2005, that describes FERC's actions and a timetablefor further actions. This was submitted to Congress on December 27, 2005. (14) Study the Benefits of Economic Dispatch (Sec.1832). The Secretary of Energy, in consultation with the states, must studyeconomic dispatch and issue an annual report to Congress and the states. Economic dispatch isdefined as "the operation of generation facilities to produce energy at the lowest cost to reliably serveconsumers, recognizing any operational limits of generation and transmission facilities." Transmission System Monitoring (Sec. 1839). Within six months after enactment, the Secretary of Energy and FERC will study and report toCongress on what would be involved in providing all transmission system owners and RegionalTransmission Organizations with real-time transmission line operating status.

The Energy Policy Act of 2005 ( P.L. 109-58 ), signed by President Bush on August 8, 2005,was the first omnibus energy legislation enacted in more than a decade. Major provisions include taxincentives for domestic energy production and energy efficiency, a mandate to double the nation'suse of biofuels, faster procedures for energy production on federal lands, and authorization ofnumerous federal energy research and development programs. This report describes the electricityprovisions. It will not be updated. Title XII authorizes the Federal Energy Regulatory Commission (FERC) to certify a nationalelectric reliability organization (ERO) to enforce mandatory reliability standards for the bulk powersystem. All ERO standards must be approved by FERC. The ERO can impose penalties on a user,owner, or operator of the bulk power system for violations of any FERC-approved reliabilitystandard. The Secretary of Energy is required to conduct a study of electric transmission congestionevery three years and may designate a geographic area as being congested. Under certain conditions,FERC is authorized to issue construction permits in congested areas. Permit holders may petitionin U.S. District Court to acquire rights-of-way through eminent domain. An applicant for federalauthorization to site transmission facilities on federal lands could request that the Department ofEnergy be the lead agency to coordinate environmental review and other federal authorization. Ifa federal agency has denied an authorization required by a transmission or distribution facility, thedenial could be appealed by the applicant or relevant state to the President. Section 210 of the Public Utility Regulatory Policies Act (PURPA) had required utilities topurchase power from all qualifying facilities and small power producers at a rate based on theutilities' avoided cost. The Energy Policy Act repeals the PURPA mandatory purchase requirementfor new contracts if FERC finds that a competitive electricity market exists and a qualifying facilityhas adequate access to wholesale markets. Also repealed is the Public Utility Holding Company Act of 1935 (PUHCA), which restrictedthe structure of holding companies of investor-owned utilities and provided for Securities andExchange Commission (SEC) regulation of mergers and diversification proposals. FERC and stateregulatory bodies must be given access to utility books and records. FERC is directed to facilitate price transparency in wholesale electric markets, relying onexisting price publishers and providers of trade processing services to the maximum extent possible. However, FERC may establish an electronic information system if it determines that existing priceinformation is not adequate. FERC is given approval authority over the acquisition of securities andthe merger, sale, lease, or disposition of facilities under FERC's jurisdiction with a value in excessof $10 million.

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The Robinson-Patman Act (R-P)(15 U.S.C. §§13, 13a, 13b, 21a) was enacted in 1936 with the specific purpose of creating and maintaining a market atmosphere in which small business could compete effectively, at least in the purchase of commodities, with its larger rivals. The immediate impetus for that Depression-era legislation was concern for smaller grocery store operators who complained that their businesses were suffering as the direct result of the activities of the chain grocery stores generally and the Great Atlantic & Pacific Tea Company (A&P) particularly. In pertinent part, the statute states that it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or sale within the United States ..., and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with the customers of either of them. As is noted in a 1986 article, "[f]or the first time within the umbrella of the federal antitrust laws, the Congress declared that it was enacting legislation to remedy injury to competitors rather than a generalized injury to competition itself." Very simply, the act prohibits sellers in interstate commerce from charging different purchasers different prices for goods of "like grade and quality." It applies only to the sale of goods (i.e., it does not apply to the sale of services) and only where each sale is of goods purchased for resale within the United States (i.e., it does not prohibit price differentials between goods sold for resale within the United States and those sold for export). Since its enactment in 1936, the Robinson-Patman Act has been less than enthusiastically viewed by the Department of Justice, which believes that the act is not beneficial to consumers. In its 1977 Report on the Robinson-Patman Act, the Antitrust Division noted that It should not be surprising ... that Robinson-Patman can be shown to have many adverse effects on the economy. To be sure, there are some who do not recognize these effects or who argue that they are outweighed by benefits to specific sectors of the economy, notably small business; to competition by preventing increased concentration in a line of commerce; and to public values in general by establishing as a legal norm the concept of 'fair dealing' in pricing. But any discussion of the benefits of Robinson-Patman can be made only with a clear understanding of the burdens that the statute places on American economic activity. Government enforcement of the act, therefore, has always been entrusted to the Federal Trade Commission (FTC), which over the years has acted inconsistently with respect to R-P actions. The bulk of R-P cases have generally been brought by disfavored buyers. In addition to the commodities-not-of-"like grade and quality" and sales-for-export justifications for price differentials, an additional, affirmative defense permitted to refute the Robinson-Patman illegality of differential pricing is the so-called "meeting competition" defense, which has at least two levels: a defendant may assert (and must prove) that the lower price charged to a favored buyer was selected in order to permit the seller to meet that of a competing seller (primary line competition); or he may assert (and must prove) that the challenged price was necessary in order to enable his buyer to meet the competition of one of the buyer's competitors (secondary line competition). A seller may not, however, knowingly "beat" the prices of a competitor. A Robinson-Patman defendant may also successfully defend his challenged pricing activity if he can show that his price differentials were "cost justified"—that is, that the price differential made only due allowance for the costs incurred in producing or delivering the goods. There is yet another defense to an allegation of unlawful price differentials under the Robinson-Patman Act. The 1938 Nonprofit Institutions Act (15 U.S.C. §13c), which expressly permits price breaks on "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit" (emphasis added), created a broad exemption from the general price-discrimination prohibition. As the Court of Appeals for the Ninth Circuit stated in 1967: The underlying intent in granting such an exemption was indisputably to permit institutions which are not in business for a profit to operate as inexpensively as possible. Two Supreme Court opinions, announced in the mid-1970s and early 1980s, provided significant interpretations of the scope of the nonprofit exemption from the Robinson-Patman prohibition. Both involved challenges to the practice of a pharmaceutical supplier who was selling its products to certain hospitals at prices lower than those charged to retail pharmacists in the areas surrounding the hospitals in question. Abbott Laboratories v. Portland Retail Druggists Association, Inc ., 425 U.S. 1 (1976), discussed the "for their own use" phrase in the Nonprofit Institutions Act, and interpreted the provision strictly. The Court relied largely on the "for their own use" language to hold that not all purchases made by a nonprofit hospital are necessarily exempt from price discrimination prohibitions. The exemption is applicable only to those purchases made in order to enable the hospital to meet the needs of the hospital (e.g., dispensing to inpatients, outpatients treated in the hospital, emergency room use) and those of staff physicians, medical and nursing students, and their dependents: "The Congress surely did not intend to give the hospital a blank check." Although the Court included within permissible uses by the hospital, "genuine take home prescription[s], intended, for a limited and reasonable time, as a continuation of, or supplement to, the treatment that was administered at the hospital to the patient who needed, and now continues to need, that treatment," it specifically excluded from the Robinson-Patman exemption embodied in the Nonprofit Institutions Act "the refill for the hospital's former patient." Further, the Court refused to sanction purchases by the hospital-based physician for use in "that portion of his private practice unconnected with the hospital." While the primary concern addressed by the Court in Portland was the sale of pharmaceuticals to nonprofit hospitals for all uses, including patient care and resale, four years later, in Jefferson County Pharmaceutical Ass'n., Inc. v. Abbott Laboratories, 460 U.S. 150 (1983), the Court set out the limits of the exception to Robinson-Patman for government purchases: Jefferson County presented an issue "limited to state [read 'nonprofit hospital'] purchases for the purposes of competing against private enterprise—with the advantage of discriminatory prices—in the retail market." Jefferson County stressed that Robinson-Patman's prohibitions against unjustified discriminatory price differentials in the sale of commodities of "like grade and quality" dictated that government [nonprofit hospital] purchases for use in retail competition with private enterprise, as opposed to those for "traditional governmental [hospital] functions," are fully subject to the strictures of the act. The Court held that purchases of pharmaceuticals by the University of Alabama Hospital for uses other than in the treatment of its patients, as, for example, in retail sales, may not be made at prices which would give the University Hospital an unfair price advantage over its competitors in the retail sale of pharmaceuticals. Health maintenance organizations were found to be "eligible institutions" under the Nonprofit Institutions Act in De Modena v. Kaiser Foundation Health Plan, Inc ., 743 F.2d 1388 (9 th Cir. 1984), cert. denied , 469 U.S. 1229 (1985). After acknowledging that the act "does not explicitly list HPs [health plans]," and that no case law at that time specifically included HPs as "charitable" institutions, the appeals court relied on "precedent defining the term charitable for purposes of the tax code and the law of charitable trusts" to reach its conclusion: "[T]he emergence of social welfare, insurance, and municipal hospitals [has] drastically reduced the number of poor requiring free or below cost medical services": This reduction eliminated the rationale upon which the traditional, limited definition of charitable was predicated, resulting in a move towards a less restrictive interpretation of the term in recent years. Now all non-profit organizations which promote health are considered charitable under the law of charitable trusts. Further, a number of courts have specifically held that health maintenance organizations, such as HPs, are charitable institutions for tax purposes. ... Given this increasingly liberal interpretation of the term, we conclude that the [defendant] HPs are charitable institutions within the meaning of the Nonprofit Institutions Act. Further, the court relied on the expression of the "for their own use" criterion propounded by the Supreme Court in Abbott Laboratories v. Portland Retail Druggist s to decide that the "basic institutional function" of a health plan—providing a "complete panoply" of health-care services, including continuing and preventative services, to its members—requires that "drugs purchased by an HMO ... for resale to its members [be considered as] purchased for the HMO's 'own use' within the meaning of the Nonprofit Institutions Act." De Modena was endorsed in 1995 by the United States District Court for Northern Illinois: In De Modena the Ninth Circuit resolved to 'follow the true mandate of Abbott ... by determin[ing] the basic institutional function of [the HMO in issue] and then decid[ing] which sales are in keeping with this function.' De Modena , 743 F.2d at 1393. The court began its analysis by recognizing that the intended institutional operation of an HMO is to 'provide a complete panoply of health care to [its] members.' Id. The court further observed that, unlike the 'temporary and usually remedial' care that fee-for-service hospitals provide to their patients, HMOs 'provide continuing and often preventative health care for their members.' Id . Thus, concluded the De Modena court, 'any sale of drugs by an HMO to one of its members falls within the basic function of the HMO' and, therefore, constitutes 'own use' within the meaning of the Nonprofit Institutions Act. Id . To our knowledge, the inclusion of HMOs in the list of entities entitled to take advantage of the "for their own use" language of the Nonprofit Institutions Act has not been judicially repudiated, although the Supreme Court has not yet provided an opinion on the subject. If none of the affirmative defenses set out above justifies a challenged price differential, and the non-profit exemption is unavailable to the defendant, price discrimination in violation of the Robinson-Patman Act is proved. That the successful plaintiff is entitled to damages in the amount of the unlawful price differential is not, however, a foregone conclusion. In J.Truett Payne Company, Inc. v. Chrysler Motors Corporation, the Supreme Court, deciding "the appropriate measure of damages in a suit brought under § 2(a) of the Clayton Act," rejected the contention that "once [a plaintiff] has proved a price discrimination in violation of § 2(a) it is entitled at a minimum to so-called 'automatic damages' in the amount of the price discrimination:" To recover treble damages [the measure of antitrust damages under 15 U.S.C. § 15, which requires as a prerequisite to recovery that one have been 'injured in his business or property'], then, a plaintiff must make some showing of actual injury attributable to something the antitrust laws were designed to prevent. Previously, the Court had noted that "[t]he automatic-damages theory has split the lower courts," but found more persuasive the opinions that rejected it, noting that Robinson-Patman "is violated merely upon showing that 'the effect of such discrimination may be substantially to lessen competition.'" In the mid 1970s, the 94 th Congress, through an Ad Hoc Subcommittee of the House Small Business Committee, held hearings on and considered proposals to amend or repeal the Robinson-Patman Act. At that time, representatives of small business, and others, contended that retention of Robinson-Patman was essential. Although the Subcommittee received several draft bills from the Department of Justice to either substantially amend, or to repeal the act, no legislation was introduced at that time, and CRS is not aware of any introduced at any time thereafter. The Antitrust Modernization Commission was authorized in P.L. 107-273 , "21 st Century Department of Justice Appropriations Authorization Act," to "examine whether the need exists to modernize the antitrust laws and to identify and study related issues," and issued its final Report in April 2007. In its chapter on "Government Exceptions to Free-Market Competition," it devoted several pages to its study of the Robinson-Patman Act, noting that despite the aim of supporters of its passage to remedy the "concern of small businesses … that they were losing share to larger supermarkets and chain stores and in some cases were being forced to leave the market," [i]n its operation … the Act has had the unintended effect of limiting the extent of discounting generally and therefore has likely caused consumers to pay higher prices than they otherwise would. The Commission recommended that "Congress should repeal the Robinson-Patman Act in its entirety." Whether the current economic climate will result in a further renewal of efforts to modify or repeal the statute, or whether Congress will determine that statutory intervention is appropriate, is not known at this time.

The Robinson-Patman (R-P) Act, 15 U.S.C. §§ 13, 13a, 13b, 21a, makes it unlawful, with certain exceptions, to knowingly sell goods "in commerce," for use or sale within the United States, at differing prices to contemporaneous buyers of those goods. The "in commerce" language of Robinson-Patman has been held to mean that the interstate commerce requirement is satisfied only when at least one of the two (or more) sales is made "in the stream of commerce"—that is, across state lines. Enacted during the Depression at the behest of small grocers who feared the buying power of large and growing chain grocers, Robinson-Patman is the exception to the notion that the antitrust laws protect competition, not competitors in that it generally prohibits precisely the kind of price differentiation which would normally be thought to result from vigorous competition. Allegations of Robinson-Patman violations may be defended by asserting and proving either that the differing prices reflect only the cost of the seller's manufacture or delivery (the "cost justification" defense); or, that the seller is attempting either (1) to meet the competition of another seller, or (2) enable his buyer to meet the competition of a competitor of the buyer ("meeting competition" defense). In addition, there is also a broad exception to the prohibition against price discrimination when one of the sales is made to any of certain entities listed in the Nonprofit Institutions Act, 15 U.S.C. § 13c, and the goods are purchased for the institution's "own use"; nonprofits may not, however, take advantage of their privileged Robinson-Patman status to purchase commodities at favorable prices in order to compete commercially with entities not so entitled. Further, lower courts have found that health maintenance organizations (HMOs) qualify as organizations entitled to take advantage of the Nonprofit Institutions Act, on the theory that they perform services that traditionally have been considered as "charitable"; the Supreme Court has not had occasion to rule on the status of HMOs. Disfavored purchasers who prove a Robinson-Patman violation are not, however, automatically entitled to damages on that account. The Supreme Court has held that since, technically, Robinson-Patman prohibits any price differential whose effect "may be substantially to lessen competition, (emphasis added)," not all proven R-P violations actually damage those who prove them: "[t]o recover treble damages … a plaintiff must … make some showing of actual injury attributable to something the antitrust laws were designed to prevent"—that is, a causal connection between the violation and the injury allegedly suffered. Although there have been some attempts at amending or repealing Robinson-Patman, none has been successful. The Antitrust Division of the Department of Justice has always believed the statute to be inflationary; that it artificially deprives consumers of the advantages of the lower prices that are the aim of the antitrust laws; and that, inter alia, it "reduces pricing flexibility [and] discourages the development of efficient distribution systems." Small businesses, and others, have contended, on the other hand, that their survival depends on the prevention of unjustified price differentials. Whether the current economic climate will revive efforts to modify the statute, which has not been enforced by the Department of Justice since its enactment, and has been enforced sporadically by the Federal Trade Commission, is not known.

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The Obama Administration has faced significant scrutiny following a series of determinations in which the relevant federal agency charged with the implementation of a given statute has chosen to limit or delay the enforcement of specific provisions of federal law. These nonenforcement, under enforcement, or delayed enforcement decisions have generally been implemented through stated agency policies directing officials not to take action to ensure compliance with statutory requirements that federal law imposes upon a third party. Notably, these policies have been grounded in practical or policy considerations, and have not been based on any argument that the statutory provisions themselves are unconstitutional or otherwise invalid. Instead, the Administration has largely justified its inaction as consistent with a proper exercise of enforcement discretion, a legal doctrine that generally shields executive branch enforcement decisions, including the determination of whether to initiate a criminal, civil, or administrative enforcement action, from judicial review. This report focuses on two distinct forms of enforcement discretion: prosecutorial discretion, exercised in the criminal context; and administrative enforcement discretion, exercised in the administrative context. The Department of Justice (DOJ) has cited prosecutorial discretion as the basis for its efforts to curtail the enforcement of the federal Controlled Substances Act (CSA) in states that have adopted both medical and recreational marijuana legalization initiatives. Although the possession, cultivation, or distribution of marijuana remains a clear federal crime, the DOJ has directed federal prosecutors to "not focus federal resources [] on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." Rather, U.S. Attorneys have been directed to prioritize investigative and prosecutorial resources on persons whose actions relate to identified federal priorities such as distribution to minors, the participation of criminal enterprises and cartels, or the use of marijuana on federal property. In 2012, the Secretary of Homeland Security relied on the doctrine of administrative enforcement discretion in a memorandum setting forth guidelines on how to "enforce the Nation's immigration laws against certain young people who were brought to this country as children and know only this country as home." The directive provided that, rather than use limited agency removal resources on low priority deportation cases, immigration officers should exercise their discretion to forego enforcement actions, for at least a period of time, against a specific class of individuals who unlawfully entered the United States as children, have not committed certain crimes, and meet other key requirements. It has been argued, however, that the Secretary's memorandum contravenes statutory mandates under the Immigration and Nationality Act which, opponents of the policy assert, require that aliens who entered the country without inspection be "detained for removal proceedings." In 2013 and 2014, the Administration utilized enforcement discretion to justify delays in the enforcement of a number of provisions of the Affordable care act (ACA), including the law's employer mandate and minimum coverage requirements. These provisions were to take effect beginning on January 1, 2014. In July 2013, the Treasury Department announced that enforcement of the ACA's new excise tax on employers with 50 or more employees that fail to provide affordable health coverage (the "employer mandate") would be delayed for one year, until 2015. In February 2014, the Administration announced that employers with at least 50 but fewer than 100 full-time equivalent employees would have an additional year to comply with the mandate. Similarly, the Centers for Medicare and Medicaid Services announced in November 2013 that it was adopting a "transitional policy," under which health insurers can continue to offer coverage that fails to meet certain statutorily required minimum standards for private health insurance under the ACA without threat of federal enforcement consequences.   In contrast to the Administration position, some Members of Congress have asserted that these unilateral Presidential nonenforcement determinations upset the separation of powers, harm Congress as an institution and a coordinate branch of government, and are in direct violation of the President's constitutional obligation to "take Care that the Laws be faithfully executed..." Although the House has held hearings addressing the issue and has approved legislation that would require the Administration to provide Congress with a report describing the legal grounds for any nonenforcement decisions, the Senate has not concurred with the House's objections. As a result, the House appears to be focusing on the judicial process as a means of addressing the Administration's nonenforcement policies. The ENFORCE the Law Act of 2014, which passed the House in March 2014, would establish an expedited process by which either house of Congress could file a lawsuit challenging a "formal or informal policy, practice, or procedure to refrain from enforcing, applying, following, or administering any provision of a Federal statute, rule, regulation, program, policy, or other law in violation of the requirement that the President take care that the laws be faithfully executed..." In addition, the House approved a joint resolution that would authorize the Speaker—through the House General Counsel—to file a lawsuit seeking "any appropriate relief regarding the failure of the President, the head of any department or agency, or any other officer or employee of the executive branch, to act in a manner consistent with that official's duties under the Constitution and laws of the United States with respect to implementation of any provision of the [ACA]." In light of these ongoing controversies, this report will address the President's general obligation to "take Care that the Laws be faithfully executed." The report will then discuss the limited role the judicial branch has traditionally adopted in reviewing discretionary enforcement decisions, including the decision to initiate a criminal prosecution or an administrative enforcement action. The report will conclude with a discussion of Congress's authority to restrict executive discretion in the enforcement of federal law. [H]e shall take Care that the Laws be faithfully executed... U.S. Constitution, Article II, §3 The Take Care Clause would appear to stand for two, at times diametrically opposed propositions—one imposing a "duty" upon the President and the other viewing the Clause as a source of Presidential "power." Primarily, the Take Care Clause has been interpreted as placing an obligation on both the President and those under his supervision to comply with and execute clear statutory directives as enacted by Congress. However, the Supreme Court has also construed the Clause as ensuring Presidential control over the enforcement of federal law. As a result, courts generally will not review Presidential enforcement decisions, including the decision of whether to initiate a criminal prosecution or administrative enforcement action in response to a violation of federal law or regulation. The puzzling result is that the Clause has been invoked as forming the constitutional basis for both the President's obligation to enforce the law, and his discretion not to. It is beyond dispute that the President plays a significant role in the legislative process. The specific powers enumerated in Article II, §3 and Article I, §7 of the Constitution, along with the general vesting of "the executive power" in Article II, §1, provide the President with the authority to recommend legislation to Congress, communicate his opposition or support for legislation under consideration, and, ultimately, to either sign legislation that meets his approval, or veto that legislation which "he thinks bad." It is equally well established, however, that once a bill is enacted into law, the President's legislative role comes to an end and is supplanted by his express constitutional obligation under Article II, §3 to "take Care that the Law[] be faithfully executed." Although there was little discussion of the Clause at the Constitutional Convention, most scholars have agreed that, at a minimum, the Clause represents a repudiation of the royal suspending and dispensing power that had been historically exercised by English monarchs. James Wilson, delegate to the constitutional convention form Pennsylvania, summarized this view in characterizing the Clause as providing the President with the "authority, not to make, or alter, or dispense with the laws, but to execute and act the laws." The executive branch has agreed with this view, acknowledging that "the Supreme Court and the Attorneys General have long interpreted the Take Care Clause as standing for the proposition that the President has no inherent constitutional authority to suspend the enforcement of the laws, particularly of statutes." The Clause would appear then to prevent the President from simply disregarding or suspending laws enacted by Congress. Today, the Take Care Clause makes a significant contribution to the separation of powers. The constitutionally created distinction between the "faithful" execution of the law under Article II, and the "finely wrought" process for the creation of law under Article I §4, operates as a clear demarcation of the legitimate powers and responsibilities of both the President and Congress in our constitutional system. Just as Congress may neither enforce the laws nor improperly intrude into the President's execution of the same, the President and his subordinates may not create law by unilaterally disregarding, amending, or repealing a validly enacted statute. The ultimate power to legislate is a power possessed solely by Congress, and to permit the President the freedom to suspend, amend, or disregard laws of his choosing would be to "clothe" the executive branch with the power of lawmaking. A long line of Supreme Court precedent indicates the Court's consistent view that the Take Care Clause imposes a "duty" or "obligation" upon the President to ensure that executive branch officials obey Congress's commands, and, additionally, that the Clause does not provide the President with the authority to frustrate legal requirements imposed by law. The notion that the President and executive branch officers must "faithfully" implement and execute the law can be seen as early as the seminal case of Marbury v. Madison in 1803. Although Marbury is best known for Chief Justice John Marshall's discussion of the Supreme Court's power of "judicial review"—the authority of the Court to invalidate laws it determines to be unconstitutional— the case also contains strong language relating to the obligation of executive branch officials to comply with the law. In the final hours of his Presidency, John Adams had appointed William Marbury to serve as Justice of the Peace for the District of Columbia. Marbury's commission, however, was never delivered, and upon assuming office President Thomas Jefferson instructed Secretary of State James Madison to withhold the commission, thus denying Marbury the position. Marbury filed suit, asking the Supreme Court to compel Madison to deliver the commission as, Marbury argued, was required by law. Although the Supreme Court determined that it lacked jurisdiction to hear the case and therefore did not compel Madison to take any action, Chief Justice Marshall nonetheless established that when an executive officer fails to perform a "specific duty [] assigned by law," the courts may enforce the obligation through a writ of mandamus. The Marbury opinion recognized Congress's authority to impose specific duties upon executive branch officials by law, as well as the official's corresponding obligation to execute the congressional directive. The general rule established in Marbury had limits, however; the Chief Justice drew a clear distinction between the enforceability of ministerial or mandatory requirements—which were subject to judicial enforcement— and political acts involving either statutory or constitutional discretion—which were not. The Supreme Court's most forceful articulation of the President's obligation to execute the law came thirty years later in Kendall v. United States ex rel. Stokes . In Kendall , a federal law directed the Postmaster General to provide back pay to a group of mail carrier contractors in an amount determined by the Solicitor of the Treasury. The Postmaster General, apparently at the express direction of the President, refused to pay the amount that the Solicitor had found owing. The Supreme Court, viewing the Postmaster General's duty to pay the full amount as ministerial rather than discretionary, held that the President had no authority to direct the Postmaster's performance of his statutory obligation. Where Congress has imposed upon an executive officer a valid duty, the Court declared "the duty and responsibility grow out of and are subject to the control of the law, and not to the direction of the President." Any interpretation of the Constitution that characterized the obligation of an executive branch official to execute the law as arising from the direction of the President alone, and not as arising from the law itself, would "cloth[e] the President with a power entirely to control the legislation of Congress, and paralyze the administration of justice." "This is a doctrine," the majority held "that cannot receive the sanction of this court." Perhaps the most significant aspect of the Kendall opinion was its repudiation of the government's assertion that the Take Care Clause constituted a source of presidential power. The Court plainly rejected this argument, holding that the Clause could not be relied upon as a basis for noncompliance with the law. "To contend that the obligation imposed on the President to see the laws faithfully executed implies a power to forbid their execution," the Court held, "is a novel construction of the Constitution, and entirely inadmissible." The legal reasoning in Kendall has long been cited as refuting any asserted presidential power to block the execution of validly enacted statutes. The Supreme Court reinforced the Constitution's clear distinction between Congress's role in the creation of the law and the President's role in the execution of the law in Youngstown Sheet & Tube Co. v. Sawyer . In Youngstown , the Court heard a challenge to an Executive Order issued by President Harry Truman directing the Secretary of Commerce to seize various steel mills in an effort to avert the detrimental effect a potential workers' strike would have on the prosecution of the Korean conflict. The Court invalidated the President's directive, holding that neither the Constitution nor any statutory delegation from Congress authorized such an order. The majority opinion was based chiefly on the proposition that the Constitution limits the President's "functions in the lawmaking process" to recommending laws he supports, vetoing laws he opposes, and executing laws that have been enacted by Congress. "In the framework of our Constitution," wrote Justice Black, "the President's power to see that the laws be faithfully executed refutes the idea that he is to be a lawmaker." Justice Jackson's influential concurring opinion likewise concluded that "the Executive, except for recommendation and veto, has no legislative power." The legal reasoning espoused in Marbury , Kendall , and Youngstown is buttressed by the judicial response to an illustrative conflict in which President Richard Nixon claimed the authority to disregard congressional enactments. Beginning in 1972, President Nixon asserted the authority to decline to spend or obligate appropriated funds in order to reduce public spending and to negate programs established by congressional legislation. Termed an "impoundment," the legal justification for Nixon's policy was claimed to have derived from the Take Care Clause. Most of the courts that reviewed the matter rejected the declared authority, holding—generally on statutory grounds—that neither the President nor the agency heads involved had discretion as to whether to spend appropriated funds. To permit such an action would be to allow a President to substitute his policy choices on spending for those established by congressional appropriations. The Supreme Court agreed in Train v. City of New York, holding that as a statutory matter the Administrator of the Environmental Protection Agency had no discretion to withhold funds that had been validly appropriated. The U.S. District Court for the District of Columbia, however, offered a more robust rejection of the impoundments and the President's claimed constitutional authority. In Local 2677 AFGE v. Phillips, the district court held that until Congress terminates a program, "historical precedent, logic, and the text of the Constitution itself obligate the [President] to continue to operate [the program] as was intended by the Congress..." The opinion further suggested that were the President's asserted power to be accepted, "no barrier would remain to the executive ignoring any and all Congressional authorizations if he deemed them, no matter how conscientiously, to be contrary to the needs of the nation." Notwithstanding the Supreme Court's articulation of the President's constitutional responsibility to execute the law, it is important to note that judicial enforcement of that duty is wholly contingent upon the creation of a well-defined statutory mandate or prohibition. Where Congress has legislated broadly, ambiguously, or in a nonobligatory manner, courts are unlikely to command or halt action by either the President or his officials. Absent the creation of a clear duty, "the executive must be allowed to operate freely within the sphere of discretion created for him by that legislation." In addition to establishing the President's obligation to execute the law, the Supreme Court has simultaneously interpreted the Take Care Clause as ensuring presidential control over those who execute and enforce the law. In framing the Clause as establishing a personal responsibility in the President, the court has previously invalidated laws that would undermine the President's ability to oversee the execution and enforcement of the law. These principles have grown mainly out of the Court's consideration of the President's appointment and removal power. In Bowsher v. Synar , for example, the Court invalidated a law that had delegated executive powers, including the authority to interpret and execute the law, to the Comptroller General—a legislative branch officer removable by Congress. The Court held that "[a] direct congressional role in the removal of officers charged with the execution of the laws ... is inconsistent with separation of powers." Likewise, in Buckley v. Valeo , the Court determined that Congress could not provide itself with the power to appoint members of an independent commission that had been vested, among other powers, with the authority to undertake enforcement actions. In striking down the appointment structure of the Federal Election Commission, the Court held that "a lawsuit is the ultimate remedy for a breach of the law, and it is to the President, and not to Congress, that the Constitution entrusts the responsibility to take care that the laws be faithfully executed." In Printz v. U.S, the Court suggested that vesting state and local officers with the authority to enforce federal law may also intrude upon the President's duty to oversee those that execute the law. Although Printz is primarily known as a 10 th Amendment case addressing federal intrusion into state sovereignty, the Court also considered the effect the Brady Handgun Violence Prevention Act would have on the President's obligation to "take Care that the Laws be faithfully executed." At issue in Printz was a provision of the Act that required the chief law enforcement officers (CLEOs) of state and local governments to conduct background checks to ascertain whether individuals were ineligible to purchase handguns. The Court suggested that the law may impermissibly diminish presidential power, noting: The Constitution does not leave to speculation who is to administer the laws enacted by Congress; the President, it says, "shall take Care that the Laws be faithfully executed," personally and through officers whom he appoints...The Brady Act effectively transfers this responsibility to thousands of CLEOs in the 50 States, who are left to implement the program without meaningful Presidential control (if indeed meaningful Presidential control is possible without the power to appoint and remove). The insistence of the Framers upon unity in the Federal Executive—to ensure both vigor and accountability—is well known. That unity would be shattered, and the power of the President would be subject to reduction, if Congress could act as effectively without the President as with him, by simply requiring state officers to execute its laws. More recently in Free Enterprise Fund v. PCAOB , the Supreme Court invalidated a statute that insulated officers of the Public Company Accountability Oversight Board from the President by providing Board members with dual layers of "for cause" removal protections. In the course of striking down the law, the Court cited with approval the holding in Myers v. U.S . that the President must retain "general administrative control of those executing the laws," for he cannot "'take Care that the laws be faithfully executed' if he cannot oversee the faithfulness of the officers who execute them." Whereas the President must be able to oversee those who enforce the law, Presidential control over law enforcement officers need not be absolute. In Morrison v Olson , a case upholding a law establishing the office of the Independent Counsel, the Court summarized its removal jurisprudence as ensuring that "Congress does not interfere with the President's exercise of the 'executive power' and his constitutionally appointed duty to 'take care that the laws be faithfully executed' under Article II." However, the opinion then sanctioned Congress's authority to provide a prosecutor with independence from the President by providing the officer with "for cause" removal protections—holding that such protections did not "sufficiently deprive[] the President of control over the independent counsel to interfere impermissibly with his constitutional obligation to ensure the faithful execution of the laws. " Morrison , which may act as a significant limitation on the exclusivity of executive branch enforcement discretion, will subsequently be discussed in greater detail. As a corollary to the requirement that the President must retain some level of control over those that enforce the law, the courts have similarly cited the Clause as providing the President and his officers with discretion as to how the laws are to be enforced against the general public. This discretion has been considered an essential component of the President's obligation to "discharge his constitutional responsibility to 'take Care that the Laws be faithfully executed.'" It is worth emphasizing, however, that any discretion that may arise from the Take Care Clause would extend only to decisions directly related to the enforcement of federal law upon third parties. At no time has the Court recognized the Clause as a justification for either affirmatively suspending federal law or refusing to comply with explicit mandates or restrictions imposed on the executive branch. Moreover, whether executive enforcement discretion constitutes a presidential "power" or a rule of judicial restraint is an important question, and a crucial one in delineating Congress's authority to restrict that discretion, yet unanswered by the Supreme Court. The Obama Administration has relied upon enforcement discretion, in both the criminal and administrative context, as the chief legal justification for the previously identified actions and it is to this doctrine that this report now turns. The judicial branch has traditionally accorded federal prosecutors "broad" latitude in making a range of investigatory and prosecutorial determinations, including when, against whom, and whether to prosecute particular criminal violations of federal law. This doctrine of prosecutorial discretion has a long historical pedigree—the early roots of which can be traced at least to a sixteenth century English common law procedural mechanism known as the nolle prosequi . In the early English legal system, criminal prosecutions were generally initiated by private individuals rather than public prosecutors. The nolle prosequi , however, allowed the government, generally at the direction of the Crown, to intervene in and terminate a privately initiated criminal action it viewed as "frivolous or in contravention of royal interests." The discretionary device and its principles were later adopted into American common law, permitting prosecutors to avoid prosecutions that were determined to be unwarranted or which the prosecuting authority chose not to pursue. Notwithstanding this historical background, the modern doctrine of prosecutorial discretion derives more from our constitutional structure than English common law. The exact justification for the doctrine, however, does not appear to have been explicitly established. Generally, courts have characterized prosecutorial discretion as a function of some mixture of constitutional principles, including the separation of powers, the Take Care Clause, and the duties of a prosecutor as an appointee of the President. Regardless of its precise textual source, courts generally will not review discretionary prosecutorial decisions in criminal matters, nor coerce the executive branch to initiate a particular prosecution. Most courts have agreed that judicial review of prosecutorial decisions is generally improper given that the "prosecutorial function, and the discretion that accompanies it, is [] committed by the Constitution to the executive." Judicial deference to prosecutorial decisions made by federal prosecutors has been justified on the ground that the "decision to prosecute is particularly ill-suited to judicial review." The courts have repeatedly acknowledged that these types of discretionary decisions involve the consideration of factors—such as the strength of evidence, deterrence value, available resources, and existing enforcement priorities—"not readily susceptible to the kind of analysis the courts are competent to undertake." Indeed, "[f]ew subjects are less adapted to judicial review than the exercise by the Executive of his discretion in deciding when and whether to institute criminal proceedings, or what precise charge shall be made, or whether to dismiss a proceeding once brought." A core aspect of prosecutorial discretion would appear to be the decision to initiate a criminal prosecution. As a result, judicial hesitance to review prosecutorial decisions is perhaps at its peak when the government chooses not to prosecute. The Supreme Court issued one of its strongest pronouncements of this principle in U.S. v. Nixon , proclaiming that "the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case." Although the Court did not elaborate on the statement, other lower courts have adopted similar lines of reasoning. For example, a strong statement of judicial restraint was issued in the oft cited case of United States v. Cox , in which the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) held that a district court could not compel a U.S. Attorney to sign an indictment returned by the grand jury. The court held that as an officer of the executive department...[the prosecutor] exercises a discretion as to whether or not there shall be a prosecution in a particular case. It follows as an incident of the constitutional separation of powers, that the courts are not to interfere with the free exercise of the discretionary powers of the attorneys of the United States in their control over criminal prosecutions. This principle was further exemplified by the U.S. Court of Appeals for the Second Circuit (Second Circuit) in Inmates of Attica Correctional Facility v. Rockefeller . In that case, prison inmates brought suit against the U.S. Attorney for the Western District of New York for his failure to take any action against government officials following the suppression of the Attica prison revolt that resulted in the deaths of 32 inmates. The plaintiffs sought a mandamus order, directing the U.S. Attorney to "investigate, arrest, and prosecute" those state officials who committed federal criminal civil rights violations. The court dismissed the claim, holding that "federal courts have traditionally and, to our knowledge, uniformly refrained from overturning...discretionary decisions of federal prosecuting authorities not to prosecute..." The court noted that this "judicial reluctance" and the "traditional judicial aversion to compelling prosecutions" is grounded in the constitutional separation of powers as well as the practical consideration that "the manifold imponderables which enter into the prosecutor's decision to prosecute or not to prosecute make the choice not readily amendable to judicial supervision." In its view, the executive branch has asserted that it must maintain absolute control over prosecutorial decisions, concluding specifically that "because the essential core of the President's constitutional responsibility is the duty to enforce the laws, the Executive Branch has exclusive authority to initiate and prosecute actions to enforce the laws adopted by Congress." The DOJ has also asserted a "corollary" proposition, "that neither the Judicial nor Legislative Branches may directly interfere with the prosecutorial discretion of the Executive by directing the Executive Branch to prosecute particular individuals." While prosecutorial discretion is broad, it is not "unfettered. " Indeed, the government "cannot cloak constitutional violations under the guise of prosecutorial discretion and expect the federal courts simply to look the other way." For example, in discussing the scope of the executive branch's discretion, courts have repeatedly noted that the determination as to whether to prosecute may not be based upon "race, religion, or other arbitrary classification. " Nor may an exercise of prosecutorial discretion infringe individual constitutional rights. Where prosecutions (or other enforcement actions) are based upon impermissible factors "the judiciary must protect against unconstitutional deprivations." This principle was evident in Yick Wo v. Hopkins , where the Supreme Court found that prosecutors' practice of enforcing a state law prohibiting the operation of laundries against only persons of Chinese descent ran afoul of the Equal Protection Clause. In practice, however, defendants generally find it difficult to maintain a claim of selective prosecution. Courts generally require defendants to introduce "clear evidence" displacing the presumption that the prosecutor has acted lawfully. In addition to reviewing decisions that violate individual constitutional rights, courts may also choose to review prosecutorial decisions for compliance with express statutory requirements. In Nader v Saxbe , a case involving nonenforcement of the Federal Corrupt Practices Act, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) suggested that "the exercise of prosecutorial discretion, like the exercise of Executive discretion generally, is subject to statutory and constitutional limits enforceable through judicial review." Although dismissing the case for lack of standing, the D.C. Circuit rejected the district court's determination that "prosecutorial decision-making is wholly immune from judicial review." Therefore, it would appear that where Congress has explicitly established a statutory framework under which prosecutions are to take place, and as a result altered the traditional scope of prosecutorial discretion, "the judiciary has the responsibility of assuring that the purpose and intent of congressional enactments are not negated..." Under these rare circumstances, courts may elect to review prosecutorial decisions—including the decision of whether to initiate a criminal prosecution— to ensure compliance with federal law. However, courts have been reluctant to read criminal statutes as establishing the type of framework necessary to withdraw the executive's discretion to decide whether to initiate a prosecution, instead requiring clear and unambiguous evidence of Congress's intent to withdraw traditional prosecutorial discretion. For example, in Powell v Katzenbach, the D.C. Circuit dismissed a challenge to the Attorney' General's failure to prosecute a national bank for certain criminal violations. After assuming, "without deciding, that where Congress has withdrawn all discretion from the prosecutor by special legislation, a court might be empowered to force prosecutions in some circumstances," the circuit court determined "the language of [the provision in question] and its legislative history fail to disclose a congressional intent to alter the traditional scope of the prosecutor's discretion." Moreover, both the U.S. Court of appeals for the Fourth Circuit (Fourth Circuit) and the U.S. District Court for the District of Columbia have held that language in the federal civil rights statutes stating that U.S. Attorneys are "authorized and required to institute prosecutions against all persons violating" certain provisions of the Civil Rights Act similarly failed to "strip" federal prosecutors of "their normal prosecutorial discretion." The Fourth Circuit specifically found the use of the word "require" to be "insufficient to evince a broad congressional purpose to bar the exercise of executive discretion in the prosecution of federal civil rights crimes." As a result, the court determined that it was "unnecessary to decide whether, if Congress were by explicit direction and guidelines to remove all prosecutorial discretion with respect to certain crimes or in certain circumstances we would properly direct that a prosecution be undertaken." The separation of powers concerns that would derive from a law that unambiguously and expressly sought to remove prosecutorial discretion and compel criminal prosecutions will be explored in greater detail infra . Agency civil enforcement decisions in the administrative context "share[] to some extent the characteristics of the decision of a prosecutor" in the criminal context. This freedom in setting enforcement priorities, allocating resources, and making specific strategic enforcement decisions— including the decision to initiate an enforcement action— is commonly described as "administrative enforcement discretion." Whether this form of enforcement discretion enjoys the same constitutional footing as prosecutorial discretion is not entirely clear. Indeed, the judicial reluctance to review agency enforcement decisions would appear to arise as much from the Administrative Procedure Act (APA) as it does from the Take Care Clause. Although the APA establishes a general presumption that all final agency decisions are subject to judicial review, it also specifically precludes from judicial consideration any agency action that is "committed to agency discretion by law." A decision is generally considered "committed to agency discretion" when a reviewing court would have "no law to apply" in evaluating the determination. Consistent with this framework, and in light of the traditional discretion exercised by agencies in enforcing statutes they administer, courts generally will not review discretionary agency enforcement decisions. These discretionary activities may include any range of actions and decisions taken throughout the investigative and enforcement process, including, but not limited to, the imposition of penalties or the initiation of an agency investigation, prosecution, adjudication, lawsuit, or audit. In situations where an agency refrains from bringing an enforcement action, courts have historically been cautious in reviewing the agency determination—generally holding that these nonenforcement decisions are "committed to agency discretion" and therefore not subject to judicial review under the APA. The seminal case on this topic is Heckler v. Chaney , a Supreme Court decision in which death row inmates challenged the Food and Drug Administration's refusal to initiate an enforcement action to block the use of certain drugs in lethal injection. In rejecting the challenge, the Supreme Court held that "an agency's decision not to prosecute or enforce...is a decision generally committed to an agency's absolute discretion." The Court noted that agency enforcement decisions, involve a "complicated balancing of a number of factors which are peculiarly within [the agency's] expertise" including, whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action requested best fits the agency's overall policies, and, indeed, whether the agency has enough resources to undertake the action at all. An agency generally cannot act against each technical violation of the statute it is charged with enforcing. Agencies, the Court reasoned, are "far better equipped" to evaluate "the many variables involved in the proper ordering of its priorities" than are the courts. Consistent with this deferential view, the Heckler opinion proceeded to establish the standard for the reviewability of agency nonenforcement decisions, holding that an "agency's decision not to take enforcement action should be presumed immune from judicial review ." However, the Court also clearly indicated that the presumption against judicial review of agency nonenforcement decisions may be overcome in a variety of specific situations. For purposes of this report, two identified exceptions necessitate significant discussion. First, a court may review an agency nonenforcement determination "where the substantive statute has provided guidelines for the agency to follow in exercising its enforcement powers." In such a situation, Congress has supplied the court with "law to apply" in reviewing the agency decision. Second, the Court suggested that judicial review of nonenforcement may be appropriate when an agency has "'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities." Due presumably to standing limitations, lower federal courts have only rarely had opportunity to clarify these exceptions to Heckler's presumption of non-reviewability of nonenforcement decisions. The Heckler opinion specifically recognized Congress's authority to curtail an agency's ability to exercise enforcement discretion "either by setting substantive priorities, or by otherwise circumscribing an agency's power to discriminate among issues or cases it will pursue." Congress may, for instance, choose to remove an agency's discretion by indicating "an intent to circumscribe agency enforcement discretion" and "provid[ing] meaningful standards for defining the limits of that discretion." In this manner Congress overrides the inherent discretion possessed by the agencies in the enforcement of federal law and provides a reviewing court with a standard upon which to review the agency inaction. The Court succinctly articulated the principle in Heckler : If [Congress] has indicated an intent to circumscribe agency enforcement discretion, and has provided meaningful standards for defining the limits of that discretion, there is "law to apply" under [the APA] and courts may require that the agency follow that law; if it has not, then an agency refusal to institute proceedings is a decision "committed to agency discretion by law" within the meaning of that section. Although the exercise of agency discretion may therefore be influenced by congressional controls, it would appear that Congress's intent to curtail the agency enforcement discretion must be made explicit, as courts are hesitant to imply such limitations. In applying this standard, the Heckler opinion held that the FFDCA had not curtailed the FDA's discretion in a manner sufficient to allow the court to review the agency's nonenforcement determination. The FFDCA provided only that the Secretary was "authorized to conduct examinations and investigations;" and not that he was required to do so. Moreover, the Court determined that the FFDCA's requirement that any person who violates the Act "shall be imprisoned...or fined," could not be read to mandate that the FDA initiate an enforcement action in response to every violation. The FFDCA's prohibition on certain conduct, although framed in mandatory terms, was insufficient to permit review of nonenforcement absent additional language delineating how and when the agency was to respond to violations. "The Act's enforcement provisions," held the Court "thus commit complete discretion to the Secretary to decide how and when they should be exercised." In his concurrence, Justice Brennan identified the potential consequences of the majority's position and attempted to narrow the scope of the opinion, writing that agencies should not feel "free to disregard legislative direction in the statutory scheme that the agency administers." Brennan emphasized that the presumption against reviewability applied only to the "individual, isolated nonenforcement decisions" that "must be made by hundreds of agencies each day." "Absent some indication of congressional intent to the contrary," Brennan found it reasonable to believe that Congress did not intend the courts to review "such mundane matters." Justice Brennan's more limited reasoning had carried the day in the pre- Heckler case of Dunlop v. Bachowski . In Dunlop , a union member challenged the Secretary of Labor's refusal to bring an enforcement action to set aside a union election. The Labor-Management Reporting and Disclosure Act (L-MRDA) provides that upon the filing of a complaint, "[t]he Secretary shall investigate such complaint and, if he finds probable cause to believe that a violation... has occurred...he shall...bring a civil action..." Brennan's majority opinion rejected the agency's argument that the Secretary's determination of whether to bring a civil action was an unreviewable exercise of administrative discretion. In doing so, the Court did not itself address the enforcement discretion question, but rather stated its agreement with the appellate court's conclusion that "[a]lthough the Secretary's decision to bring suit bears some similarity to the decision to commence a criminal prosecution, the principle of absolute prosecutorial discretion is not applicable to the facts of this case." The appellate court identified two reasons for this conclusion. First, the court found that enforcement discretion in the civil context should be limited to cases which, "like criminal prosecutions, involve the vindication of societal or governmental interests, rather than the protection of individual rights." Second, the court found the "most convincing reasoning" for reviewability of the Secretary's decision was that in criminal cases, a prosecutor generally must balance "considerations that are 'beyond the judicial capacity to supervise.'" To the contrary, the court found the "factors to be considered by the secretary" under the L-MRDA to be "more limited and clearly defined." The court determined that the statute: provides that after investigating a complaint, he must determine whether there is probable cause to believe that violations of § 481 have occurred affecting the outcome of the election. Where a complaint is meritorious and no settlement has been reached which would remedy the violations found to exist, the language and purpose of § 402(b) indicate that Congress intended the Secretary to file suit. Thus, apart from the possibility of settlement, the Secretary's decision whether to bring suit depends on a rather straightforward factual determination, and we see nothing in the nature of that task that places the Secretary's decision 'beyond the judicial capacity to supervise.' The language held to override the presumption against review of agency nonenforcement in Dunlop contained an express trigger for an enforcement action. The Secretary, however, retained discretion in determining whether the precondition (whether there was probable cause to believe a violation had occurred) was met. The Supreme Court confirmed the continued validity of Dunlop in Heckler , but distinguished the two decisions, holding that unlike the FFDCA, the L-MRDA "quite clearly withdrew discretion from the agency and provided guidelines for exercise of its enforcement power." Federal statutes, unlike the L-MRDA, that do not contain language defining how and when the agency is to exercise its enforcement discretion, even when framed in mandatory terms, generally have not been held to override agency enforcement discretion. As previously discussed, a congressional command that an agency "shall enforce" a particular statute, without additional guidelines as to the circumstances under which enforcement is to occur, is generally insufficient to permit review of a nonenforcement decision. The Heckler court suggested as much, noting that it could not "attribute such a sweeping meaning" to the type of mandatory language that was commonly found in federal law. A Florida district court applied this reasoning in its review of a statute commanding that "the provisions of [the Endangered Species Act (ESA)] and any regulations or permits issued pursuant thereto shall be enforced by the Secretary." Citing to Heckler , the court held that the provision "plainly does not mandate an impossibility—i.e., the Service to pursue to the fullest each and every possible violation of the ESA or permits thereunder." Moreover, the ESA did not "provide criteria or guidelines charting a process the Service shall use to investigate possible noncompliance." The U.S. District Court for the Northern District of Texas applied Heckler and Dunlop in a recent challenge to the Secretary of Homeland Security's exercise of administrative enforcement discretion in the granting of "deferred action"— the name given to one type of relief from removal whereby immigration officials agree to forego taking action against an individual for a specified time frame—under the DACA memorandum. In Crane v. Napolitano , Immigration and Customs Enforcement (ICE) agents asserted that the Secretary's directive was in violation of the Immigration and Nationality Act (INA), which, the plaintiffs argued, "requires" ICE officers to initiate a removal proceeding if they encounter an unlawfully present alien who is not "clearly and beyond a doubt entitled to be admitted." Section 1225(b)(2)(A) of the INA provides that if an "examining immigration officer determines that an alien seeking admission is not clearly and beyond a doubt entitled to be admitted, the alien shall be detained for a [removal] proceeding..." In response to a motion for a preliminary injunction, the district court determined that the INA established an obligation for officers to initiate a removal proceeding against any alien whom the officer determines is not "clearly and beyond a doubt entitled to be admitted." The court held that judicial review of the agency nonenforcement policy was appropriate because the INA "provides clearly defined factors for when inspecting immigration officers are required to initiate removal proceedings against an arriving alien, just as the statute at issue in Dunlop provided certain clearly defined factors for when the Secretary of Labor was required to file a civil action." The district court ultimately dismissed the case, however, holding that the employment related claims asserted by the ICE agents were within the exclusive jurisdiction of the Merit Systems Protection Board and, therefore, not properly before the court. The above cases would appear to establish the proposition that agency nonenforcement decisions are presumptively unreviewable exercises of administrative discretion. However, when Congress removes or restricts that discretion, by expressly providing "guidelines" or "meaningful standards" for the manner in which the agency may exercise its enforcement powers, the presumption of nonreviewability may be overcome. Whether Congress has provided sufficient guidelines is difficult to determine. For example, establishing that certain conduct constitutes a violation of law and then authorizing an agency to enforce that law, or even establishing that the agency "shall" enforce the law or is "required" to enforce the law, would appear to be insufficient to overcome the Heckler presumption. However, where Congress clearly imposes criteria, considerations, standards, or guidelines on the agency's exercise of its enforcement discretion (i.e., when, or how the agency is to take enforcement actions) or establishes clear conditions to trigger enforcement actions, it would appear that courts may review whether a nonenforcement decision contravenes the statutory framework. If a court finds that a statute permits review of an agency nonenforcement decision, it would appear that that decision will be evaluated for compliance with statutory requirements under the "arbitrary and capricious" test established in §706 of the APA. In Dunlop , the Court was careful to make clear that in such a situation, the reviewing court may not "substitute its judgment for the decision of the [agency] not to bring suit." The court's role is limited to determining "whether or not the discretion, which still remains in the [agency], has been exercised in a manner that is neither arbitrary nor capricious." In order to conduct this review, a court may require that the agency provide a statement of reasons as to why the nonenforcement decision was made that addressed "both the grounds of decision and the essential facts upon which the [agency's] inferences are based." The court can then evaluate whether the agency's decision was "reached for an impermissible reason or for no reason at all." To the contrary, "if the court concludes there is a rational and defensible basis [for the agency's] determination, then that should be an end of [the] matter, for it is not the function of the Court to determine whether or not the case should be brought or what its outcome would be." In Heckler , the Supreme Court also suggested that the presumption against the review of nonenforcement decisions may be overcome if the agency has "'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities." The Court, however, was unclear as to whether such an agency policy would in fact be reviewable, stating only that "[a]lthough we express no opinion on whether such decisions would be unreviewable under [the APA], we note that in those situations the statute conferring authority on the agency might indicate that such decisions were not "committed to agency discretion." In raising the "statutory abdication" argument, the Court cited to Adams v. Richardson , a decision from the D.C. Circuit. Adams involved a challenge to the Secretary of Health, Education, and Welfare's (HEW) failure to enforce Title VI of the Civil rights Act of 1964. The Act "authorizes and directs" federal agencies to ensure that federal financial assistance is not provided to segregated educational institutions. The district court had rejected the Secretary's assertion that the law provided federal agencies with "absolute discretion" with respect to whether to take action to terminate funding, holding that the agency has "the duty of accomplishing the purposes of the statute through administrative enforcement proceedings or by other legal means." The district court ordered the agency to commence enforcement proceedings against certain school districts within a specified time period. The D.C. Circuit affirmed the district court decision in language characteristic of the "statutory guidelines" exception, holding that "Title VI not only requires the agency to enforce the Act, but also sets forth specific enforcement procedures." The court distinguished the Adams nonenforcement scenario from traditional exercises of enforcement discretion, noting that in past cases, Congress had not enacted "specific legislation requiring particular action." The court appeared to then give great weight to the breadth of the Secretary's nonenforcement, noting: More significantly, this suit is not brought to challenge HEW's decisions with regard to a few school districts in the course of a generally effective enforcement program. To the contrary, appellants allege that HEW has consciously and expressly adopted a general policy which is in effect an abdication of its statutory duty. The court determined that HEW had consistently and unsuccessfully relied on voluntary compliance as a means of enforcing Title VI without resorting to the more formal and effective enforcement procedures available to the agency. This "consistent failure" was a "dereliction of duty reviewable in the courts." Although arguably applicable to any "general policy" of nonenforcement, the Adams opinion may be limited to certain types of enforcement. In reaching its conclusion the court stressed the "nature of the relationship between the agency and the institutions in question." The court noted that: HEW is actively supplying segregated institutions with federal funds, contrary to the expressed purposes of Congress. It is one thing to say the Justice Department lacks the resources necessary to locate and prosecute every civil rights violator; it is quite another to say HEW may affirmatively continue to channel federal funds to defaulting schools. The anomaly of this latter assertion fully supports the conclusion that Congress's clear statement of an affirmative enforcement duty should not be discounted. As such, it is not clear that the Adams exception would apply with equal force to more traditional enforcement actions—such as those that require the expenditure of significant agency resources in investigating and penalizing members of the public for violations of law. Given the sparse case law associated with this exception, it is difficult to assess what level of nonenforcement constitutes an "abdication of statutory responsibilities." Presumably, if an agency announced that it would no longer enforce a provision of law against any individual at any time, regardless of the nature of the violation, a court would likely be willing to review the policy. The Fifth Circuit, however, has stated that merely "inadequate" enforcement is insufficient to overcome the Heckler presumption of nonreviewability. In Texas v. United States , the state of Texas sued the United States arguing that the Attorney General had failed to control immigration as dictated by the INA, and that the failure to enforce the immigration laws had resulted in substantial costs to the state. With respect to the enforcement claim, the court rejected "out-of-hand the State's contention that the federal defendants' alleged systemic failure to control immigration is so extreme as to constitute a reviewable abdication of duty." In holding that nonenforcement decisions are not subject to judicial review, the court concluded: The State does not contend that federal defendants are doing nothing to enforce the immigration laws or that they have consciously decided to abdicate their enforcement responsibilities. Real or perceived inadequate enforcement of immigration laws does not constitute a reviewable abdication of duty. Whether limited nonenforcement policies— for instance if an agency announced that it will delay enforcement of a particular provision for a specified period of time—could also be subject to review would appear to be less clear. For example, in Schering Corp. v. Heckler , the D.C. Circuit held that the FDA decision not to pursue an enforcement action against a drug manufacturer for a specific period of time fell "squarely within the confines of Chaney " and was therefore not reviewable. In that case, the FDA had reached a settlement with an animal drug manufacturer in which the agency had agreed not to "initiate any enforcement action...for a period of 18 months." A rival drug manufacturer brought a claim seeking a declaration that the settlement was invalid. The court dismissed the claim, holding that there was no "policy or pattern of nonenforcment that amounts to 'an abdication of its statutory responsibilities,'" and that the agency decision to hold enforcement in "abeyance" while it considered its position was a "paradigm case of enforcement discretion." It should be noted that as a general matter, agency delays are notoriously difficult to enforce, even in situations where Congress has established a clear statutory deadline for mandatory action. In light of the standards established in Heckler and other cases, it would appear that, absent explicit statutory language, challenges to particular prosecutorial or agency nonenforcement decisions are unlikely to meet with much success. Courts have made clear that these decisions are generally committed to the agency's or the prosecutor's discretion and are not subject to judicial review. However, the mere invocation of prosecutorial or enforcement discretion is not "to be treated as a magical incantation which automatically provides a shield for arbitrariness." It would appear that courts may be more willing to grant review of established agency policies of nonenforcement than more traditional, case-by-case, individual enforcement decisions. Justice Brennan emphasized this point in his Heckler concurrence, noting that that the presumption against reviewability applied only to "individual, isolated nonenforcement decisions." Similarly, in Crowley Caribbean Transportation v. Pena , the D.C. Circuit made a clear distinction between "single-shot nonenforcement decisions" on one hand, and "an agency's statement of a general enforcement policy" on the other. The court determined that review of an agency's "general enforcement policy" was reviewable where the agency had 1) "expressed the policy as a formal regulation," 2) "articulated [the policy] in some form of universal policy statement," or 3) otherwise "[laid] out a general policy delineating the boundary between enforcement and nonenforcement" that "purport[s] to speak to a broad class of parties." The court articulated its reasons for finding review of general enforcement, or nonenforcement policies to be appropriate as follows: By definition, expressions of broad enforcement policies are abstracted from the particular combinations of facts the agency would encounter in individual enforcement proceedings. As general statements, they are more likely to be direct interpretations of the commands of the substantive statute rather than the sort of mingled assessments of fact, policy, and law that drive an individual enforcement decision and that are, as Chaney recognizes, peculiarly within the agency's expertise and discretion. Second, an agency's pronouncement of a broad policy against enforcement poses special risks that it 'has consciously and expressly adopted a general policy that is so extreme as to amount to an abdication of its statutory responsibilities,' a situation in which the normal presumption of nonreviewability may be inappropriate. Finally, an agency will generally present a clearer (and more easily reviewable) statement of its reasons for acting when formally articulating a broadly applicable enforcement policy, whereas such statements in the context of individual decisions to forego enforcement tend to be cursory, ad hoc, or post hoc. Other cases similarly support the notion that courts are more willing to review nonenforcement policies than individual enforcement-based decisions in both the criminal and administrative contexts. In Nader v. Saxbe , the D.C. Circuit drew a clear distinction between judicial review of discretionary enforcement decisions, and judicial review of compliance with "statutory and constitutional limits to" those decisions. Nader was a suit in which a nonprofit corporation asked the court to compel the Attorney General to initiate criminal prosecutions under the Federal Corrupt Practices Act, a law that required presidential candidates and committees supporting presidential candidates to file reports on campaign contributions and expenditures. The plaintiffs argued that despite numerous allegations of violations of the law, DOJ had adopted a policy, based on prosecutorial discretion, to only respond to violations referred by the Clerk of the House or the Secretary of the Senate. Although the court found that the plaintiffs lacked standing to bring the claim, it nevertheless determined that "established precedents" do not "necessarily foreclose judicial review of [nonenforcement] policies." The court then drew a clear distinction between the review of individual enforcement decisions and the review of broad nonenforcement policies: The instant complaint does not ask the court to assume the essentially Executive function of deciding whether a particular alleged violator should be prosecuted. Rather, the complaint seeks a conventionally judicial determination of whether certain fixed policies allegedly followed by the Justice Department and the United States Attorney's office lie outside the constitutional and statutory limits of "prosecutorial discretion." One reason a court may be more receptive to reviewing a nonenforcement policy, as opposed to an individual nonenforcement decision, could relate to the remedy that would ultimately be provided if the court reached a decision favorable to the plaintiffs. The remedy to an individual nonenforcement decision would likely be a court order, perhaps in the form of a writ of mandamus, directing the agency to initiate an enforcement action. Mandamus is an "extraordinary remedy reserved for extraordinary circumstances," and will generally only be issued where there is a violation of a "clear duty to act." While courts have granted mandamus to compel an agency to issue a rule where Congress has provided an explicit deadline, courts are generally loathe to order enforcement actions. Indeed, the D.C. Circuit has held in the criminal context that "it is well settled that the question of whether and when prosecution is to be instituted is within the discretion of the Attorney General. Mandamus will not lie to control the exercise of this discretion." To the contrary, a court may have greater flexibility in crafting a remedy to an invalid agency nonenforcement policy. For instance, if a reviewing court found the agency policy to be inconsistent with the existing statutory framework, the court may simply invalidate the policy, or direct the agency to reconsider its policy, without necessarily taking additional steps or directing the agency to take any specific action. This line of reasoning was evident in the U.S. Court of Appeals for the Eleventh Circuit opinion of Smith v. Meese . Meese involved a claim by black voters and elected officials challenging "a policy and pattern of investigatory and prosecutory decisions," including the nonenforcement of federal civil rights laws, that allegedly had the effect of depriving the plaintiffs of their constitutional rights. In holding that the separation of powers was not threatened by judicial review of the prosecutorial decisions, the court found it "important to note" that rather than being "asked to block or require the prosecution of any individual" the plaintiffs had instead "asked the federal court to order the defendants to stop following a deliberate policy of discriminatory investigations and prosecutions." The court went on to address the type of remedy that a court may be likely to grant in a challenge to nonenforcement, suggesting that It is unlikely that the appropriate remedy would be for the district court to enjoin all voting fraud prosecutions or to require prosecutions of all possible election crimes. Instead, it is likely that the district court would order the defendants to make prosecutorial decisions based on constitutional factors, instead of targeting one race or one political party for investigation. The Executive branch likewise acknowledges that "the individual prosecutorial decision is distinguishable from instances in which courts have reviewed the legality of general executive branch policies." As the foregoing discussion makes clear, there is a default presumption that the executive branch has discretion in making a wide range of decisions relating to the discharge of its duty to enforce federal law. Congress, however, may alter the default rule by explicitly guiding or restricting the exercise of that discretion through statute. The Supreme Court has stated quite bluntly that "[a]ll constitutional questions aside, it is for Congress to determine how the rights which it creates shall be enforced." In the administrative context, this principle was reflected in Heckler , where the Court expressly held that Congress may establish "guidelines for the agency to follow in exercising its enforcement powers" and the "Congress may limit an agency's exercise of enforcement power if it wishes, either by setting substantive priorities, or by otherwise circumscribing an agency's power to discriminate among issues or cases it will pursue." Thus, Congress may restrain administrative enforcement discretion by statute, and enact laws that reduce agency officials' freedom in making enforcement, and indeed nonenforcement, decisions. These principles arguably apply with equal force in the criminal context. Indeed, a pair of early Supreme Court cases suggest that the exercise of prosecutorial discretion must conform to statutory restrictions. In U.S. v. Morgan the Supreme Court considered whether a Department of Agriculture hearing was a required condition precedent to a DOJ criminal prosecution under the Pure Food and Drug Act. Under the law, if agency officials determined that a violation had occurred, the federal prosecutor was obliged "to cause appropriate proceedings to be commenced and prosecuted." Although the case did not focus on whether the law mandated prosecutions, the court nonetheless stated in dicta that the law created a "condition where the district attorney is compelled to prosecute without delay." In noting that the statute "compels [the prosecutor] to act" and that " he...is bound to accept the finding of the Department," the Court made no mention of prosecutorial discretion or the separation of powers. The Court suggested a similar congressional role in influencing criminal prosecutorial decisions in the Confiscation Cases . In that decision, which has been viewed as "one of the canonical statements of executive authority over prosecution," the Supreme Court nonetheless suggested in dicta that the executive branch's control over the termination of criminal prosecutions may be subject to limits imposed by statute. Although the case upheld the federal prosecutor's discretion to dismiss a forfeiture suit, the Court qualified that discretion by suggesting that "public prosecutions...are within the exclusive direction of the district attorney..... except in cases where it is otherwise provided in some act of Congress. " Assuming then that Congress has the authority to regulate the exercise of executive enforcement discretion, what limits exist, if any, to that authority? There has been relatively little judicial discussion of the scope of Congress's authority to restrict the executive exercise of enforcement discretion. It is clear, however, that the judicial branch's reluctance to review executive branch prosecutorial and administrative enforcement decisions is grounded in a respect for the roles and functions of each branch of government; an acknowledgement that it would generally be improper and impractical for the court to review discretionary enforcement decisions made by executive branch officers; and the Take Care Clause, as control over the enforcement of law has been viewed as within the "special province of the Executive Branch" and an aspect of executive power that "lies at the core of the Executive's duty to see to the faithful execution of the laws." However, the presumption against the review of enforcement decisions is also founded upon statutory principles, limitations on judicial review imposed by the APA, and the notion that when Congress delegates enforcement authority to the executive branch, it intends to provide the agency with the discretion that traditionally accompanies those delegations. To the extent that judicial deference to executive enforcement decisions is based on statutory principles, it would appear that Congress must be free to modify the statutory environment and alter the traditional scope of enforcement discretion. Other forms of administrative discretion, for instance, can be enlarged, reduced, or altered by Congress through statute. While acknowledging that Congress can guide enforcement discretion, the Supreme Court has never directly addressed the precise limits of Congress's power, nor whether Congress can remove that discretion entirely by enacting mandatory enforcement language. Nor has the Court addressed whether Congress's authority to restrict administrative enforcement discretion differs in any meaningful way from its authority to restrict criminal prosecutorial discretion. A comparison of the strong constitutionally-based language used in cases addressing the executive's discretionary authority to initiate a criminal prosecution, with the mainly statutorily-based language in Heckler , would appear to suggest that Congress would have wider latitude in controlling civil or administrative enforcement actions than it would over federal criminal prosecutions. Justice Marshall, for instance, felt compelled to draw a distinction between prosecutorial and administrative discretion in his concurrence in Heckler , noting that it was "inappropriate to rely on notions of prosecutorial discretion to hold agency action unreviewable" because "arguments about prosecutorial discretion do not necessarily translate into the context of agency refusals to act." The Fifth Circuit has made a similar distinction based expressly on presidential power. In Riley v. St. Luke's Episcopal Hospital , the circuit court found intrusions into the executive's control over criminal cases to be more worrisome than intrusions into civil litigation. The Riley court made this distinction in upholding the qui tam provision of the False Claims Act against a claim that the law unconstitutionally infringed on the executive's civil enforcement power. The circuit court held that "no function cuts more to the heart of the Executive's constitutional duty to take care that the laws are faithfully executed than criminal prosecution." The conduct of civil litigation, on the other hand, involved "lesser uses of traditional executive power." Given the separate status accorded presidential control over criminal and civil matters, the court determined that: the Executive must wield two different types of control in order to ensure that its constitutional duties under Article II are not impinged. Should the occasion arise, these two different types of control necessarily require the application of two different sorts of tests. While it would appear that Congress may have greater authority over administrative enforcement discretion, legislation that can be characterized as significantly restricting the exercise of executive branch enforcement decisions, in either the criminal, civil, or administrative context, could raise questions under the separation of powers. This is especially true considering the Supreme Court has had little opportunity to address the precise contours and outer reaches of Congress's authority to impinge on discretionary executive enforcement decisions. In the absence of clearly established judicial precedent, the executive branch has historically opposed any judicial or legislative "interference" with enforcement decisions as a violation of the Take Care Clause. It may be helpful to first outline what would appear to be general limits to Congress's authority to intrude upon the executive's enforcement power. First, Congress may neither itself, nor through its officers, directly enforce federal law. To exercise both the power to make and enforce the law would be an apparent violation of the separation of powers. The Supreme Court has clearly stated that "Legislative power, as distinguished from executive power, is the authority to make laws, but not to enforce them..." James Madison outlined this fundamental principle in Federalist 47, where he characterized the accumulation of legislative and executive power in a single entity as "the very definition of tyranny." Second, Congress may neither appoint, nor reserve for itself the power to remove officers engaged in the enforcement of law. The Supreme Court's appointment and removal jurisprudence makes clear that Congress's role in selecting or controlling those who execute and enforce the law is severely limited. The President, and the President alone, must be permitted a degree of control over those engaged in enforcement. Congress may place limits on that control, by providing such officers with "for cause" removal restrictions, but it may not remove presidential control entirely. Third, it would appear unlikely that Congress could direct the executive to bring a criminal prosecution against a specific individual. In light of the Supreme Court's statement in U.S. v. Nixon that "the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case," the initiation of criminal prosecutions has been considered to be within the "special province of the executive branch" and at the heart of prosecutorial discretion. The executive branch would presumably consider such a directive from Congress to be a significant intrusion into Presidential power. Regardless of the validity of that position, there are other reasons why such legislation would be problematic. First, legislation that targets an individual for punishment may run afoul of the constitutional prohibition on bills of attainder. Second, if Congress were to enact such a law, and the executive failed to comply, it is unlikely that a court would be willing to enforce the provision by issuing an order directing the executive branch to initiate a prosecution against a specific individual. Whether the separation of powers would be violated if Congress used less restrictive means to influence or confine the exercise of enforcement discretion, rather than to use its own officers to enforce the law or compel specific enforcement actions remains less clear. Any such legislation would presumably be evaluated under the standards established by the Supreme Court in Morrison v. Olson . Morrison , as previously mentioned, involved a constitutional challenge to the independent counsel provisions of the Ethics in Government Act (EGA). The EGA authorized the appointment of an independent counsel to investigate and prosecute high ranking executive branch officials for violations of certain federal laws. Under the statute, the Attorney General was required to conduct a preliminary investigation once he received "specific" and "credible" information alleging that certain executive officials had committed serious federal offenses. Under the now expired law, if the Attorney General determined that there were "reasonable grounds to believe that further investigation or prosecution [was] warranted" then the law stated that he "shall apply" to a special three-judge panel of the D.C. Circuit for the appointment of an independent counsel. Once appointed, the independent counsel was granted "full power and independent authority to exercise all investigative and prosecutorial functions and powers of the [DOJ]" and was removable by the Attorney General "only for good cause."   Former Assistant Attorney General Theodore Olson argued that by providing an individual, who was not under the President's control, with the authority to initiate and conduct criminal prosecutions, the law constituted an unconstitutional congressional intrusion into the President's enforcement power. The court rejected this argument, determining that the law was consistent with the appointments clause; did not impermissibly expand the judicial function; did not infringe upon the President's removal power; and finally did not violate the separation of powers. With respect to the separation of powers, the Court determined that the law neither "'impermissibly undermine[s]' the powers of the Executive Branch, [n]or 'disrupts the proper balance between the coordinate branches [by] prevent[ing] the Executive Branch from accomplishing its constitutionally assigned functions.'" In reaching this conclusion, the Court placed great weight on the fact that the independent counsel provisions did not "involve an attempt by Congress to increase its own powers at the expense of the Executive Branch." Congress retained no powers of "control of supervision." Rather its role was limited to receiving reports and exercising oversight. Although the law clearly "reduce[d] the amount of control or supervision" exercised by the President over the "investigation and prosecution of a certain class of alleged criminal activity," it did not do so in an impermissible manner. Furthermore, the President retained an adequate "degree of control over the power to initiate an investigation" because the Independent Counsel could be appointed only at the request of the Attorney General, and—"most importantly"—the Attorney General retained the power to remove the counsel for "good cause." As a result, the court concluded: Notwithstanding the fact that the counsel is to some degree 'independent' and free from executive supervision to a greater extent than other federal prosecutors, in our view these features of the Act give the Executive Branch sufficient control over the independent counsel to ensure that the President is able to perform his constitutionally assigned duties. Justice Scalia's dissent in Morrison adopted a much stronger view of executive enforcement powers, holding that the investigation and prosecution of crimes was a "quintessential" and "exclusive" executive function. Scalia would have invalidated the independent counsel provisions, and expressly rejected the majority's conclusion that "the ability to control the decision whether to investigate and prosecute the President's closest advisers, and indeed the President himself, is not 'so central to the functioning of the Executive Branch' as to be constitutionally required to be within the President's control." He went on to assert that: We should say here that the President's constitutionally assigned duties include complete control over investigation and prosecution of violations of the law, and that the inexorable command of Article II is clear and definite: the executive power must be vested in the President of the United States. Morrison may reasonably be interpreted as rejecting the notion that the executive's power over the enforcement of law is the type of core, or exclusive presidential power that is beyond the reach of Congress. The Court explicitly acknowledged, that it was "undeniable that the Act reduces the amount of control or supervision that the Attorney General and, through him, the President exercises over the investigation and prosecution of a certain class of alleged criminal activity." That reduction, however, was not in itself unconstitutional. The majority opinion would appear to authorize legislative restrictions on the exercise of executive branch enforcement discretion, so long as Congress does not violate the established limitations previously discussed or otherwise "prevent the executive branch from accomplishing its constitutionally assigned functions." The Morrison standard for evaluating intrusions into the executive's enforcement power has been applied by a number of appellate courts in upholding the qui tam provision of the False Claims Act (FCA). This provision authorizes a private person, known as the relator, to initiate a civil proceeding "in the name of the government" for violations of the FCA. Upon filing a qui tam action, the relator must give notice to the government disclosing all material evidence the relator has gathered. The government then has 60 days to investigate the allegations and determine whether it wishes to take control of the enforcement action or allow the relator to continue to "conduct" the proceeding. If the government chooses to assume responsibility for the enforcement action, the relator may continue as a party, but the DOJ may make enforcement decisions without the approval of the relator, including a decision to dismiss the case or settle the claim. In a series of appellate level cases, the government argued that by granting private parties the authority to initiate a civil action on behalf of the United States, the FCA had violated the separation of powers and unconstitutionally infringed upon the President's enforcement function. Each circuit to review the question ultimately rejected this position, holding generally that the FCA does not impermissibly "interfere" with the President's constitutional functions under the Take Care Clause. In applying the Morrison standard, the courts generally focused on the degree of control that the executive branch exercises over the relator, including the government's authority to intervene, place limits on the relators participation, restrict the relators power in discovery, and ultimately to decide whether to settle or dismiss the case. As such, although the provision may " diminish Executive branch control over the initiation and prosecution of a defined class of civil ligation," the Executive retains "'sufficient control' over the relator's conduct to insure that the President is able to perform his constitutionally assigned duty." Acknowledging the limitations imposed by the separation of powers, the precise scope of Congress's authority to counter agency policies of nonenforcement remains an open question. There may, however, be a number of ways in which Congress can use its legislative powers to encourage the executive branch to enforce laws in a manner reflective of Congress's will. For example, it would appear that Congress may prohibit or require the consideration of certain factors in the decision to initiate an enforcement action, or affirmatively set enforcement priorities reflective of Congress's intent. With respect to permissible factors for consideration, the Court has made clear, in other contexts, that it will reject agency action where the agency has "relied on factors which Congress has not intended it to consider." With respect to setting enforcement priorities, the Supreme Court acknowledged in Heckler that congress may set "substantive priorities" for an agency to follow in exercising its enforcement power. Further support for Congress's prominent role in setting agency priorities appears in TVA v. Hill . There, the Court stated "emphatically" that it is "the exclusive province of the Congress not only to formulate legislative policies and mandate programs and projects, but also to establish their relative priority for the Nation. Once Congress [] has decided the order of priorities in a given area, it is for the Executive to administer the laws and for the courts to enforce them when enforcement is sought." If Congress does utilize its legislative authority to set enforcement priorities or establish factors for consideration in making enforcement decisions, it would appear to be within the judicial authority to ensure executive compliance with those explicit statutory requirements. This would especially be the case in a situation where a stated agency enforcement policy is in direct conflict with the statutory framework. Whether Congress can remove the discretion to initiate an enforcement action by establishing a generally applicable statutory framework that requires the executive branch to enforce the law, not against specific individuals, but rather under certain factual scenarios; where certain criteria are met; or where certain aggravating factors are present; may raise concerns. This is especially true in the criminal context, where some courts have made broad statements about the nature of the executive's power to decide whether to bring a criminal prosecution. But these statements have generally occurred in opinions that either focus the power of the courts (as opposed to Congress) to interfere in prosecutorial decisions, or that avoid the question of congressional authority by interpreting a statute as insufficient to curtail prosecutorial discretion. Although no court appears to have directly addressed the issue, the Supreme Court did note in U.S. v. Nixon that "the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case." While the value of the Nixon dicta is debatable, it nevertheless suggests that congressional attempts to require prosecutions may be problematic. The executive branch has previously determined that Congress lacks the authority to compel prosecutions in the criminal context. In its evaluation of whether the criminal contempt statute requires the U.S. Attorney to refer a contempt citation to the grand jury, the DOJ argued that "although prosecutorial discretion may be regulated to a certain extent by Congress and in some instances by the Constitution, the decision not to prosecute an individual may not be controlled because it is fundamental to the executive's prerogative." The DOJ went on to assert that "divesting" a federal prosecutor of the discretion to decide whether to bring a prosecution would "run afoul...of the separation of powers by stripping the Executive of its proper constitutional authority and by vesting improper power in Congress." The DOJ position was reached four years prior to the Supreme Court's important decision on Presidential control over the enforcement of law in Morrison. Under Morrison , the standard for evaluating the separation of powers concerns associated with a law that arguably intrudes on the President's personal obligation to "take Care that the laws be faithfully executed" would appear to be whether the law "'impermissibly undermine[s]' the powers of the Executive Branch," or "prevent[s] the Executive Branch from accomplishing its constitutionally assigned functions." The chief considerations in the Morrison analysis appear to have related to "aggrandizement" and "control." The Court upheld the independent counsel provisions because Congress had not sought to aggrandize its own powers (the independent counsel was "independent" from both the President and Congress), and because the President, through the Attorney General, retained sufficient "supervision" and "control" over actions of the independent counsel. How a court would apply these principles to a law that sought to compel a criminal prosecution upon the occurrence of certain conditions is difficult to determine. It could be argued that by mandating scenarios under which criminal prosecutions must occur, Congress is, in effect, replacing the prosecutor's discretionary decision of whether to initiate a case, with its own congressional determination. This could be seen as "controlling" the exercise of a discretionary enforcement decision, depriving the President of adequate control over federal prosecutors, and an "aggrandizement" of congressional power, as Congress would have vested power in itself to determine when and whether prosecutions are to be initiated. To the contrary, a court may be equally likely to decide that such a law is a permissible legislative restriction on the exercise of the initial discretionary decision of whether to initiate a prosecution that neither aggrandizes Congress's power nor subverts Presidential control, as the conduct of the prosecution, once initiated, remains entirely in the hands of the executive branch. Characterized in this manner, Congress has acted to limit, but not remove, executive control over enforcement. Morrison and the qui tam cases suggest that it is constitutionally permissible for Congress to "reduce" or "diminish" executive branch control over the initiation of an enforcement action. In addition, constitutional issues may be ameliorated by ensuring that the executive branch retains significant discretion to determine whether the conditions that trigger the mandated prosecution are met. In the administrative context, Heckler's approval of the reasoning in Dunlop would appear to approve of legislation that creates a mandatory administrative enforcement framework. Even so, obtaining a court order actually compelling enforcement may be difficult, as was evident in how the Dunlop case ultimately concluded. As previously discussed, the Supreme Court stated that the "principle of absolute prosecutorial discretion" was inapplicable in Dunlop because Congress had, by statute, required the Secretary to bring an enforcement action if certain "clearly defined" factors were present. In confirming the continued validity of Dunlop , the Court in Heckler stated that "The statute being administered quite clearly withdrew discretion from the agency and provided guidelines for exercise of its enforcement power." The removal of discretion, the Court held, was a: decision [] in the first instance for Congress... If it has indicated an intent to circumscribe agency enforcement discretion, and has provided meaningful standards for defining the limits of that discretion, there is 'law to apply' under [the APA] and courts may require that the agency follow that law; if it has not, then an agency refusal to institute proceedings is a decision 'committed to agency discretion by law.' However, the court did not order the Secretary to initiate an enforcement proceeding, but rather directed the Secretary to file a "statement of reasons" as to why no action was brought and directed the district court to review that document to determine whether the nonenforcement decision was "arbitrary and capricious." The court further directed that if the district court "determines that the Secretary's statement of reasons adequately demonstrates that his decision not to sue is not contrary to law, the ... suit fails and should be dismissed." The court then noted that if the district court came to the opposite conclusion, new concerns under the separation of powers may arise, stating: The district court may, however, ultimately come to the conclusion that the Secretary's statement of reasons on its face renders necessary the conclusion that his decision not to sue is so irrational as to constitute the decision arbitrary and capricious. There would then be presented the question whether the district court is empowered to order the Secretary to bring a civil suit against the union to set aside the election. We have no occasion to address that question at this time. It obviously presents some difficulty in light of the strong evidence that Congress deliberately gave exclusive enforcement authority to the Secretary. We prefer therefore at this time to assume that the Secretary would proceed appropriately without the coercion of a court order when finally advised by the courts that his decision was in law arbitrary and capricious. In a footnote, the Court noted the union's argument that the separation of powers does not "countenance a court order requiring the executive branch, against its wishes, to institute a lawsuit in federal court." The Court stated only that "[s]ince we do not consider at this time the question of the court's power to order the Secretary to file suit, we need not address [the separation of powers] contentions." On remand, the district court found the provided statement of reasons to be inadequate to justify the agency inaction, but again, did not order the Secretary to initiate an enforcement action. Instead it simply directed a reconsideration of the agency decision and prohibited the Secretary from using a method of determining whether a violation occurred that the court found to be inconsistent with congressional intent.

The Take Care Clause would appear to stand for two, at times diametrically opposed propositions—one imposing a "duty" upon the President and the other viewing the Clause as a source of Presidential "power." Primarily, the Take Care Clause has been interpreted as placing an obligation on both the President and those under his supervision to comply with and execute clear statutory directives as enacted by Congress. However, the Supreme Court has also construed the Clause as ensuring Presidential control over the enforcement of federal law. As a result, courts generally will not review Presidential enforcement decisions, including the decision of whether to initiate a criminal prosecution or administrative enforcement action in response to a violation of federal law. In situations where an agency refrains from bringing an enforcement action, courts have historically been cautious in reviewing the agency determination—generally holding that these nonenforcement decisions are "committed to agency discretion" and therefore not subject to judicial review under the Administrative Procedure Act. The seminal case on this topic is Heckler v. Chaney, in which the Supreme Court held that an "agency's decision not to take enforcement action should be presumed immune from judicial review." However, the Court also clearly indicated that the presumption against judicial review of agency nonenforcement decisions may be overcome in a variety of specific situations. For example, a court may review an agency nonenforcement determination "where the substantive statute has provided guidelines for the agency to follow in exercising its enforcement powers," or where the agency has "'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities." As such, it would appear that Congress may overcome the presumption of nonreviewability and restrict executive discretion through statute by expressly providing "meaningful standards" for the manner in which the agency may exercise its enforcement powers. Nevertheless, legislation that can be characterized as significantly restricting the exercise of executive branch enforcement decisions, in either the criminal, civil, or administrative context, could raise questions under the separation of powers.

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In 2013, the official U.S. poverty rate was 14.5%, compared to 15.0% in 2012, and marked the first statistically significant drop in the rate since 2006. In 2013, 45.3 million persons were estimated as having income below the official poverty line, a number statistically unchanged from the estimated 46.5 million poor in 2012. (See Figure 1 .) Figure 1 shows a clear relationship between poverty and the economy. The level of poverty tends to follow the economic cycle quite closely, tending to rise when the economy is faltering and fall when the economy is in sustained growth. The poverty rate increased markedly over the past decade, in part a response to two economic recessions (periods marked in red). A strong economy during most of the 1990s is generally credited with the declines in poverty that occurred over the latter half of that decade, resulting in a record-tying, historic low poverty rate of 11.3% in 2000 (a rate statistically tied with the previous lowest recorded rate of 11.1% in 1973). The poverty rate increased each year from 2001 through 2004, a trend generally attributed to economic recession (March 2001 to November 2001), and failed to recede appreciably before the onset of the December 2007 recession. This most recent recession, which officially ended in June 2009, was the longest recorded (18 months) in the post-World War II period. Over the course of the most recent recession, the unemployment rate increased from 4.9% (January 2008) to 7.2% (December 2008), and continued to rise over most of 2009, peaking at 10.0% in October of that year. Even as the economy has been recovering, poverty has remained well above pre-recessionary levels. Although the unemployment rate has generally been falling since late 2009, it has not been until this past year that we have seen a marked (statistically significant) decline in the official poverty rate. That the unemployment rate has continued to fall over 2014 suggests that poverty levels are likely to fall in 2014. Poverty statistics for 2014 poverty will be issued in the late summer of 2015. The recession especially affected non-aged adults (persons age 18 to 64) and children. (See Figure 2 .) The poverty rate of non-aged adults reached 13.8% in 2010, the highest it has been since the early 1960s. In 2013 the non-aged poverty rate of 13.6% remained statistically unchanged from rates seen in the prior three years. The poverty rate for non-aged adults will need to fall to 10.8% to reach its 2006 pre-recession level. The 2013 poverty data provide one encouraging sign with respect to children. Both the estimated number of poor children and their poverty rate fell from 2012 to 2013. In 2013, the number of poor children fell by an estimated 1.3 million (15.4 million in 2012 to 14.1 million in 2013), and their poverty rate fell from 21.3% in 2012 to 19.5% in 2013. The 2013 child poverty rate is still well above its pre-recession low of 16.9% (2006). Child poverty appears to be especially sensitive to economic cycles, as it often takes two working parents to support a family, and a loss of work by one may put the family at risk of falling into poverty. Moreover, roughly one-third of all children in the country live with only one parent, making them even more prone to falling into poverty when the economy falters. In 2013, the aged poverty rate (9.5%) was statistically unchanged from 2012, although the number of poor rose by an estimated 305,000 (from 3.9 million in 2012 to 4.2 million in 2013). In spite of the recession, the aged poverty rate remains near an historic low level. The longer-term secular trend in poverty has been affected by changes in household and family composition and by government income security and transfer programs. In 1959, over one-third (35.2%) of persons age 65 and over were poor, a rate well above that of children (26.9%). Social Security, in combination with a maturing pension system, has helped greatly to reduce the incidence of poverty among the aged over the years, and as recent evidence seems to show, it has helped protect them during the economic downturn. The Census Bureau's poverty thresholds form the basis for statistical estimates of poverty in the United States. The thresholds reflect crude estimates of the amount of money individuals or families, of various size and composition, need per year to purchase a basket of goods and services deemed as "minimally adequate," according to the living standards of the early 1960s. The thresholds are updated each year for changes in consumer prices. In 2013, for example, the average poverty threshold for an individual living alone was $11,888; for a two-person family, $15,142; and for a family of four, $23,834. The current official U.S. poverty measure was developed in the early 1960s using data available at the time. It was based on the concept of a minimal standard of food consumption, derived from research that used data from the U.S. Department of Agriculture's (USDA's) 1955 Food Consumption Survey. That research showed that the average U.S. family spent one-third of its pre-tax income on food. A standard of food adequacy was set by pricing out the USDA's Economy Food Plan—a bare-bones plan designed to provide a healthy diet for a temporary period when funds are low. An overall poverty income level was then set by multiplying the food plan by three, to correspond to the findings from the 1955 USDA Survey that an average family spent one-third of its pre-tax income on food and two-thirds on everything else. The "official" U.S. poverty measure has changed little since it was originally adopted in 1969, with the exception of annual adjustments for overall price changes in the economy, as measured by the Consumer Price Index for all Urban Consumers (CPI-U). Thus, the poverty line reflects a measure of economic need based on living standards that prevailed in the mid-1950s. It is often characterized as an "absolute" poverty measure, in that it is not adjusted to reflect changes in needs associated with improved standards of living that have occurred over the decades since the measure was first developed. If the same basic methodology developed in the early 1960s was applied today, the poverty thresholds would be over three times higher than the current thresholds. Persons are considered poor, for statistical purposes, if their family's countable money income is below its corresponding poverty threshold. Annual poverty estimates are based on a Census Bureau household survey (Annual Social and Economic Supplement to the Current Population Survey, CPS/ASEC, conducted February through April). The official definition of poverty counts most sources of money income received by families during the prior year (e.g., earnings, social security, pensions, cash public assistance, interest and dividends, alimony, and child support, among others). For purposes of officially counting the poor, noncash benefits (such as the value of Medicare and Medicaid, public housing, or employer provided health care) and "near cash" benefits (e.g., food stamps, renamed Supplemental Assistance Nutrition (SNAP) benefits beginning in FY2009) are not counted as income, nor are tax payments subtracted from income, nor are tax credits added (e.g., Earned Income Tax Credit (EITC)). Many believe that these and other benefits should be included in a poverty measure so as to better reflect the effects of government programs on poverty. The Census Bureau, in partnership with the Bureau of Labor Statistics (BLS), has recently released a Supplemental Poverty Measure (SPM), designed to address many of the perceived flaws of the "official" measure. The SPM is discussed in a separate section at the end this report (see " The Research Supplemental Poverty Measure "). Even during periods of general prosperity, poverty is concentrated among certain groups and in certain areas. Minorities; women and children; the very old; the unemployed; and those with low levels of educational attainment, low skills, or disability, among others, are especially prone to poverty. The incidence of poverty among African Americans and Hispanics exceeds that of whites by several times. In 2013, 27.2% of blacks (11.0 million) and 23.5% of Hispanics (12.7 million) had incomes below poverty, compared to 9.6% of non-Hispanic whites (18.8 million) and 10.5% of Asians (1.8 million). Although blacks represent only 13.0% of the total population, they make up 24.4% of the poor population; Hispanics, who represent 17.3% of the population, account for 28.1% of the poor. Poverty rates for Hispanics fell from 25.6% in 2012 to 23.5% in 2013, as did the number of poor Hispanics, from 13.6 million in 2012, to 12.7 million in 2013. Poverty rates and the numbers estimated as poor were statistically unchanged from 2012 to 2013 for white non-Hispanics, blacks, and Asians. In 2013, among the native-born population, 13.9% (37.9 million) were poor—a rate and number statistically unchanged from 2012 (14.3%, 38.8 million). Among the foreign-born population, 18.0% (7.4 million) were poor in 2013—a statistically significant drop in the poverty rate (from 19.7%), but not in the number estimated as poor. The poverty rate among foreign-born naturalized citizens (12.7%, in 2013) was lower than that of the native-born U.S. population (13.9%). In 2013, the poverty rate of non-citizens (22.8%) dropped significantly from 2012 (24.9%), as did the estimated number who were poor (about one-half million, dropping from 5.4 million in 2012, to 4.0 million in 2013). Poverty among children dropped significantly from 2012 to 2013. Their estimated poverty rate fell from 21.3% in 2012, to 19.5% in 2013. In 2013, an estimated 1.3 million fewer children were poor than in 2012 (14.1 million versus 15.4 million, respectively). However, the 2013 child poverty rate (19.5%) is still well above its pre-recession low of 16.9% (2006). The lowest recorded rate of child poverty was in 1969, when 13.8% of children were counted as poor. Children living in single female-headed families are especially prone to poverty. In 2013 a child living in a single female-headed family was nearly five times more likely to be poor than a child living in a married-couple family. In 2013, among all children living in single female-headed families, 45.8% were poor. In contrast, among children living in married-couple families, 9.5% were poor. The increased share of children who live in single female-headed families has contributed to the high overall child poverty rate. In 2013, one quarter (25.0%) of children were living in single female-headed families, more than double the share who lived in such families when the overall child poverty rate was at a historical low (1969). Among all poor children, nearly 6 in 10 (58.7%) were living in single female-headed families in 2013. In 2013, 38.0% of black children were poor (4.2 million), compared to 30.0% of Hispanic children (5.3 million) and 10.1% of non-Hispanic white children (3.8 million). (See Figure 3 .) Among children living in single female-headed families, more than half of black children (54.0%) and Hispanic children (52.3%) were poor; in contrast, one-third of non-Hispanic white children (33.6%) were poor. The poverty rate among Hispanic children who live in married-couple families (19.9%) was above that of black children (16.8%), and four times that of non-Hispanic white children (4.9%) who live in such families. Contributing to the high rate of overall black child poverty is the large share of black children who live in single female-headed families (54.0%) compared to Hispanic children (30.1%) or non-Hispanic white children (15.7%). (See Figure 4 .) Adults with low education, those who are unemployed, or those who have a work-related disability are especially prone to poverty. Among 25- to 34-year-olds without a high school diploma, between one-third and two-fifths (36.8%) were poor in 2013. In 2013, 1 in 10 25- to 34-year-olds lacked a high school diploma. Within the same age group whose highest level of educational attainment was a high school diploma, about one in five (20.7%) were poor. In contrast, only about 1 in 16 (6.5%) of 25- to 34-year-olds with at least a bachelor's degree were found to be living below the poverty line. Among persons between the ages of 16 and 64 who were unemployed in March 2014, nearly 3 out of 10 (29.8%) were poor based on their families' incomes in 2013; among those who were employed, 6.9% were poor. In 2013, persons who had a work disability represented 11.3% of the 16- to 64-year-old population, and about one-quarter (26.0%) of the poor population within this age range. Among those with a severe work disability, 35.6% were poor, compared to 17.0% of those with a less severe disability and 11.4% who reported having no work-related disability. In 2013, the 9.5% poverty rate among persons age 65 and older was statistically unchanged from the 2012 rate (9.1%), but statistically higher than the all-time low-poverty rate among the aged of 8.7% attained in 2011. The number of aged poor grew by 305,000 from 2012 to 2013, from 3.9 million to 4.2 million,. Among persons age 75 and over, 11.2% were poor in 2013, compared to 8.3% of those ages 65 to 74. Measured by a slightly raised poverty standard (125% of the poverty threshold), 15.1% of the aged could be considered poor or " near poor " in 2013; 12.6% who are ages 65 to 74, and 18.4% who are 75 years of age and over, could be considered poor or "near poor." In 2013, nearly three of every four poor persons (73.8%) lived in households that received any means-tested assistance during the year. Such assistance could include cash aid, such as Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI) payments, SNAP benefits (Food Stamps), Medicaid, subsidized housing, free or reduced price school lunches, and other programs. In 2013, somewhat over one in five (17.4%) poor persons lived in households that received cash aid ; half (49.5%) received SNAP benefits (formerly named Food Stamps); 6 in 10 (61.3%) lived in households where one or more household members were covered by Medicaid; and about 1 in 7 (14.8%) lived in subsidized housing. Poor single-parent families with children are among those families most likely to receive cash aid. Among poor children who were living in single female-headed families, about one-fifth (21.9%) were in households that received government cash aid in 2013, down from 24.0% in 2012. The share of poor children in single female-headed families receiving cash aid is well below historical levels. In 1993, 70.2% of these children's families received cash aid. In 1995, the year prior to passage of sweeping welfare changes under PRWORA, 65% of such children were in families receiving cash aid. Poverty is more highly concentrated in some areas than in others; it is about twice as high in center cities as it is in suburban areas and nearly three times as high in the poorest states as it is in the least poor states. Some neighborhoods may be characterized as having high concentrations of poverty. Among the poor, the likelihood of living in an area of concentrated or extreme poverty varies by race and ethnicity. Within metropolitan areas, the incidence of poverty in central city areas is considerably higher than in suburban areas—19.1% versus 11.1%, respectively, in 2013. Nonmetropolitan areas had a poverty rate of 16.1%. A typical pattern is for poverty rates to be highest in center city areas, with poverty rates dropping off in suburban areas, and then rising with increasing distance from an urban core. In 2013, only nonmetropolitan areas experienced a statistically significant decline in poverty (both rate and numbers poor) from 2012, with the poverty rate decreasing from the 17.7% in 2012 to 16.1% in 2013, and the number of poor declining by an estimated 891,000 persons. Poverty rates and estimated numbers of poor people remained statistically unchanged in metropolitan areas, center cities, and suburbs from 2012 to 2013. In 2013, poverty rates were lowest in the Northeast (12.7%) and Midwest (12.9%), followed by the West (14.7%), with the South (16.1%) having the highest poverty rate. Poverty remained statistically unchanged (measured both in terms of numbers poor and rates) in each of the four regions from 2012 to 2013. Based on 2012 American Community Survey (ACS) data, poverty rates were highest in the South (with the exception of Virginia), extending across to Southwestern states bordering Mexico (Texas, New Mexico, and Arizona). (See Figure 5 .) Poverty rates in several states bordering the Ohio River (Ohio, West Virginia, Kentucky) also exceeded the national rate, as did those of Michigan and New York, and the District of Columbia, in the eastern half of the nation, and California, Oregon, and Montana in the western half. States along the Atlantic Seaboard from Virginia northward tended to have poverty rates well below the national rate, as did three contiguous states in the upper Midwest/plains (Iowa, Minnesota, and North Dakota), as well as Utah, Wyoming, Alaska, and Hawaii. Figure 6 shows estimated poverty rates for the United States and for each of the 50 states and the District of Columbia on the basis of the 2013 American Community Survey (ACS), the most recent ACS data currently available. In addition to the point estimates, the figure displays a 90% statistical confidence interval around each state's estimate, indicating the degree to which these estimates might be expected to vary based on sample size. Although the states are sorted from lowest to highest by their respective poverty rate point estimates, the precise ranking of each state is not possible because of the depicted margin of error around each state's estimate. All states with non-overlapping statistical confidence intervals have statistically significant different poverty rates from one another. Some states with overlapping confidence intervals may also have significantly different poverty rates from one another, measured at the 90% confidence interval. For example, New Hampshire, shown as having the lowest poverty rate (8.7%) in 2013, is statistically tied with Alaska (9.3%). Mississippi clearly stands out as the state with the highest poverty rate (24.0%) and New Mexico, with a poverty rate of 21.8%, has the second-highest poverty rate. Louisiana, a state ranked as having the third-highest poverty rate (19.7%), is statistically tied with Arkansas (19.7%) and the District of Columbia (18.9%), but not with Georgia (19.0%), even though Louisiana and Georgia's statistical confidence intervals overlap. Table 1 provides estimates of state and national poverty rates from 2002 through 2013 from the ACS. Statistically significant changes from one year to the next are indicated by an upward-pointing arrow (▲) if a state's poverty rate was statistically higher, and by a downward-pointing arrow (▼) if statistically lower, than in the immediately preceding year or for other selected periods (i.e., 2005 vs. 2002, 2013 vs. 2007). It should be noted that ACS poverty estimates for 2006 and later are not strictly comparable to those of earlier years, due to a change in ACS methodology that began in 2006 to include some persons living in non-institutionalized group quarters who were not included in earlier years. Table 1 shows that three states (New Jersey, New Mexico, and Washington) experienced statistically significant increases in their poverty rates from the 2012 to 2013 ACS. New Jersey's estimated poverty rate increased from 10.8% in 2012 to 11.4% in 2013, New Mexico's rate increased from 20.8% to 21.9%, and Washington's rate increased from 13.5% to 14.1%. Four states (Colorado, New Hampshire, Texas, and Wyoming) experienced statistically significant decreases in their poverty rates from 2012 to 2013. The table shows that poverty among states generally increased over the 2002 to 2005 period, as measured by the ACS, consequent to the 2001 (March to November) economic recession. From the 2002 to 2003 ACS, five states (including the District of Columbia) experienced statistically significant increases in their poverty rates, whereas none experienced a statistically significant decrease. From 2003 to 2004, eight states saw their poverty rates increase, whereas two saw decreases. From 2004 to 2005, 13 states saw their poverty rates increase, whereas only 1 saw its poverty rate decrease. Comparing poverty rates from the 2005 ACS to those from the 2002 ACS, poverty was statistically higher in 22 states, and lower in only one. By 2007, poverty rates among states were beginning to improve, with 13 states (including the District of Columbia) experiencing statistically significant declines in their poverty rates from 2006; only Michigan experienced a statistically significant increase in its poverty rate in 2007 compared to a year earlier. Since 2007, state poverty rates have generally increased consequent to the 18-month recession (December 2007 to June 2009). From 2007 to 2008, the ACS data showed eight states (California, Connecticut, Florida, Hawaii, Indiana, Michigan, Oregon, and Pennsylvania) as experiencing statistically significant increases in their poverty rates, whereas three states (Alabama, Louisiana, and Texas) experienced statistically significant decreases. From 2008 to 2009, 32 states saw their poverty rates increase, and no state experienced a statistically significant decrease, and from 2009 to 2010, 34 states experienced statistically significant increases in poverty, and again, no state experienced a decrease. As noted above, from 2012 to 2013, three states saw their poverty rates rise, and four saw a decline. Comparing 2013 to 2007, poverty rates were statistically higher in 48 states (including the District of Columbia), and no state had a poverty rate statistically below its prerecession rate. The four tables that follow provide poverty estimates for large metropolitan areas having a population of 500,000 and over, and for smaller metropolitan areas having a population of 50,000 or more but less than 500,000. Among large metropolitan areas, 10 areas with some of the lowest poverty rates are shown in Table 2 , and the 10 areas with some of the highest poverty rates are shown in Table 3 . Among smaller metropolitan areas, 10 areas with some of the lowest poverty rates are shown in Table 4 , and 10 among those with the highest poverty rates in Table 5 . It should be noted that metropolitan areas shown in these tables may not be statistically different from one another, or from others not shown in the tables. Poverty estimates for all metropolitan areas in 2013 are shown in Appendix B . Table B-1 . Poverty estimates for congressional districts are shown in Appendix C . Table C-1 includes poverty rate estimates for 2012. Congressional districts in 2012 are not directly comparable to earlier years, due to re-districting. Neighborhoods can be delineated from U.S. Census Bureau census tracts. Census tracts usually have between 2,500 and 8,000 persons and, when first delineated, are designed to be homogeneous with respect to population characteristics, economic status, and living conditions. The Census Bureau defines "poverty areas" as census tracts having poverty rates of 20% or more. Figure 7 groups census tracts according to their level of poverty. The first two groupings are based on poor persons living in census tracts with poverty rates below the national average (15.4% based on the five-year ACS data), and from 15.4% to less than 20.0%. Poor persons living in census tracts with poverty rates of 20% or more meet the Census Bureau definition of living in "poverty areas." Poverty areas are further demarcated in terms of poor persons living in areas of "concentrated" poverty (i.e., census tracts with poverty rates of 30% to 39.9%), and areas of "extreme" poverty (i.e., census tracts with poverty rates of 40% or more). The figure is based on five years of data (2009-2013) from the U.S. Census Bureau's American Community Survey (ACS). Five years of data are required in order to get reasonably reliable statistical data at the census tract level while at the same time preserving the confidentiality of survey respondents. Figure 7 shows that over the five-year period 2009-2013, over half of all poor persons (55.0%) lived in "poverty areas" (i.e., census tracts with poverty rates of 20% or more). Among the poor, about three out of ten (30.7%) lived in areas with poverty of 30% or more, and about one in seven (14.5%) lived in areas of "extreme" poverty, having poverty rates of 40% or more. Among the poor, African Americans, American Indian and Alaska Natives, and Hispanics are more likely to live in poverty areas than either Asians or white non-Hispanics. Among poor blacks, nearly half (48.0%) live in neighborhoods with poverty rates of 30% or more, and one-quarter (25.2%) live in "extreme" poverty areas, with poverty rates of 40% or more. Among poor Hispanics, about two-fifths (39.6%) live in areas with poverty rates of 30% or more, and about one in six (17.5%) live in areas of "extreme" poverty. Among poor white non-Hispanics, over half (53.2%) live outside poverty areas, while nearly one-quarter (23.2%) live in areas with poverty rates of 30% or more. On October 16, 2014, the Census Bureau released its fourth annual report using a new Supplemental Poverty Measure (SPM). As its name implies, the SPM is intended to "supplement," rather than replace, the "official" poverty measure. The "official" Census Bureau statistical measure of poverty will continue to be used by programs that allocate funds to states or other jurisdictions on the basis of poverty, and the Department of Health and Human Services (HHS) will continue to derive Poverty Income Guidelines from the "official" Census Bureau measure. Many experts consider the "official" poverty measure to be flawed and outmoded. In 1990, Congress commissioned a study on how poverty is measured in the United States, resulting in the National Academy of Sciences (NAS) convening a 12-member expert panel to study the issue. The NAS panel issued a wide range of specific recommendations to develop an improved statistical measure of poverty in its 1995 report M easuring Poverty: A New Approach . In late 2009, the Office of Management and Budget (OMB) formed an Interagency Technical Working Group (ITWG) to suggest how the Census Bureau, in cooperation with the Bureau of Labor Statistics (BLS), should develop a new Supplemental Poverty Measure, using the NAS expert panel's recommendations as a starting point. Referencing the work of the ITWG, the Department of Commerce announced in March 2010 that the Census Bureau was developing a new Supplemental Poverty Measure, as "an alternative lens to understand poverty and measure the effects of anti-poverty policies," with the intention that the new measure "will be dynamic and will benefit from improvements over time based on new data and new methodologies." The SPM is intended to address a number of weaknesses of the "official" measure. Criticisms of the "official" poverty measure raised by the NAS expert panel include the following: The "official" poverty measure, by counting only families' total cash, pre-tax income as a resource in determining poverty status, ignores a host of government programs and policies that affect the disposable income families may actually have available. For example, the official measure ignores the effects of payroll taxes paid by families, and tax benefits they may receive such as the EITC and the Child Tax Credit. It ignores a variety of in-kind benefits, such as SNAP benefits and free or reduced-price lunches under the National School Lunch Program, that free up resources to meet other needs. Similarly, it ignores housing subsidies that help make housing more affordable. The "official" poverty income thresholds used in determining families' and individu als' poverty status, devised in the early 1960s, have changed little since . Except for minor technical changes and adjustments for price inflation, poverty income thresholds have essentially been frozen in time, reflecting living standards of a half-century ago. The "official" poverty measure does not take into account necessary work-related expenses, such as child care and transportation costs that are associated with getting to work. Child care expenses are much more common today than when the "official" poverty measure was originally developed, as mothers' labor force participation has since increased. The "official" poverty measure does not take into account medical expenses that individuals and families may incur , affecting their ability to meet other basic needs. These costs, which tend to vary by age, health status, and insurance coverage of individuals, may differentially affect families' abilities to meet other basic needs, especially given rising health care costs. The "official" poverty measure does not take into account changing family situations, such as cohabitation among unmarried couples, or child support payments. The "official" poverty measure does not adjust for differences in prices across geographic areas, which may affect the cost of living from one area to another. The ITWG, using the NAS-panel recommendations as a starting point, suggested an approach to developing the SPM that addressed how income thresholds should be set and resources counted in measuring poverty. Conceptual differences between the "official" and supplemental poverty measures are summarized in Table 6 . The SPM incorporates a more comprehensive income/resource definition than that used by the "official" poverty measure, including in-kind benefits (e.g., SNAP) and refundable tax credits (e.g., EITC). It also expands upon the traditional family definition based on blood, marriage, and adoption to include cohabiting partners and their family relatives as part of a broader economic unit for assessing poverty status. The SPM subtracts necessary expenses (i.e., taxes, work-related expenses including child-care, child support paid, medical out-of-pocket [MOOP] expenses) from resources to arrive at a measure of an economic unit's disposable income/resources that may be applied to a standard of need based on food, clothing, shelter, and utilities (FCSU), plus "a little bit more" for everything else. The SPM income/resource thresholds are initially set at a range in the distribution (30 th to 36 th percentile) of what reference families (families with exactly two children) actually spend on FCSU. Separate thresholds are derived for homeowners with a mortgage and those without a mortgage, and for renters. Thresholds are adjusted for price differences in housing costs by geographic area (metropolitan and nonmetropolitan areas in a state). Thresholds for economic units other than initial reference units (i.e., those with exactly two children) are adjusted upwards or downwards for the number of adults and number of children in the unit. As described earlier, the "official" U.S. poverty measure measures cash—pre-tax—income against income thresholds that vary by family size and composition. The thresholds were derived from research that showed that the average U.S. family spent one-third of its pre-tax income on food, based on a USDA 1955 Food Consumption Survey. After pricing minimally adequate food plans for families of varying sizes and compositions, poverty thresholds were derived by multiplying the cost of those food plans by a factor of three (i.e., one-third of the thresholds were assumed to address families' food needs, and two-thirds addressed everything else). The thresholds, established in 1963, are adjusted each year for price inflation. The SPM poverty thresholds are based on the NAS panel recommendation that thresholds be based on a point in the empirical distribution that "reference" families spend on food, clothing, shelter, and utilities (FCSU). Based on ITWG's suggestions, the Census Bureau derives FCSU thresholds for "reference" units with exactly two children, between the 30 th and 36 th percentile of what such units spend on FCSU, averaged over five years of survey data from the BLS Consumer Expenditure (CE) Survey. Whereas "official" poverty thresholds are based on initial thresholds adjusted for price changes over time, the SPM thresholds are based on changes in reference consumer units' actual spending on FCSU over time. Following the ITWG's suggestion, three separate sets of thresholds are established: one set for homeowners with a mortgage, another set for homeowners without a mortgage, and a third set for renters. Following NAS panel recommendations, the ITWG suggested that initial poverty thresholds based on FCSU be multiplied by a factor of 1.2, to account for all other needs (e.g., household supplies, personal care, non-work-related transportation). Additionally, thresholds are adjusted upward and downward based on SPM reference unit size using a three parameter equivalence scale based on the number of adults and children in the unit. Lastly, the thresholds are adjusted to account for variation in geographic price differences across metropolitan and nonmetropolitan areas, by state, based on differences in median housing costs across areas relative to the nation. The geographic housing cost adjustment is applied to the shelter portion of the FCSU-based thresholds. Figure 8 depicts poverty threshold levels under the "official" poverty measure and under the Research SPM for a resource unit consisting of two adults and two children. The figure shows that in 2013, the official poverty threshold for a family with two adults and two children was $23,624. In comparison, for a similar family, the SPM poverty threshold for homeowners with a mortgage was $25,639, $2,015 (8.5%) above the official poverty threshold, and for homeowners without a mortgage, $21,397, or $2,227 (9.4%) below the official threshold. The SPM poverty threshold for renters was $25,144 or $1,520 (6.4%), above the official measure. As discussed earlier, the "official" poverty measure is based on counting families' and unrelated individuals' pre-tax cash income against poverty thresholds that vary by family size and composition. The SPM expands upon the pre-tax cash income resource definition used by the "official" measure to develop a more comprehensive measure of "disposable" income that SPM units might use to help meet basic needs (i.e., poverty thresholds based on FCSU, plus "a little more"). The SPM resource measure includes the value of a number of federal in-kind benefits, such as Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamp) benefits; free and reduced-price school lunches; nutrition assistance for women, infants, and children (WIC); federal housing assistance; and energy assistance under the Low Income Home Energy Assistance Program (LIHEAP). It also includes federal tax benefits administered by the Internal Revenue Service, such as the Earned Income Tax Credit (EITC) and the partially refundable portion of the Child Tax Credit (CTC), known as the Additional Child Tax Credit (ACTC). The SPM subtracts a number of necessary expenses from SPM units' resources to arrive at a measure of "disposable" income that units might have available to meet basic needs. Necessary expenses subtracted from resources on the SPM include child support paid; estimated federal, state, and local income taxes; estimated social security payroll (FICA) taxes; estimated work-related expenses other than child care (e.g., work-related commuting costs, purchase of uniforms or tools required for work); reported work-related child care expenses; and reported medical out of pocket (MOOP) expenses, including the employee share of health insurance premiums plus other medically necessary items such as prescription drugs and doctor copayments. The effects of counting each of these resources and expenses in the SPM are assessed later in this report (see " Marginal Effects of Counting Specified Resources and Expenses on Poverty under the SPM "). In 2013, the overall poverty rate was somewhat higher under the SPM (15.5%) than under an " adjusted official" poverty measure (14.6%)— "adjusted" to include unrelated children typically excluded from the "official" measure. In 2013, an estimated 48.671 million people were poor under the SPM, 2.9 million people more than the 45.748 million estimated under the "official" (adjusted) poverty measure. The remainder of this report focuses on differences in poverty rates among and between various groups under the two measures. The SPM yields a very different impression of the incidence of poverty with respect to age than that portrayed by the "official" measure. Figure 9 compares poverty rates by age group under the SPM and the "official" measure in 2013. The poverty rate for adults ages 18 to 64 is somewhat higher under the SPM than under the "official" measure (15.4% compared to 13.6%). The figure shows that the poverty rate for children (under age 18) is lower under the SPM than under the "official" measure (16.4% compared to 20.4%). In contrast, the poverty rate among persons age 65 and over is much higher under the SPM than under the "official" measure (14.6% compared to 9.5%). Although the child poverty rate is lower under the SPM than under the "official" measure, and the aged poverty rate is considerably higher, the incidence of poverty among children still exceeds that of the aged under the SPM, as it did under the "official" measure. The SPM paints a much different picture of poverty among the aged than that conveyed by the "official" measure. As will be shown later, much of the difference between the aged poverty rate measured under the SPM compared to the "official" measure is attributable to the effect of medical expenses on the disposable income among aged units to meet basic needs represented by the SPM resource thresholds. As noted above, the SPM expands the definition of the economic unit considered for poverty measurement purposes over that used under the "official" poverty measure. The "official" poverty measure groups all co-residing household members related by marriage, birth, or adoption as sharing resources for purposes of poverty determination. Unrelated individuals, whether living alone as a single person household or with other unrelated members, are treated as separate economic units under the "official" poverty measure. The "official" measure also excludes unrelated children under age 15 from the universe for poverty determination. As noted earlier, the "adjusted official" poverty measure presented in this section of the report includes unrelated children, resulting in a 14.6% poverty rate as opposed to the published rate of 14.5% in 2013. The SPM expands the economic unit used for poverty determination beyond that used by the "official" measure. The SPM assesses the relationship of unrelated household members to others in the household to determine whether they will be joined with others to construct expanded economic units. For example, the SPM combines unrelated co-residing household members age 14 and older who are not married and who identify each other as boyfriend, girlfriend, or partner as cohabiting partners. Cohabiting partners, as well as any of their co-resident family members, are combined as an economic unit under the SPM. The SPM also combines unmarried co-residing parents of a child living in the household as an economic unit, even if the parents do not identify as a cohabiting couple. Any unrelated children who are under age 15 and are not foster children are assigned to the householder's economic unit, as are foster children under the age of 22. Additionally, the SPM combines children over age 18 living in a household with a parent, and any younger children of the parent, as an economic unit. Under the "official" poverty measure, a child age 18 and over is treated as an unrelated individual, and the child's parent is also treated as an unrelated individual if no other family members are present, or as an unrelated subfamily head if a spouse or other children (under age 18) are also residing in the household. In 2013, an estimated 27.953 million persons, 8.9% of the 313.395 million persons represented in the CPS/ASEC, were classified as either joining an economic unit or having members added to their economic unit under the SPM measure, compared to how they would have been classified under the "official" measure's economic unit definition. Combining the resources of these additional household members had the effect of reducing poverty under the SPM measure, compared to the "official" measure, in 2013. Figure 10 shows poverty rates in 2013 by type of economic unit. Persons identified as being in a married-couple unit, or in female- or male-householder units, are persons in those economic units whose members remained unchanged under the SPM compared to the "official" poverty measure. Persons who were added to an economic unit, or were part of an economic unit that had members added to it under the SPM definition, are labeled as being in a "new SPM unit." The figure shows that poverty rates for persons in married-couple units, and in male-householder units, are higher under the SPM than under the "official" poverty measure (9.5% versus 6.7% for persons in married-couple units, and 23.1% versus 18.7% for persons in male-householder units). Poverty rates for persons living in female-householder units did not statistically differ from one another, with about three out of ten persons in such units considered poor under either measure. In contrast, poverty among persons who were members of "new SPM units" fell by about two-fifths, from 31.4% under the "official" measure to 17.9% under the SPM. Figure 11 compares poverty rates in 2013 under the SPM with the "official" measure by Census region. The figure shows that poverty rates in the West are considerably higher (26% higher) under the SPM (18.7%) than under the "official" measure (14.8%). Poverty rates are about 11% higher in the Northeast under the SPM (14.3%) compared to the "official" measure (12.8%). Poverty rates in the Midwest are lower under the SPM than under the "official" measure, and in the South, essentially equal. The differences in poverty rates within and between regions based on the SPM compared to the "official" measure are most directly due to the SPM's geographic price adjustments to poverty thresholds for differences in the cost of housing in metropolitan and nonmetropolitan areas across states. The cost of housing tends to be higher in the West and Northeast, causing their poverty rates to rise under the SPM relative to the "official" measure and relative to the South and Midwest, where housing tends to be less expensive. Figure 12 depicts poverty rates by residence in metropolitan (principal city, and outside principal city [i.e., "suburban"]) and nonmetropolitan areas in 2013. The figure shows that under the SPM, the poverty rate for persons living in Metropolitan Statistical Areas (MSAs) (15.9%) is somewhat higher than under the "official" measure (14.3%), whereas for persons living outside MSAs, the poverty rate is lower under the SPM (13.2%) than under the "official" measure (16.2%). Again, this most likely reflects differences in the cost of housing between MSAs and non-MSAs. Within MSAs, poverty rates are higher for persons living within principal cities under both measures than for people living outside them in "suburban" or "ex-urban" areas. Figure 13 depicts states according to whether the state's SPM poverty rate statistically differs from its "official" poverty rate. Estimates are based on three-year (2011 to 2013) averages of CPS/ASEC data. Three years of data are combined in order to improve the statistical reliability of CPS/ASEC estimates at the state level. The figure shows that 13 states (Alaska, California, Connecticut, Florida, Hawaii, Illinois, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New York, and Virginia) and the District of Columbia had higher poverty rates under the SPM than under the "official" measure. Among the 13 states with higher SPM poverty rates than their respective "official" poverty rate, only Illinois and Nevada were inland, and with the exception of Florida and Virginia, none were in the South. The figure shows that the SPM poverty rate was not statistically different than the "official" poverty rate in 11 states (Arizona, Colorado, Delaware, Georgia, Minnesota, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, and Washington). Among the 26 remaining states in which their SPM poverty rates were lower than their respective "official" poverty rates, nearly all (with Maine being the exception) were either in the South, or inland. Figure 14 and Figure 15 depict poverty rates by state under the official poverty measure and the SPM based on three years of CPS/ASEC data. Estimates are based on three-year (2011 to 2013) averages to improve the statistical reliability of estimates attainable from CPS/ASEC data at the state level. The two figures differ only in terms of the order in which states are sorted. In Figure 14 , states are sorted from lowest to highest based on their respective "official" poverty rate point estimates, whereas in Figure 15 states are sorted from lowest to highest based on their respective SPM poverty rate point estimates. In neither figure are precise rankings of states possible because of the depicted margin of error around each state's estimate. Within a state, a statistically significant difference between a state's official poverty rate and its SPM poverty rate is signified by solid-filled markers, indicating the point estimate under each measure, and a line connecting them, indicating the estimated difference (which is also shown in parentheses after each state name). The figures show the magnitude of the difference among the 13 states and the District of Columbia that had statistically significant higher poverty rates under the SPM than under the "official" measure, as well as for the 26 states in which the state's SPM rate was lower than its "official" poverty rate and the 11 states in which the incidence of poverty under the two measures did not differ statistically. Differences in state poverty rates based on the SPM compared to the "official" measure may be due to a variety of factors. Geographic adjustments to SPM poverty income thresholds to account for differences in housing costs tend to result in higher poverty rates in areas with higher-priced housing than in areas with lower-priced housing. The mix of housing tenure (e.g., owner occupied, with or without a mortgage, renter occupied) may account for some of the difference between "official" and SPM poverty rates, within and between areas. Similarly, taxes may differ among areas. Also, populations may differ across areas in terms of household composition (e.g., share of households with cohabiting partners). The composition of the population based on age, or health insurance status, may also affect the incidence of SPM poverty relative to "official" poverty within and between geographic areas, by affecting medical out of pocket spending (MOOP), which is considered by SPM in estimating poverty. Among the states with a statistically significant increase in poverty under the SPM, California's poverty rate increased by more than any other state's, increasing from 16.0% under the "official" measure to 23.4% under the SPM, or 7.4 percentage points. Under the "official" measure, California's poverty rate was substantially above the U.S. rate (14.6%), but under the SPM, California's poverty rate is estimated as the highest in the nation. Other states with comparatively large increases in their poverty rates (in the four to five percentage point range) under the SPM compared to the "official" measure include Florida (a 15.1% to 19.1% increase), Hawaii (an increase from 12.4% to 18.4%), and New Jersey (a 10.7% to 15.9% increase). Four states had decreases in their SPM poverty rate compared to their "official" rate in the four to five percentage point range. Among the states with the highest "official" poverty rates, New Mexico and Mississippi, (21.5% and 20.7%, respectively) both have estimated SPM poverty rates (16.0% and 15.3%, respectively) statistically tied with U.S. SPM rate (15.9%). Kentucky and West Virginia's "official" poverty rates (18.1% and 17.4%, respectively) are well above the "official" U.S. rate (14.9%), but their SPM poverty rates (13.8% and 13.2%) fall well below the U.S. SPM rate (15.9%). Figure 16 focuses strictly on the SPM, examining the marginal effects on poverty rates attributable to the inclusion of each selected income/resource or expenditure element on the measure. The marginal effects of each element on the SPM are displayed by age group. Elements that marginally contribute resources, and thereby have a poverty reducing effect when included in the SPM, are ranked from left to right in terms of their effect on poverty reduction among all persons. Similarly, expenditure elements, which are subtracted from resources and thereby marginally increase poverty as measured by the SPM, are ranked from left to right by their marginal poverty increasing effects on all persons. The figure shows, for example, that the EITC has a greater poverty reducing effect than any of the other depicted resource elements. Overall, the EITC lowers the SPM poverty rate for all persons by 2.9 percentage points. The EITC is followed by SNAP benefits (1.6 percentage point reduction), housing subsidies (1.3 percentage point reduction), school lunch (0.5 percentage point reduction), and WIC (0.2 percentage point reduction) and LIHEAP (0.1 percentage point reduction). In contrast, on the expenditure side, child support paid to members outside the household has a relatively small effect on increasing the overall poverty rate. Federal income taxes before considering refundable credits, such as the EITC (counted on the resource side), result in an increase in overall poverty of 0.4 percentage points. FICA payroll taxes have a larger effect on marginal poverty (1.5 percentage point increase) than federal income taxes, as do work expenses (1.9 percentage points). Among all of the expense elements presented, medical out of pocket expenses (MOOP) contribute to the largest increase in poverty (3.5 percentage point increase for all persons). Among the three age groups, the additional resources included in the SPM have a greater effect on reducing poverty among children (persons under age 18) and poverty among working age adults (ages 18 to 64) than on the aged (age 65 and older), with the exception of housing subsidies, which reduce the aged poverty rate by about the same amount as that of children. The EITC has a greater effect of reducing poverty among children (6.4 percentage point reduction) than any of the other added SPM resources. On the expenditure side, FICA payroll taxes and work expenses have a greater effect on increasing poverty among children (due to a working parent) and non-aged adults than on the aged, who are less likely to be in the labor force and incur work-related taxes and expenses. Notably, under the SPM, MOOP expenses contribute to a substantial increase in poverty among the aged, contributing to a 6.3 percentage point increase in their poverty rate. The relative distribution of additional resources and expenses in the SPM by age group helps to explain why poverty among children is lower under the SPM than it is under the "official" measure, whereas it is considerably higher for the aged. Figure 17 shows the distribution of the population by age group according to the degree to which their income and resources fall below or above poverty under the "official" and SPM definitions. The figure breaks out the poor population, depicted by brackets, into the share whose income and resources fall below half of their respective poverty lines (a classification sometimes referred to as "deep poverty") and the remainder. Others are categorized by the extent to which their income/resources exceed poverty under the two definitions, with those who fall below twice the poverty line also demarcated by brackets. The figure shows, for example, that the share of children in "deep poverty" under the SPM is considerably lower than under the "official" measure (4.4% compared to 9.3%). As shown earlier, the SPM child poverty rate (16.4%) is lower than the "official" rate (20.3%). However, under the SPM, a much greater share of children live in "families" with income/resources between one and two times the poverty line than under the "official" measure (38.2% compared to 22.5%, respectively). Altogether, well over half of the children live in "families" having income/resources below twice the poverty line under the SPM (54.6%) compared to about two-fifths (42.8%) under the "official" measure. Thus, while the SPM appears to result in fewer children being counted as poor than under the "official" measure, under the SPM a greater share than under the "official" measure are concentrated at income levels just above poverty. Among persons age 65 and over, a greater share are poor under the SPM than under the "official" measure, as shown earlier (14.6% compared to 9.5%), and a greater share are in "deep poverty" under the SPM (4.8%) than under the "official" measure (2.7%). In contrast to the "official" measure, under which one-third (33.1%) of the aged have income below 200% of poverty, somewhat under half (45.1%) have income/resources below that level under the SPM. As a research measure, the SPM offers potential for improved insight leading to better understanding of the nature and circumstances of those deemed to be among the nation's most economically and socially vulnerable. The SPM offers the means to better assess the performance of the economy, government policies, and programs with regard to the population's ability to secure sufficient income/resources to be able to meet basic expenditures for food, clothing, shelter, and utilities (plus "a little bit more"). The SPM counts considerably more elderly as poor than does the "official" measure. Medical expenses appear to be the driving factor in increasing poverty among the elderly under the SPM (see Figure 16 ). While not negating the improvement in the poverty status of the aged over the years, based on the "official" measure (see Figure 2 ), the SPM points more directly to the economic vulnerability of the aged, based not on income/resources alone, but rather, medical expenses competing for income that might otherwise be used to meet basic needs (i.e., FCSU plus "a little bit more"). Rising medical costs in society overall and individuals' personal health and insurance statuses pose potential economic risk to the aged being able to meet basic needs, as captured by FCSU-based poverty thresholds. The SPM provides additional insight that poverty reduction among the elderly depends not only on improving income, but also on their ability to reduce exposure to high medical expenses through "affordable" insurance. Rising medical costs in society also place the aged at increased risk of poverty under the SPM. It is worth noting that the SPM does not consider financial assets, other than interest, dividends, and annuity income from those assets, nor non-liquid assets (e.g., home equity) in determining poverty status. The SPM therefore does not address the means or extent to which the aged might tap those assets to meet medical or other needs. The SPM results in fewer children being counted as poor than under the "official" measure. Still, the incidence of child poverty under the SPM, as under the "official" measure, exceeds that of the aged, but by a much slimmer margin (see Figure 9 ). Work-based supports, which both encourage work and help to offset the costs of going to work, appear be especially important to families with children, as captured by the SPM. The EITC, not counted under the "official" measure, significantly reduces child poverty as measured by the SPM, helping to offset taxes and work-related expenses working families with children incur (also captured by the SPM, but not under the "official" measure) (see Figure 16 ). The lack of safe, reliable, and affordable child care may limit parents' attachment to the labor force, contributing to poverty by reducing earnings that parents might otherwise secure. The SPM recognizes child care as a necessary expense many families face in their decisions relating to work by subtracting work-related child care expenses from income/resources that might otherwise go to meeting basic needs (i.e., FCSU plus "a little bit more"). As a consequence, the SPM should be sensitive to measuring the effects of child care programs and policies on child care affordability and poverty. The SPM captures the policy effects of assisting the poor through the provision of in-kind benefits, as opposed to just cash, whereas the "official" measure does not. For example, SNAP benefits, not captured under the "official" poverty measure, appear to have a sizeable effect in reducing child poverty under the SPM. Additionally, the expansion of the economic unit under the SPM to include cohabiting partners and their relatives may also contribute to lower child poverty rates under the SPM than under the "official" poverty measure, which is based on family ties defined by blood, marriage, and adoption. Appendix A. U.S. Poverty Statistics: 1959-2013 Appendix B. Metropolitan Area Poverty Estimates Appendix C. Poverty Estimates by Congressional District

In 2013, 45.3 million people were counted as poor in the United States under the official poverty measure—a number statistically unchanged from the 46.5 million people estimated as poor in 2012. The poverty rate, or percent of the population considered poor under the official definition, was reported at 14.5% in 2013, a statistically significant drop from the estimated 15.0% in 2012. Poverty in the United States increased markedly over the 2007-2010 period, in tandem with the economic recession (officially marked as running from December 2007 to June 2009), and remained unchanged at a post-recession high for three years (15.1% in 2010, and 15.0% in both 2011 and 2012). The 2013 poverty rate of 14.5% remains above a 2006 pre-recession low of 12.3%, and well above an historic low rate of 11.3% attained in 2000 (a rate statistically tied with a previous low of 11.1% in 1973). The incidence of poverty varies widely across the population according to age, education, labor force attachment, family living arrangements, and area of residence, among other factors. Under the official poverty definition, an average family of four was considered poor in 2013 if its pre-tax cash income for the year was below $23,834. The measure of poverty currently in use was developed some 50 years ago, and was adopted as the "official" U.S. statistical measure of poverty in 1969. Except for minor technical changes, and adjustments for price changes in the economy, the "poverty line" (i.e., the income thresholds by which families or individuals with incomes that fall below are deemed to be poor) is the same as that developed nearly a half century ago, reflecting a notion of economic need based on living standards that prevailed in the mid-1950s. Moreover, poverty as it is currently measured only counts families' and individuals' pre-tax money income against the poverty line in determining whether or not they are poor. In-kind benefits, such as benefits under the Supplemental Nutrition Assistance Program (SNAP, formerly named the Food Stamp program) and housing assistance, are not accounted for under the "official" poverty definition, nor are the effects of taxes or tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC). In this sense, the "official" measure fails to capture the effects of a variety of programs and policies specifically designed to address income poverty. A congressionally commissioned study conducted by a National Academy of Sciences (NAS) panel of experts recommended, some 20 years ago, that a new U.S. poverty measure be developed, offering a number of specific recommendations. The Census Bureau, in partnership with the Bureau of Labor Statistics (BLS), has developed a Supplemental Poverty Measure (SPM) designed to implement many of the NAS panel recommendations. The SPM is to be considered a "research" measure, to supplement the "official" poverty measure. Guided by new research, the Census Bureau and BLS intend to improve the SPM over time. The "official" statistical poverty measure will continue to be used by programs that use it as the basis for allocating funds under formula and matching grant programs. The Department of Health and Human Services (HHS) will continue to issue poverty income guidelines derived from "official" Census Bureau poverty thresholds. HHS poverty guidelines are used in determining individual and family income eligibility under a number of federal and state programs. Estimates from the SPM differ from the "official" poverty measure and are presented in a final section of this report.

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Trade plays a critical role in the U.S. agricultural sector. USDA estimates that exports account for about 20% of total U.S. agricultural production. Because the United States plays such an important role in so many agricultural markets, its farm policy is often subject to intense scrutiny both for compliance with current WTO rules and for its potential to diminish the breadth or impede the success of future multilateral negotiations—in part because a farm bill locks in U.S. policy behavior for an extended period of time during which the United States would be unable to accept any new restrictions on its domestic support programs. Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm legislation since the 1930s. Each successive farm bill usually involves some modification or replacement of existing farm programs. The current omnibus farm bill, the Agricultural Act of 2014 ( P.L. 113-79 ; the 2014 farm bill), which was signed into law on February 7, 2014, made several substantial changes to the previous farm safety net of the 2008 farm bill. Many of the new farm programs became operational for the current 2014 crop year. Most of the 2014 farm bill agricultural provisions will not expire until September 30, 2018, or with the 2018 crop year. Ultimately the current farm bill will either be replaced with new legislation, temporarily extended, or allowed to lapse and be replaced with "permanent law"—a set of essentially mothballed provisions for the farm commodity programs that date from the 1930s and 1940s. The most recent U.S. notification to the WTO of domestic support outlays (made on December 8, 2014) is for the 2012 crop year, which was governed by farm programs of the 2008 farm bill. A potential major constraint affecting U.S. agricultural policy choices is the set of commitments made as part of membership in the World Trade Organization (WTO) , with its various agreements governing agriculture and trade, including dispute settlement. With respect to disciplines governing domestic agricultural support, two WTO agreements are paramount—the Agreement on Agriculture (AoA) and the Agreement on Subsidies and Countervailing Measures (SCM). The AoA sets country-specific aggregate spending limits on the most market-distorting policies. It also defines very general rules covering trade among member countries. In general, domestic policies or programs found to be in violation of WTO rules may be subject to challenge by another WTO member under the WTO dispute settlement process. If a WTO challenge occurs and is successful, the WTO remedy likely would imply the elimination, alteration, or amendment by Congress of the program in question to bring it into compliance. Since most governing provisions over U.S. farm programs are statutory, new legislation could be required to implement even minor changes to achieve compliance. As a result, designing farm programs that comply with WTO rules can avoid potential trade disputes. This report provides a brief overview of the WTO commitments most relevant for U.S. domestic farm policy. A key question that policymakers ask of virtually every new farm proposal is, how will it affect U.S. commitments under the WTO? The answer depends not only on cost, but also on the proposal's design and objectives, as described below. Under the AoA, WTO member countries agreed to general rules regarding disciplines on domestic subsidies (as well as on export subsidies and market access). The AoA's goal was to provide a framework for the leading members of the WTO to make changes in their domestic farm policies to facilitate more open trade. The WTO's AoA categorizes and restricts agricultural domestic support programs according to their potential to distort commercial markets. Whenever a program payment influences a producer's behavior it has the potential to distort markets (i.e., to alter the supply of a commodity) from the equilibrium that would otherwise exist in the absence of the program's influence. Those outlays that have the greatest potential to distort agricultural markets—referred to as amber box subsidies—are subject to spending limits. In contrast, more benign outlays (i.e., which cause less or minimal market distortion) are exempted from spending limits under green box, blue box, de minimis , or special and differential treatment exemptions. The AoA contains detailed rules and procedures to guide countries in determining how to classify its programs in terms of which are most likely to distort production and trade; in calculating their annual cost, measured by the Aggregate Measure of Support (AMS) index; and in reporting the total cost to the WTO. Specifically, the WTO uses a traffic light analogy to group programs. Green Box programs are minimally or non-trade distorting and not subject to any spending limits. Blue Box programs are described as production-limiting. They have payments that are based on either a fixed area or yield, or a fixed number of livestock, and are made on less than 85% of base production. As such, blue box programs are also not subject to any payment limits. Amber Box programs are the most market-distorting programs and are subject to a strict aggregate, annual spending limit. The United States is subject to a spending limit of $19.1 billion in amber box outlays subject to certain de minimis exclusions. De minimis exemptions are domestic support spending that is sufficiently small—relative to either the value of a specific product or total production—to be deemed benign. De minimis exemptions are limited by 5% of the value of production—either total or product-specific. Prohibited (i.e., Red Box) programs include certain types of export and import subsidies and non-tariff trade barriers that are not explicitly included in a country's WTO schedule or identified in the WTO legal texts. These AoA classifications are described in more detail below in the section entitled, " Questions for Evaluating WTO Compliance of Domestic Farm Spending ." The most recent U.S. notification to the WTO of its domestic farm program spending is provided in the Appendix . To the extent that domestic farm policy effects spill over into international markets, U.S. farm programs are also subject to certain rules under the Agreement on Subsidies and Countervailing Measures (SCM). The SCM details rules for determining when a subsidy is "prohibited" (as in the case of certain export and import-substitution subsidies) and when it is "actionable" (as in the case of certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns). The key aspect of SCM commitments is the degree to which a domestic support program engenders market distortion. Based on precedent from past WTO decisions, several criteria are important in establishing whether a subsidy could result in significant market distortions: the subsidy constitutes a substantial share of farmer returns or covers a substantial share of production costs; the subsidized commodity is important to world markets because it forms a large share of either world production or world trade; and a causal relationship exists between the subsidy and adverse effects in the relevant market. The SCM evaluates the "market distortion" of a program or policy in terms of its measurable market effects on the international trade and/or market price for the affected commodity: did the subsidy displace or impede the import of a like product into the subsidizing member's domestic market; did the subsidy displace or impede the exports of a like product by another WTO member country other than the subsidizing member; did the subsidy (via overproduction and resultant export of the surplus) result in significant price suppression, price undercutting, or lost sales in the relevant commodity's international market; and did the subsidy result in an increase in the world market share of the subsidizing member? For any farm program that is challenged under the SCM, a WTO dispute settlement panel will review the relevant trade and market data and make a determination of whether the particular program being challenged resulted in a significant market distortion. Under WTO rules, challenged subsidies that are found to be prohibited by a WTO dispute settlement panel must be stopped or withdrawn "without delay" in accordance with a timetable laid out by the panel; otherwise the member nation bringing the challenge may take appropriate countermeasures. Similarly, actionable subsidies, if successfully challenged, must be withdrawn or altered so as to minimize or eliminate the distorting aspect of the subsidy, again as laid out by a WTO panel or as negotiated between the two disputing parties. The WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) provides a means for WTO members to resolve disputes arising under WTO agreements. WTO members must first attempt to settle their dispute through consultations, but if these fail, the member initiating the dispute may request that a panel examine and report on its complaint. The DSU provides for Appellate Body review of panel reports, panels to determine if a defending member has complied with an adverse WTO decision by the established deadline in a case, and possible retaliation if the defending member has failed to do so. As of April 8, 2015, 492 complaints have been filed under the DSU, with nearly one-half (232) involving the United States as a complainant or defendant. The Office of the United States Trade Representative (USTR) represents the United States in WTO disputes. The United States currently is committed, under the AoA, to spend no more than $19.1 billion per year on amber box trade-distorting support. The WTO's AoA procedures for classifying and counting trade-distorting support are somewhat complex; however, four questions might be asked to determine whether a particular farm measure will cause total U.S. domestic support to be above or below the $19.1 billion annual AMS limit. A subsequent fifth question may be asked to ascertain whether AoA-compliant outlays are also SCM-compliant. 1. Can the measure be classified as a "green box" policy —one presumed to have the least potential for distorting production and trade and therefore not counted as part of the AMS? 2. Can it be classified as a "blue box" policy —that is, a production-limiting program that receives a special exemption and therefore is also not counted as part of the AMS? 3. If it is a potentially trade-distorting "amber box" policy , can support still be excluded from the AMS calculation under the so-called 5% de minimis exemption (explained later in more detail) because total support is no more than 5% of either: a. the value of total annual production if the support is non-product specific, or b. the value of annual production of a particular commodity if the support is specific to that commodity? 4. If such support exceeds the de minimis 5% threshold (and thus cannot be exempted), when it is added to all other forms of non-exempt amber box support is total U.S. AMS still beneath the $19.1 billion limit? 5. If a program is fully compliant with the AoA rules and limits, does its support result in price or trade distortion in international markets that, in turn, cause adverse effects upon another WTO member? If so, then it may be subject to challenge under SCM rules. No limits are placed on green box spending, since it is considered to be minimally or non-trade distorting. To qualify for exemption in the green box, a program must meet two general criteria, as well as a set of policy-specific criteria relative to the different types of agriculture-related programs. The two general criteria are: 1. It must be a publicly funded government program (defined to include either outlays or forgone revenue) that does not involve transfers from consumers. 2. It must not have the effect of providing price support to producers. In addition, every green-box-qualifying program must comply with at least one of the following criteria and conditions specific to the program itself. A "general service" benefitting the agricultural or rural community in general cannot involve direct payments to producers or processors. Such programs can include research; pest and disease control; training, extension, or advisory services; inspection services, including for health, safety, grading, or standardization; marketing and promotion services, including information advice and promotion (but not spending for unspecified purposes that sellers could use to provide price discounts or other economic benefits to purchasers); and generally available infrastructure like utility, transportation, or port facilities, water supply facilities, or other capital works construction. Public acquisition (at current market prices) and stockholding of products for food security must be integral to a nationally legislated food security program and be financially transparent. Domestic food aid is to be based upon clearly defined eligibility and nutritional criteria, be financially transparent, and involve government food purchases at current market prices. "Decoupled" income support is to use clearly defined eligibility criteria in a specified, fixed base period; not be related in any way after the base period to (a) domestic or world prices, (b) type or volume of crop or livestock production, or (c) factors of production; and, further, not be contingent on any production in exchange for payments. Government financial participation in an income insurance or income safety net program should define eligibility as agricultural income loss exceeding 30% of average gross income (or equivalent in net income terms) in the preceding three-year period (or preceding five-year period, excluding the highest and lowest years—the so-called Olympic average), with such payment compensating for less than 70% of the income loss in year of eligibility, and payments based solely on income, not production, price, or inputs. Total annual payments under this and natural disaster relief (see next paragraph) cannot exceed 100% of a producer's total loss. Payments (whether direct or through government crop insurance) for natural disaster relief are to use eligibility based on formal government recognition of the disaster. Payments are to be determined by a production loss exceeding 30% of production in the preceding three-year (or five-year Olympic average) period, apply only to losses of income, livestock, land, or other production factors, and cannot exceed the total replacement cost or require types/quantities of future production. Total annual payments under this and the income insurance or safety net measure cannot exceed 100% of a producer's total loss. Structural adjustment through producer retirement shall tie eligibility to clearly defined criteria in programs to facilitate producers' "total and permanent" retirement from agricultural production or their movement into nonagricultural activities. Structural adjustment through resource retirement shall be determined through clearly defined programs designed to remove land, livestock, or other resources from marketable production, with payments (a) conditioned on land being retired for at least three years and on livestock being permanently disposed; (b) not contingent upon any alternative specified use of such resources involving marketing agricultural production; and (c) not related to production type/quantity, or to prices of products using remaining productive resources. Structural adjustment provided through investment aids must be determined by clearly defined criteria for programs assisting financial or physical restructuring of a producer's operations in response to objectively demonstrated structural disadvantages (and may also be based on a clearly defined program for "re-privatization" of agricultural land). The amount of payments (a) cannot be tied to type/volume of production, or to prices, in any year after the base period; (b) shall be provided only for a time period needed for realization of the investment in respect of which they are provided; (c) cannot be contingent on the required production of designated products (except to require participants not to produce a designated product); and (d) must be limited to the amount required to compensate for the structural disadvantage. Environmental program payments must have eligibility determined as part of a clearly defined government environmental or conservation program, and must be dependent upon meeting specific program conditions, including conditions related to production methods or inputs. Payments must be limited to the extra costs (or loss of income) involved with program compliance. Regional assistance program payments shall be limited only to producers in a clearly designated, contiguous geographic region with definable economic and administrative identity, considered to be disadvantaged based on objective, clearly defined criteria in the law or regulation, which indicate that the region's difficulties are more than temporary. Such payments in any year (a) shall not be related to or based on type/volume of production in any year after the base period (other than to reduce production) or to prices after the base period; (b) where related to production factors, must be made at a degressive rate above a threshold level of the factor concerned; and (c) must be limited to the extra costs or income loss involved in agriculture in the prescribed area. In summary, the above measures are eligible for placement in the green box (i.e., exempted from AMS) as long as they (1) meet general criteria one and two, above; and (2) additionally comply with any criteria specific to the type of measure itself. If these conditions are satisfied, no further steps are necessary; the measure is exempt. However, if not, then the next step is to determine whether it qualifies for the blue box exemption. No limits are placed on blue box spending, in part because it contains safeguards to prevent program incentives from expanding production. To qualify for exemption in the blue box, a program must be a direct payment under a production-limiting program, and must also either: be based on fixed areas and yields, or be made on 85% or less of the base level of production, or, if livestock payments, be made on a fixed number of head. If these conditions are satisfied, the measure is exempt. However, if not, then it is considered to be an amber box policy , and the next step is to determine whether spending is above or below the 5% de minimis rate (see below). The AoA states that developed country members (including the United States) do not have to count, when calculating their total AMS, the value of amber box programs whose total cost is small (or benign) relative to the value of either a specific commodity, if the program is commodity-specific, or the value of total production, if the program is not commodity-specific. In other words, "amber box" (i.e., potentially trade-distorting) policies may be excluded under the following two de minimis exclusions. Product-specific domestic support, whereby it does not exceed 5% of the member's "total value of production of a basic agricultural product during the relevant year." Support provided through all of the measures specific to a product—not just a single measure in question—is tallied to determine whether the 5% level is exceeded. For example, the value of the 2012 U.S. corn crop was $74.3 billion, and 5% of that was $3.8 billion. This compares with corn-specific AMS outlays of $2.7 billion. As a result, the entire $2.7 billion was exempted from inclusion under the AMS limit for the marketing year 2012. In contrast, U.S. sugar support of $1.454 billion for 2012 easily exceeded its 5% product-specific de minimis of $184.8 million (based on total sugar value of $3.7 billion) and, therefore, was counted against the AMS limit. Non-product-specific domestic support, whereby it does not exceed 5% of the "value of the Member's total agricultural production." All non-product-specific support is tallied to determine whether the 5% level is exceeded. For example, the value of 2012 U.S. agricultural production was notified to the WTO as $396.6 billion. The 5% threshold for non-product-specific support was calculated as $19.8 billion. The United States notified outlays of $309.3 million for non-product-specific support in 2012. As a result, the entire $309.3 million was exempted from inclusion under the AMS limit. These provisions are known as the so-called de minimis clause. To reiterate, it is not enough to determine whether a single amber box measure (i.e., one not classified as either green or blue) by itself may be beneath the 5%-of-production-value trigger. Its level of support must be added to the support provided by other non-exempt (amber box) measures. If the cost of any particular measure effectively boosts the total support above 5%, then all such support must be counted toward the U.S. total annual AMS. Finally, all support that fails to qualify for an exemption is added for the year. If total U.S. AMS does not exceed $19.1 billion, the WTO commitment is met. The 2014 farm bill includes a provision, Section 1601(d), that serves as a safety trigger for USDA to adjust program outlays (subject to notification being given to both the House and Senate agriculture committees) in such a way as to avoid breaching the AMS limit ( Figure 1 and Figure 2 ). Through 2012, the most recent year for which the United States has made notifications to the WTO, the United States has never exceeded its AMS limit. The closest approach was in 2000, when the United States notified a total AMS of $16.8 billion. An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a domestic farm support program—comes into play when a domestic farm policy effect spills over into international markets. This is particularly relevant for the United States because it is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, but especially of temperate field crops (which are the main beneficiaries of U.S. farm program support). If a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is compliant with all AoA commitments and agreed-upon spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures (Brazil's WTO case against U.S. cotton programs is a prime example of this). The AoA's structure of varying spending limits across the amber, blue, and green boxes is intentional. By leaving no constraint on spending in the green box while imposing limits on AMS spending, the WTO implicitly encourages countries to design their domestic farm support programs to be green-box-compliant. Negotiations to further reform agricultural trade within the context of the WTO—referred to as the Doha Round of multilateral trade negotiations—began in 2001. They are not expected to be completed in the near future. As lawmakers consider policy options, other countries will be evaluating not only whether, in their view, these options will comply with the U.S. commitments under the AoA, but also how they reflect on the U.S. negotiating position in the Doha Round of talks. The U.S. objective is for negotiations to result in substantial reductions in trade-distorting support and stronger rules that ensure that all production-related support is subject to discipline, while preserving criteria-based "green box" policies that can support agriculture in ways that minimize trade distortions. At the same time, Congress might seek domestic farm policy measures that it can justify as AoA- and SCM-compliant. The last U.S. notification to the WTO was made on December 8, 2014, for the 2012 marketing year and the farm programs of the 2008 farm bill. Following are examples of how various U.S. domestic policies were classified in that notification, along with the associated values. Green Box Policies ($127.5 Billion) The United States notified $127.5 billion in green box outlays, including outlays under the following programs ( Figure 4 ). General Services ($10.3 Billion) State programs for agriculture ($2.4B) Risk Management Agency (RMA) total costs ($1.5B) including: 1. Risk Management Agency (RMA) administrative costs ($0.08B) 2. RMA A&O reimbursements ($1.4B) 3. RMA underwriting gains ($0.0B) Farm Service Agency (FSA) & Natural Resources Conservation Service (NRCS) ($1.0B) Agricultural Research Service ($1.2B) Animal and Plant Health Inspection Service (APHIS) programs ($1.1B) National Institute for Food and Agriculture (NIFA) programs ($1.4B) Food Safety and Inspection Service (FSIS) meat and poultry inspection ($1.0B) Agricultural Marketing Service (AMS) ($0.3B) National Agricultural Statistics Service (NASS) ($0.164B) Economic Research Service (ERS) ($0.08B) Grain Inspection, Packers and Stockyards Administration (GIPSA) ($0.04B) Trade Adjustment Assistance for Farmers (TAA for Farmers) ($0.04B) Domestic Food Aid ($106.8 Billion) Supplemental Nutrition Assistance Program (SNAP) ($80.4B) Child nutrition programs ($18.3B) Special supplemental food program for women, infants, children (WIC) ($6.8B) Section 32 food purchases ($0.8B) Other food assistance programs ($0.4B) Decoupled Income Support ($4.8 Billion) Direct payments ($3.8B) Tobacco quota buyout payments ($1.0B) Payments for Relief from Natural Disasters ($0.344 Billion) Non-insured crop disaster assistance program (NAP) payments ($0.342B) Structural Adjustment Through Investment Aids ($0.135 Billion) Farm credit programs ($0.131B) Environmental Payments ($5.2 Billion) Conservation Reserve Program (CRP) payments ($1.8B) Environmental Quality Incentives Program (EQIP) ($1.4B) Conservation Stewardship Program ($0.9B) Wetland Reserve Program ($0.6B) Farmland Protection Program ($0.145B) Grassland Reserve Program ($0.065B) Blue Box Policies ($0) The United States has not notified any payments under the blue box since 1995 (the first year of WTO notifications). In that year, U.S. blue box notifications consisted entirely of target-price deficiency payments, which ended with 1996 farm law ( P.L. 104-127 ). De Minimis Exclusions ($5.3 Billion) Product-specific de minimis exclusions totaled $5.0 billion in 2012, including certain federal subsidies for commodity-specific crop insurance premiums that were below 5% of the value of production for those specific commodities. Non-product-specific de minimis exclusions of $0.3 billion in 2012 were well below 5% of the total value of U.S. agricultural production of $396.6 billion. Amber Box Policies ($6.9 Billion) Prior to the d e m inimis exclusions, U.S. amber box notifications totaled $12.1 billion, including $11.8 billion of product-specific outlays and $0.3 billion of non-product-specific outlays. However, $5.0 billion in product-specific support and all non-product-specific support of $0.3 billion were exempted from the AMS limit under the d e m inimis exclusions, leaving $6.9 billion in amber box support subject to the $19.1 billion limit. Product-Specific Support ($11.8 Billion) Commodity-specific crop and revenue insurance subsidies ($7.0B) Dairy price support ($2.9B) Sugar price support ($1.5B) Milk Income Loss Contract (MILC) ($0.4B) Marketing loan benefits, including gains from repaying marketing loans at less than the loan rate and loan deficiency payments ($0.0B) Commodity loan-related interest subsidies ($0.087B) Special cotton marketing payments ($0.060B) Average Crop Revenue Election (ACRE) program ($0.003B) Disaster Assistance Programs LIP, LFP, ELAP, and TAP ($0.0B) Non-Product Specific Support ($0.3 Billion) Irrigation subsidies in western states ($0.167B) Grazing programs ($0.054B) Renewable Energy for America Program (REAP) ($0.068B) Biomass Crop Assistance Program (BCAP) ($0.0B) Supplemental Crop Revenue Assurance (SURE) program ($0.0B) Counter-cyclical payments ($0.0B)

Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm bills since the 1930s. Each successive farm bill usually involves some modification or replacement of existing farm programs. A key question likely to be asked of every new farm proposal or program is how it will affect U.S. commitments under the World Trade Organization's (WTO's) Agreement on Agriculture (AoA) and its Agreement on Subsidies and Countervailing Measures (SCM). The United States currently is committed, under the AoA, to spend no more than $19.1 billion annually on those domestic farm support programs most likely to distort trade—referred to as amber box programs and measured by the aggregate measure of support (AMS). The AoA spells out the rules for countries to determine whether their policies—for any given year—are potentially trade-distorting, and how to calculate the costs. An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a farm program—comes into play when a domestic farm policy effect spills over into international markets. The SCM details rules for determining when a subsidy is "prohibited" (e.g., certain export- and import-substitution subsidies) and when it is "actionable" (e.g., certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns). Because the United States is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, the SCM is relevant for most major U.S. agricultural products. As a result, if a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is within agreed-upon AoA spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures. Designing farm programs that comply with WTO rules can avoid potential trade disputes. Based on AoA and SCM rules, U.S. domestic agricultural support can be evaluated against five specific successive questions to determine how it is classified under the WTO rules, whether total support is within WTO limits, and whether a specific program fully complies with WTO rules. 1. Can a program's support outlays be excluded from the AMS total by being placed in the green box of minimally distorting programs? 2. Can a program's support outlays be excluded from the AMS total by being placed in the blue box of production-limiting programs? 3. If amber, will support be less than 5% of production value (either product-specific or non-product-specific) thus qualifying for the de minimis exclusion? 4. Does the total, remaining annual AMS exceed the $19.1 billion amber box limit? 5. Even if a program is found to be fully compliant with the AoA rules and limits, does its support result in price or trade distortion in international markets? If so, then it may be subject to challenge under SCM rules.

govreport

Three need-based student financial aid programs authorized under Title IV of the Higher Education Act of 1965 (HEA)—Federal Supplemental Educational Opportunity Grant (FSEOG) program, the Federal Work-Study (FWS) program, and the Federal Perkins Loan program—are collectively referred to as the "campus-based" programs. These programs are considered campus-based because federal funds are awarded directly to institutions of higher education (IHEs) that administer the programs and provide institutional funds to match the federal funds they receive for them. The campus-based programs are unique in that the mix and amount of aid awarded to students are determined according to institution-specific award criteria, rather than according to non-discretionary award criteria such as those applicable to Pell Grants and Direct Loans. The campus-based programs' authorizations of appropriations, along with many other provisions under the HEA, expired at the end of FY2015. The FSEOG and FWS programs have continued to be funded through annual appropriation bills, most recently through the Continuing Appropriations Act 2018 ( P.L. 115-56 ), which extended funding for the programs through December 8, 2017. The Perkins Loan program was amended and extended through FY2017 under the Federal Perkins Loan Program Extension Act of 2015 (Extension Act; P.L. 114-105 ). The Extension Act prohibits future appropriations for the Perkins Loan program and prohibits an automatic extension of it under the General Education Provisions Act (GEPA; P.L. 90-247, as amended). The campus-based programs are among the oldest of the federal financial aid programs. As federal aid has largely transitioned to a system that allows for "portability" in receipt of student aid, meaning that most forms of aid are made available to students at whichever participating institution a student chooses to attend, the campus-based programs have come to play a relatively smaller role in the federal student aid effort. For example, of the approximately $125 billion of federal aid that was made available to students through programs authorized under the HEA in FY2016, 76% was through the Direct Loan program, 21% through the Pell Grant program, and 2% through the campus-based aid programs. The HEA authorizes most of the federal programs that provide direct financial aid to postsecondary students. As lawmakers consider reauthorization of the HEA, several issues related to the campus-based programs may be considered. These include the extent to which the campus-based programs provide types of aid to students that are not provided via other postsecondary aid programs, whether the current formula for allocating funds to institutions is optimal, and the potential role of the campus-based aid programs in a redesigned federal aid system. Provisions specific to each program, such as requirements for community service under FWS and terms and conditions of Perkins Loans, are also likely to be considered. This report begins with a brief discussion of the history of each of the campus-based programs and the formula used to allocate funds among IHEs participating in them. This is followed by a discussion of institutional and student participation in the programs relative to participation in other federal aid programs. The report concludes with a discussion of issues related to the campus-based programs that might garner attention as the 115 th Congress considers reauthorization of the HEA. For a more complete description of the campus-based programs and trends in participation, refer to CRS Report RL31618, Campus-Based Student Financial Aid Programs Under the Higher Education Act . The campus-based aid programs were among the first of the federally funded student aid programs. Each of the programs was designed to increase access to higher education for students who demonstrated financial need. This section of the report discusses the history of each program and the formula for allocating funds to the institutions. The Federal Perkins Loan program is the oldest of the campus-based aid programs. It was originally enacted under Title II of the National Defense Education Act of 1958 (NDEA; P.L. 85-864), and was established in part as a response to the space-race between the United States and the Soviet Union and concerns over national security. The program authorized participating IHEs to award low-interest rate loans (fixed at 3%) to undergraduate, graduate, and professional students who were enrolled full-time and who demonstrated financial need. These loans were originally known as National Defense Student Loans (NDSLs), and were later known as National Direct Student Loans. When selecting award recipients, IHEs were required to give "special consideration" to those students who demonstrated "superior academic backgrounds" in mathematics, science, engineering, or modern foreign language, or who intended to teach in any elementary or secondary school. NDSL loan amounts, which were also determined by the IHE, could not exceed $1,000 in any academic year or $5,000 over the student's entire postsecondary education career. Loan repayments were deferred for as long as the student attended the institution full-time and for up to three years while the borrower served in the military. Borrowers who worked full-time as teachers in a public elementary or secondary school could have 50% of their loan principal and interest repayments cancelled. Repayments were also cancelled for borrowers who died or became permanently and totally disabled. The program was incorporated into the HEA through the Education Amendments of 1972 (P.L. 92-318) and was later renamed the Federal Perkins Loan program by amendments made through the Higher Education Amendments of 1986 ( P.L. 99-498 ). When originally enacted, the appropriations for the program were authorized through FY1966. Funds for the program were allocated to participating institutions as a Federal Capital Contribution (FCC) that could not exceed $250,000 during any fiscal year. Institutions were required to provide an institutional capital contribution (ICC) of at least $1 for each $9 the IHE received in FCC. After FY1966, it was hoped the program would become self-sustaining because institutions would be required to use repayments on loans awarded to students before 1966 to fund loans in future years. The idea was that funds from loan repayments would provide sufficient amounts, without additional FCCs, for loans to future students. However, the number of postsecondary institutions participating in the program grew, and the number of students receiving Perkins Loans increased faster than most institutions could build up loan funds. Thus, the Perkins Loan FCCs continued to be provided beyond FY1966 and were last provided in FY2004. The NDEA also required that the Commissioner of Education reimburse institutions for Perkins Loans cancellations for students engaged in public service. Initially, funding for the loan cancellation reimbursements was taken from appropriations designated for Perkins Loan FCCs. However, under the 1972 amendments to the HEA, the loan cancellation reimbursement provisions were amended to require that funds for the reimbursement of Perkins Loan cancellation be appropriated under an authorization separate from that for funds for Perkins Loan FCCs. Funding for Perkins Loan cancellations was last provided in FY2009. In subsequent years after the original enactment of the program, several notable revisions were made to the program itself and loans provided through it, including the following: the requirement that institutions give special consideration to students in certain majors when selecting award recipients was repealed; the ICC was increased to require that institutions eventually provide $1 for every $3 in FCC; the loan cancellation and deferment provisions were amended and expanded; students attending an IHE on a less than full-time basis were deemed eligible to receive a loan; institutions were permitted to use a portion of the Perkins allocation to cover the costs of administering the program; institutions were required to make loans first to students with exceptional need; interest rates were gradually increased to 5%; and the annual loan limit on Perkins Loans was gradually increased to $5,500 for undergraduate students and $8,000 for graduate students. The authorizations of appropriations for the Secretary of Education (the Secretary) to make new FCCs to institutional revolving loan funds and for IHEs to award new Perkins Loans to students expired at the end of FY2014. However, Section 422 of GEPA automatically extended the programs' authorizations through FY2015. On October 1, 2015, the program's operations were significantly curtailed. Several months later, Congress passed The Extension Act, which extended IHEs' ability to make new Perkins Loans to eligible graduate students through October 1, 2016, and to eligible undergraduate students through September 30, 2017. The Extension Act prohibits additional appropriations beyond FY2015 for the purpose of enabling the Secretary to make new FCCs. It also prohibits an automatic extension of the program under GEPA. In addition, the Extension Act amended several Perkins Loan program provisions relating to student eligibility to receive new Perkins Loans and the distribution of Perkins Loan fund assets upon the program's conclusion. The Federal Work-Study (FWS) program is the second oldest of the campus-based programs. It was originally authorized as the College Work Study program under the Economic Opportunity Act of 1964 (P.L. 88-452). The purpose of the program as originally enacted was: to stimulate and promote the part-time employment of students in institutions of higher education who are from low-income families and are in need of the earnings from such employment to pursue courses of study at such institutions. The law authorized two types of student employment: on-campus work at the IHE and off-campus work for a public or private organization. The law further required that the off-campus work be related to the student's educational interest or serve a public interest. IHEs that participated in the original work study program were required to provide an institutional match of 10% for the initial year of the program and 25% each subsequent year. The program was incorporated into the HEA in 1968, and the institutional match was changed to 20%. Several notable revisions were made to the FWS program through subsequent amendments to the HEA, including the following: The Job Location and Development program was created, allowing institutions to use a portion of their FWS allocation to locate and develop off-campus student jobs. The Work Colleges program was created to support comprehensive work-learning-service programs at select institutions called "work colleges." The purpose of the FWS program was amended to include community service as an explicit purpose, and institutions were required to use at least 5% of their Work-Study allocation for community service. Under current law, institutions are required to use at least 7% of their FWS allocation for community service. In meeting the 7% requirements, institutions must ensure that they are operating at least one tutoring or family literacy project in service to the community.The institutional match was increased to 25% for most FWS jobs. Title IV of the Higher Education Act of 1965 authorized Education Opportunity Grants, the predecessor to the current Federal Supplemental Educational Opportunity Grant (FSEOG). The purpose of the program was to assist students with exceptional financial need in attending institutions of higher education. Under the Higher Education Amendments of 1972 (P.L. 92-318), the program was extended and renamed as the FSEOG program, serving as a supplement to the Basic Educational Opportunity Grant program (BEOG) (later renamed the Pell Grant program). As originally enacted, the purpose of the FSEOG program was: to provide, through institutions of higher education, supplemental grants to assist in making available the benefits of postsecondary education to qualified students who, for lack of financial means, would be unable to obtain such benefits without such a grant. The law required that institutions give priority first to students who received financial aid under the Pell Grant program, and then to students with exceptional need who did not receive a Pell Grant award. The minimum award amount was $200 and the maximum amount was $1,500. Students could receive no more than $4,000 in total aid over a four-year period. In order to participate, students had to be undergraduate students enrolled at least half-time and could not have previously received a bachelor's degree. In subsequent years, many of the original provisions of the FSEOG were maintained; however, there have been a few notable revisions to the program. Under the Higher Education Amendments of 1986 ( P.L. 99-498 ), the following revisions were made: For the first time, institutions were required to match federal funds received. Under the 1986 amendments, institutions were required to provide at least 5% of funding for award year (AY) 1989-1990; at least 10% for AY1990-1991; and at least 15% in AY1991-1992 and each succeeding year. Students enrolled less than half-time were deemed eligible to receive awards. The award limits were changed to their current minimum level of $100 and maximum level of $4,400. Institutions were required to provide a nonfederal share of 25% of total FSEOG funds. Students participating in study abroad programs were deemed eligible to receive awards. When each campus-based aid program was originally authorized, funds for it were allocated to institutions using a two-stage, state distribution formula. First, funds were allocated to each state based on the population of students in the state. In the second stage, funds received by each state were sub-allocated to IHEs within the state based on the financial need of the IHE's students. In order for an IHE to receive a share of the state allocated funds, it was required to submit an application of the projected financial need of its students to a regional panel, which then reviewed the application and determined the amount of funding each IHE would receive. In the mid-1970s, the panel review process was criticized as too complex, time consuming, and inequitable. As a result, a panel of experts was brought together to recommend new allocation procedures. Over time, the procedures recommended by the panel have been slightly modified; however, the same basic structure still remains. Under the current formula, funds for each of the campus-based programs are allocated to IHEs through a two-stage process. Although allocation procedures for each of the programs vary somewhat from one another, they share a basic framework. First, each participating IHE is allocated a base guarantee (discussed below), which in most cases is equal to a portion of the amount of program funds it received in prior award years. In the second stage, any funds that are remaining after the allocation of base guarantees are allocated to institutions according to formula-based procedures. This is known as the fair share (discussed below). If an IHE's fair share is greater than its base guarantee, it has a shortfall in funding and is eligible to receive additional funding—a fair share increase—to help reduce the shortfall between its base guarantee and its fair share. If an institution's base guarantee is greater than its fair share, it receives only the base guarantee amount. The sum of the IHE's base guarantee and fair share amount accounts for nearly all of the IHE's allocation. Under the current formula, an IHE's base guarantee is determined based on the year it began participating in each of the campus-based programs. If an IHE participated in a particular program in FY1999, it receives a base guarantee equal to 100% of the sum of its FY1999 base guarantee and its FY1999 pro rata share. If an IHE began participation after FY1999 but is not a first- or second-time participant, it receives a base guarantee that is the greater of $5,000 or 90% of the amount it received in its second year of participation. For an IHE that is a first- or second-time participant, it receives a base guarantee equal to the greatest of (1) $5,000, (2) 90% of its allocation from its first year of participation, or (3) 90% of an amount proportional to that received by comparable institutions. For AY2016-2017, the total of the base guarantees allotted to IHEs comprised more than 60% of total amounts allotted under both the FSEOG and FWS programs. Given that the base guarantee is based on prior-year participation, it is often stated that the current allocation procedures favor long-term participants over new participants. More specifically, the base guarantee provides a funding advantage for institutions with a base guarantee that is greater than their fair share. Under each of the programs, any funds remaining from the annual appropriation after the allocation of base guarantees are allocated to IHEs for fair share increases according to formula-based procedures. The first step in the fair share allocation procedures involves determining each IHE's institutional need. While the calculation of institutional need differs slightly across programs, it is generally an expression of the relationship between the institution's average cost of attendance (COA) and the average expected family contribution (EFC) of students who attend it. For purposes of the campus-based programs' allocation procedures, an IHE's COA is calculated by first dividing the total tuition and fees received by the IHE by the total number of students in attendance at the institution, and then adding to that amount an allowance for living costs and books and supplies. In AY2016-2017, on a per-student basis, the living cost allowance was $11,370, and the books and supplies allowance was $600. For purposes of calculating institutional fair share amounts, each student at an IHE is assigned an EFC based on his or her dependency status and class level. A discussion of the EFC procedures is provided below. When the fair share formulas were developed, a uniform methodology was adopted (and is still used today) in which average EFCs are calculated for categories of students grouped by income bands and dependency status, in lieu of using actual EFCs of the students at each institution. This procedure was adopted, in part, because it could be administratively burdensome for institutions to collect and report EFCs for each student in attendance, and because it was presumed that students with the same dependency status and comparable incomes will have similar EFCs. In implementing the fair-share formulas, ED calculates average EFCs for students categorized into 14 income bands. Table 1 provides the income bands and EFCs for AY2017-2018. The income bands used in the Table of EFCs (shown in Table 1 ) are determined administratively by ED and have been adjusted only a few times since the formulas were first implemented. The last revision to the income bands occurred in 1994 for AY1995-1996. Institutions have flexibility to transfer funds between the campus-based programs in which they participate. They may transfer up to a total of 25% of their allotment under the Federal Perkins Loan program for use in the FSEOG and/or FWS programs. Institutions may transfer up to 25% of their allotment under the FWS program for use in the FSEOG and/or Federal Perkins Loan programs. Institutions may also transfer up to 25% of their FSEOG allocation for use in the FWS program. Work Colleges may transfer up to 100% of their Perkins Loan FCC or FWS allocation to their Work Colleges program. Institutions participating in the campus-based programs are also entitled to an administrative cost allowance (ACA) to cover the expenses of administering the programs. An institution's ACA is calculated as follows: 5% of the institution's first $2.75 million in campus-based expenditures; plus 4% of the institution's campus-based expenditures greater than $2.75 million and less than $5.5 million; plus 3% of the institution's campus-based expenditures in excess of $5.5 million. When calculating the ACA, institutions are required to include both federal and institutional expenditures. The ACA may be taken from the annual authorization the institution receives for the FSEOG and FWS programs and from the available cash on hand in its Perkins Loan funds. An institution can withdraw its ACA from any combination of the campus-based programs for which it disbursed funds to students during the award year. This section of the report discusses institutional and student participation in the campus-based programs relative to other federal aid programs. These data may be useful as Congress considers reauthorizing and/or amending the campus-based programs. In AY2016-2017 , approximately 6,733 postsecondary i nstitutions in the United States participated in Title IV programs authorized under the HEA . Approximately 56% of these institutions awarded FSEOG aid, 49% employed students in FWS, and 21% made loans under the Perkins Loan program. Table 2 provides the percentage of U.S. Title IV institutions that have participated in the campus-based programs over the last 10 years. From AY2007-2008 to AY2015-2016, there was an overall decline in the proportion of U.S. Title IV institutions that participated in the campus-based programs. In AY2016-2017, there was an uptick in participation in the FSEOG and FWS programs. In FY2015, nearly 12 million students received aid through Title IV federal student aid programs. Students who participate in the campus-based programs comprise a relatively small proportion of those participating in the federal student aid programs. In AY2015-2016, approximately 1.5 million students received aid through the FSEOG program; approximately 635,000 received aid through the FWS program; and approximately 422,000 received a Perkins Loan. The tables below present an analysis of the characteristics of campus-based aid recipients and the extent to which campus-based aid has assisted students in covering the cost of higher education. The analysis is based on data retrieved from the National Postsecondary Student Aid Study for AY2011-2012 (NPSAS:12), which is the most recent year for which the data are available. The analysis focuses exclusively on undergraduate students and explores some of the major factors that can account for variation in aid received, such as type of institution, dependency status, income, and cost of attendance. Table 3 provides the proportion of undergraduate students who received aid through the campus-based programs and through all federal student aid programs in AY 2011- 20 12 . Overall, 10% of undergraduate students received campus-based aid compared to 57% of undergraduate students who received any federal student aid. In terms of each campus-based program, 5% of all undergraduates received FSEOG awards, 5% received FWS awards, and 2% participated in the Perkins Loan program. Table 3 also shows that students attending a private nonprofit institution were much more likely to receive campus-based aid than students attending other sector schools. For instance, 28% of students attending private nonprofit institutions received some form of campus-based aid in AY2011-2012, while 10% of students attending public four-year institutions, 4% of students attending public two-year institutions, and 13% of students attending proprietary institutions received some form of campus-based aid in the same year. In terms of income, 16% of dependent students with incomes less than $20,000 received FSEOG, while 10% received FWS, and 4% received a Perkins Loan. Students attending institutions with high COAs were much more likely to receive a campus-based award than students attending institutions with lower COA. Finally, the average FSEOG award was $541, the average FWS award was $2,213, and the average borrowed Perkins loan amount was $1,824. The average award amount across all the campus-based programs was $1,676, while average total federal student aid was $8,233. Table 4 shows the average percentage of COA that was covered by aid received through each of the campus-based programs for recipients of such aid in AY2011-2012. In general, each of the campus-based programs covered less than 10% of COA for campus-based aid recipients. A few notable exceptions were campus-based aid recipients attending public two-year or less than two-year institutions, whose average FWS award covered 22% of their COA, and independent students with incomes between $20,000 and $40,000, whose average FWS award covered 16% of their COA. Over the past few decades, there has been growing interest in reforming aspects of federal student financial aid programs so that students and parents may be better served. Some policy options that have been suggested include simplifying the student aid programs, increasing transparency with regard to how aid is awarded and the amounts that likely may be received by students and prospective students, targeting aid to the student populations with the highest levels of financial need, and linking financial aid eligibility to measures of programmatic or institutional quality. The discussion around redesigning federal aid has brought to light a number of considerations pertaining to the future of the campus-based programs. For instance, the President's FY2018 budget proposes to eliminate the FSEOG program, allow for the wind-down of the Perkins Loan program to occur, and decrease funding for the FWS program by nearly half of its current level. In debating HEA reauthorization, Congress may consider a number of issues related to the campus-based programs, including the extent to which they serve a distinctive purpose that sets them apart from other federal aid programs and whether the formula for allocating funds to institutions is optimal. Other program specific issues are also likely to be considered during reauthorization. Several topics that may garner attention are discussed below. When the campus-based programs were created, they were designed to provide students who demonstrated financial need with aid to help meet the costs of postsecondary education. The programs now operate amidst a host of other financial aid programs and tax benefits that are available for postsecondary students. The other federal student financial aid programs and benefits generally make available "portable aid," which allows students to shop among institutions that participate in the federal student aid programs. These programs are characterized by having statutorily specified methods for determining the levels of assistance available to students. In contrast, under the campus-based programs, federal funds are first allocated to IHEs, which are afforded some discretion with regard to the awarding of aid among eligible students. Possibly because of this difference in approach, debate sometimes surfaces about whether it is optimal to sustain a smaller set of federal student aid programs through which aid may be awarded in a different manner than most other federal student aid programs. Given the complexities of the federal student aid system, some have proposed eliminating one or more of the campus-based programs that could be considered to be duplicative of or overlapping with other aid programs. These proposals sometimes identify the FSEOG program and the Perkins Loan program as candidates for elimination. In considering whether overlap may exist, it can be noted that when making FSEOG awards, IHEs are required to give priority to Pell Grant recipients. Hence, it can be argued that the FSEOG program serves a student population similar to that of the Pell Grant program. This line of thought suggests that once an aggregate amount of grant aid is determined to be made available to students at the federal level, a more streamlined approach might be to disburse the aid through only one program. In AY2011-2012, the most recent year for which data are available, 99% of FSEOG recipients had also received a Pell Grant. Similar arguments can be made in relation to the Perkins Loan program. There are several federal loan programs available for students, and many offer terms that are similar to those offered by the Perkins Loans. For example, during AY2017-2018 the interest rate on Direct Subsidized Loans and Direct Unsubsidized Loans being disbursed to undergraduate students is 4.45%, which is 0.55 percentage points lower than the 5% interest rate on Perkins Loans. In addition, no interest accrues on Direct Loans or Perkins Loans while the student is enrolled in school. If individual borrowing limits would not be adversely affected, it could be argued that streamlining loan programs may be advantageous for students from a transparency standpoint and streamlining may simplify IHE administrative work and loan servicing. There have been proposals in recent years to eliminate or wind down the FSEOG and/or Perkins programs. Some legislative proposals, and proposals forwarded by groups, researchers, and organizations outside of Congress, have promoted adoption of a one-grant, one-loan approach to federal student aid. Simplification is an aim under such proposals, and it is seemingly assumed that the FWS program would be the only remaining campus-based program. Eliminating the FSEOG and Perkins Loan programs could support the goal of simplifying the federal aid programs, which could help students to navigate the different forms of aid available to them more easily. It could also reduce the burden on financial aid administrators at institutions by reducing the number of aid programs the institutions have to administer. Should the consolidation or elimination of programs be pursued, one policy question to be addressed might be whether the aggregate amount of aid made available to individual students should be affected by a new aid configuration consisting of fewer programs. Another policy question might be whether an effort to eliminate and/or consolidate programs could lead to budgetary savings. Proponents of the campus-based programs note that despite the similarities that exist between them and some of the other federal student aid programs, the campus-based programs are unique in some important ways. For instance, institutions participating in the programs are required to provide a partial match of the federal funds received. The institutional match means that more aid is made available to students for each federal dollar provided. With regard to the Perkins Loan program, the requirement that institutions make capital contributions to the funding of Perkins Loans means that institutions incur a financial risk when they lend to student borrowers. By being required to contribute some of their own funds to the capitalizing of Perkins Loans, institutions may have more incentive to ensure that students repay their Perkins Loans because the institution suffers a loss of its own funds if borrowers do not repay their loans. If one or more of the campus-based programs were eliminated, students could lose access to the aid currently made available through them. Students could also become eligible to receive a lower total amount of aid. This could occur under a new aid configuration if amounts of aid currently available through campus-based programs were not made available through another source. If the campus-based programs were eliminated, institutions might also lose the flexibility in awarding aid to help meet students' need that is available to them under the campus-based programs. An argument could be made that financial aid administrators are uniquely situated to determine which students could benefit the most from some types of aid such as campus-based aid. A counterpoint to this is that institutions allocate aid in different ways, not all of which target students with the highest level of need to the same degree, and that statutory specification of targeting procedures for the other student aid programs allows for consistency in targeting and alignment with congressional priorities. Some limitations of the campus-based aid approach are the lack of portability of the aid and more-limited availability of campus-based aid funds. The amount of campus-based aid available to students at an IHE is affected by the institution the student attends and the funding it receives, which is based on annual appropriations and a statutorily defined formula that allocates a substantial portion of funding among IHEs largely based on amounts received decades ago, when the last major change to the funding allocation procedures was enacted. Institutions that receive a campus-based allocation are afforded some discretion in determining the mix and amount of aid to award to students. A student's eligibility for campus-based aid and potential award amounts thus depend in part on institution-specific award criteria. These features of the campus-based programs are unlike other portable federal aid programs, such as the Pell Grant and Direct Loan programs, under which aid availability is more certain. Students are generally entitled to receive an award, at levels determined by statutorily specified award rules, regardless of the school they attend, if the student and the school meet federal program eligibility requirements. Under the Pell Grant and Direct Loan programs, fund availability to make awards is not dependent on how a school fares in an allocation formula. Additionally, institutions have no discretion in selecting which students to award Pell Grants and limited discretion regarding whether to originate a Direct Loan or adjust data inputs that may be used to determine the amount of Direct Loans for which a student is eligible. In this way, the Pell Grant and Direct Loan programs operate as entitlement programs, whereas campus-based aid is heavily dependent on institutional discretion and appropriations. Another issue that is likely to be considered during HEA reauthorization is whether the formula for allocating funds to institutions that participate in the campus-based programs is optimal. While the processes for allocating funds differ for each program, they are all similar in that a portion of the program funds are allocated to an institution based on the amount of funds it received in a prior year (base guarantee), and a portion is based on each institution's fair share of unmet need. A criticism of the campus-based funding formula is that the base guarantee, which accounts for more than 60% of the FSEOG and FWS allocations, does not take into account current student demographics and need. As a result, funds are not distributed across institutions based primarily on student need. Some have also argued that the current allocation procedures favor long-term IHE participants over new participants, as institutions are first allocated funds according to their base guarantee, which is largely a function of duration of institutional participation. There is also concern that campus-based aid may not be adequately targeting low-income students. Under current law, institutional need is generally an expression of the relationship between average COA and average EFC of an IHE's eligible students. The use of COA when calculating need has resulted in a tendency for high-cost IHEs to have higher levels of need per student than low-cost IHEs. In addition, while the uniform methodology for determining EFC (i.e., the income bands developed by ED) was intended to provide a fair way of determining institutional need, the income bands have not kept up with inflation. Therefore, the EFC categories may not provide an accurate reflection of an individual student's EFC, and thus may not accurately reflect an institution's fair share need. There have been a number of proposals to change the formula for allocating campus-based funds to institutions. While the proposals differ in their approach, a common goal shared across several of them is to allocate funds using a formula that is more reflective of current student demographics and financial need. Some proposals would target funds to institutions that demonstrate positive student outcomes and some would prioritize allocating funds to IHEs enrolling high numbers of low-income students. Some examples of recommended changes to the formula include the following: eliminate the base guarantee and allocate all funds based on need; reconstruct the income bands for determining EFC; develop a need calculation that places greater emphasis on the economic circumstances of students served by the IHE (for example, need could be calculated based on the dollar amount of Pell Grants awarded at the IHE); target funds to institutions based on outcome metrics of students, such as graduation rates; and limit student eligibility to participate in the FWS programs to undergraduate students. A number of issues specific to particular campus-based programs might also be considered during reauthorization; examples are discussed in this section of the report. One issue that could be considered is whether FSEOG funds can be better targeted to low-income students. During the 1972 reauthorization of the HEA, the Pell Grant program was created as a way of increasing portability in student aid. The FSEOG program was then retained to serve as a supplement to the Pell Grant program. Under current law, IHEs are required to give priority to Pell Grant recipients when awarding FSEOG; however, financial aid administrators are afforded discretion in determining the amount of aid that students receive. Congress could consider amending FSEOG award rules so that FSEOG funds are only awarded according to statutorily specified targeting preferences. A few issues pertaining to the FWS program could be considered during reauthorization. One is whether community service should continue to be an explicit purpose of the program. Currently, institutions are required to use 7% of their FWS allocation to compensate students employed in community service. Some have argued that the 7% requirement may be too difficult for some institutions to meet. Institutions may request a waiver from the community service requirements. However, the Department of Education (ED) has determined that the fact that it may be difficult for a school to comply with the requirements is not, in and of itself, a basis for granting a waiver. Congress could consider altering or eliminating the community service requirement or redefining what types of employment constitute community service. Another issue is whether employment provided through the FWS program should be more closely linked with students' career or education goals. HEA Section 443 requires that institutions, to the maximum extent practicable, ensure that FWS employment "complement[s] and reinforce[s] the educational program or vocational goals" of each FWS student participant. Currently, there is no ongoing evaluation of the FWS program. The last national study of it was completed in 2000, and 27% of institutions were able to report the extent to which the FWS jobs related to a student's academic program. Of the institutions that reported data, an average of 51% of FWS students worked in academically related jobs. A related issue is whether student participation in FWS adversely affects students' academic performance and ability to complete postsecondary education. The FWS study from 2000 found that less than 10% of FWS students felt that their job had a negative effect on their academic performance. More-recent research on the effects of the FWS program on student academic performance has generated mixed results. In addition, the research has a number of methodological limitations and does not provide a national view of student participants. Ongoing evaluation of the FWS program could provide federal policymakers with a better sense of the extent to which FWS employment supports students' career interests. It could also help to identify the extent to which populations of students may experience any adverse effects on their academic performance. The authorization for IHEs to make new Perkins Loans expired on September 30, 2017. A few institutional and student issues related to the wind-down of the Perkins Loan program may be considered prior to or during HEA reauthorization. Additionally, Congress may consider proposals to extend the Perkins Loan program again, as well as proposals to incorporate certain features of the Perkins Loan program into the Direct Loan program or another federal student loan program. Upon the expiration of the authorization to make new Perkins Loans under the program, institutions are required to begin the process of distributing the assets of their Perkins Loan funds. Each participating IHE is required to return to the Secretary the federal share of its Perkins Loans funds and the federal share of payments and collections made on outstanding Perkins Loans. The federal share is equal to the amount of the loan fund balance that is proportional to ED's overall FCC as of September 30, 2017. IHEs may retain any remaining amounts (e.g., their ICCs). Under current regulations, when an IHE discontinues its participation in the Perkins Loan program, it is required to assign all loans with outstanding balances to ED. If an institution assigns its loans to ED, it relinquishes all rights to the loan, without recompense, (i.e., ED will not reimburse it for the institutional funds used to make the loan, and it will not receive any future payments made on the outstanding loans). ED has indicated that during the Perkins wind-down, IHEs have the option to assign Perkins Loans to ED or to continue servicing them. Prior to the expiration of the Perkins Loan program, institutions were allowed to use a portion of their Perkins Loan revolving fund to cover the administrative costs of servicing the loans. ED has indicated that during the wind-down, institutions will no longer be permitted to charge an administrative cost allowance against their Perkins Loan funds. Without the administrative cost allowance, some institutions might find it too costly to continue servicing the loans, and thus may decide to assign loans to ED and forgo future payments made on the outstanding loans. Another wind-down issue relates to IHEs reimbursement for previous or future loan cancellations. Under current law, ED is required to reimburse IHEs for their cancelled Perkins Loans. The law prohibits Perkins Loan cancellations from being funded through the appropriation for FCCs; thus, a separate authorization of appropriations is required for Perkins loan cancellations. An appropriation for the Perkins Loan cancellations reimbursements has not been provided since FY2009. ED has indicated that, based on the HEA's prohibition on using FCC funds to cover the cost for cancellation reimbursements, it will not consider unreimbursed cancellations when determining IHEs' FCC. As the program winds down, it is not clear if Congress will authorize funds for Perkins Loan cancellations or allow ED to consider the cancellations when calculating IHEs' FCC. Under the Extension Act, institutions are prohibited from making new loans as of September 30, 2017. However, if an eligible student received a disbursement prior to the expiration of the program for the award year, the student may receive any subsequent disbursements of that Perkins Loan through June 30, 2018. After all the Perkins Loan final disbursements are made, undergraduate students will lose access to aid currently made available under the Perkins Loan program. While the Direct Subsidized Loan has many terms and conditions that are similar to Perkins Loans terms and conditions, annual and cumulative loan limits on Direct Subsidized Loans prevent students from borrowing above a certain amount. Access to Perkins Loans provides students with additional borrowing capacity to help cover their COA. For example, in AY2011-2012, prior to amendments to the program made under the Extension Act, Perkins Loans covered an average of 6% of Perkins Loan borrowers COA. Without the Perkins Loan program, it is not clear whether students will be able to access other forms of aid that could cover the portion of COA currently covered by Perkins Loans. Whether there is a need to provide for additional borrowing capacity may be an issue that receives attention during reauthorization. In order to maintain the amount of aid that students could be eligible to borrow, Congress might consider extending the Perkins Loan program for a second time, either as a part of or independent from reauthorization. Extending IHEs' authority to make awards to undergraduate students could enable some students, at the discretion of the IHE, to borrow additional loans to help cover their COA. However, it is not clear what the cost would be to extend the program, and what, if any, offsets could be used to cover that cost. For instance, under the Extension Act, a grandfathering provision that would have allowed students to receive Perkins Loans until FY2020 was eliminated. Eliminating the grandfathering provision provided program savings that were used to offset the cost of the Extension Act. If the program were to be extended again, such offsets may not be available under the current Perkins Loan program provisions. In lieu of extending the program, some have suggested creating a new Federal Direct Perkins Loan program that would be managed by ED, with IHEs being given lending authority to make awards to students. These proposals recommend retaining the current interest rate and borrowing limits of Perkins Loans, but the terms and conditions of the loans would be based on those that are applicable for Direct Unsubsidized Loans. The key aim of such a program would essentially be to retain some of the features that currently exist in the Perkins Loan program, but also to place greater emphasis on encouraging IHEs to keep tuition low and rewarding IHEs for graduating Pell Grant recipients.

Three need-based student financial aid programs authorized under Title IV of the Higher Education Act of 1965 (HEA)—Federal Supplemental Educational Opportunity Grant (FSEOG) program, the Federal Work-Study (FWS) program, and the Federal Perkins Loan program—are collectively referred to as the "campus-based" programs. These programs are considered campus-based because federal funds are awarded directly to institutions of higher education (IHEs) that administer the programs and provide institutional funds to match the federal funds they receive for them. The campus-based programs are among the oldest of the federal student financial aid programs. As federal aid has largely transitioned to a system that allows for "portability" in receipt of student aid, meaning that most forms of aid are made available to students at whichever participating institution a student chooses to attend, the campus-based programs have come to play a relatively smaller role in the federal student aid effort. The campus-based programs' authorizations of appropriations, along with many other provisions under the HEA, were set to expire at the end of FY2014, and were automatically extended through FY2015 under Section 422 of the General Education Provisions Act (GEPA). The FSEOG and FWS programs have continued to be funded through annual appropriation bills, most recently through the Continuing Appropriations Act 2018 (P.L. 115-56), which extended the programs through December 8, 2017. The Perkins Loan program was amended and extended through FY2017 under the Federal Perkins Loan Program Extension Act of 2015 (Extension Act; P.L. 114-105). The Extension Act prohibits future appropriations for the Perkins Loan program and prohibits an automatic extension of it under GEPA. During consideration of reauthorization of the HEA, several issues related to the campus-based programs may be considered. These include the extent to which the campus-based programs provide types of aid to students that are not provided via other postsecondary aid programs, whether the current formula for allocating funds to institutions is optimal, and the potential role of the campus-based aid programs in a redesigned federal aid system. Provisions specific to each program, such as requirements for community service under FWS and terms and conditions of Perkins Loans, are also likely to be considered.

govreport

Adults may go missing for a variety of reasons. In some cases, the disappearance of an individual may be a personal choice. However, adults may go missing as a result of a disabling condition, a natural catastrophe, or a crime such as an abduction and other instances when foul play is involved. Unlike children, adults have the legal right to go missing under most circumstances. As a result, families of missing adults may receive limited assistance from state and local law enforcement agencies in recovering their loved ones. Media attention to cases of missing adults—particularly seniors with dementia who have been found deceased after wandering from home either on foot or in a vehicle—has prompted policymakers to consider expanding the federal government's role in helping to recover vulnerable adults who go missing. Congress has recently proposed measures to assist in such recovery efforts. At the start of the 111 th Congress, the House passed legislation ( H.R. 632 ) to establish a grant program to encourage states to establish, expand, and coordinate alert systems for vulnerable adults who may go missing due to cognitive or physical disabilities, among other reasons. A companion bill ( S. 557 ) was introduced in the Senate on March 10, 2009. The proposed program is similar to a federal grant program that funds training and technical assistance for what are known as AMBER (America's Missing: Broadcast Emergency Response) Alert systems. Each state has developed an AMBER Alert system to enlist the support of law enforcement agencies and the public in recovering children who are believed to have been abducted. In response to the increased congressional focus on alert systems for missing adults, the Congressional Research Service (CRS) gathered data on existing state alert systems in 11 states. CRS conducted a review of state laws, regulations, or executive orders that established the systems, and contacted officials in the 11 states to learn more about how they are carried out. These systems were established beginning in 2006, and are administered by local and/or state law enforcement agencies. The systems are intended to alert law enforcement entities and/or the public that vulnerable adults are missing and may need assistance. Many states activate the alerts on behalf of targeted groups of individuals who may be at high risk of going missing, such as those persons with cognitive or mental impairment, including Alzheimer's and other forms of dementia, as well as persons with developmental disability. This report provides an overview of the alert systems in 11 states. It begins with background information on current federal efforts to recover missing adults, followed by a description of the methods CRS used to obtain data from each state identified as having an alert system. Subsequent sections of this report provide an overview of each state's alert systems, including (1) the legal authority to establish the systems; (2) the target population for the alerts; (3) administrative responsibility for the alerts, including coordination with AMBER Alerts; (4) training of law enforcement agencies and other entities about the alerts; (5) the process for activating alerts; (6) coordination of alerts with other states; (7) system costs; (8) use of the systems; and (9) any information about outcomes of the individuals who were believed to be lost and for whom alerts were activated. The last section of the report provides a discussion of issues for Congress to consider with respect to the federal role, if any, in developing state alert systems for missing adults. Individuals can go missing for a variety of reasons. They may become lost or disoriented due to a mental or cognitive impairment, developmental disability, or physical disability. Natural disasters, such as hurricanes or floods, may cause individuals to become displaced from their families and communities. Individuals may voluntarily go missing to escape domestic abuse, law enforcement, or for other reasons. Policymakers and advocates for the missing have identified persons with Alzheimer's disease and other forms of dementia as being particularly vulnerable to missing episodes. Increases in longevity among the older population and the aging of the baby boom generation have contributed to interest in establishing these systems. Wandering from home can be a frequent behavior that may pose a significant, sometimes life-threatening, danger to the well-being of those with Alzheimer's disease and other forms of dementia. According to the Alzheimer's Association, if not found within 24 hours, nearly 50% of those who wander risk serious illness or death. Illness or death may occur from exposure to the elements, lack of food or hydration for an extended period, and general inability of the individual to think, act, or communicate to gain assistance. While local and state law enforcement agencies are responsible for leading efforts to recover missing adults, in recent years the federal government has increasingly played a role in both helping to prevent certain types of missing adult incidents—particularly among vulnerable populations—and assisting in identifying and recovering those who go missing. The federal Missing Alzheimer's Disease Patient Alert grant assists in identifying missing individuals with Alzheimer's disease and other forms of dementia by funding what is known as Safe Return, a program administered by the Alzheimer's Association. Safe Return provides a MedicAlert bracelet or other form of identification to enrolled individuals. The identification indicates that the individual is memory impaired and includes a toll-free, 24-hour emergency response number to call if the person is found wandering or lost. As part of the program, the Alzheimer's Association provides support and referrals to caregivers of those enrolled in the program, and provides some training to law enforcement agencies about individuals with Alzheimer's disease. Authorization for the program has lapsed, but Congress has continued to appropriate funds. For each of FY2002 through FY2009 Congress appropriated between $800,000 and $2 million in funding. The Missing Alzheimer's Disease Patient Alert Program Reauthorization of 2009 ( H.R. 908 ), which was approved by the House on February 10, 2009, would amend the Violent Crime Control and Law Enforcement Act of 1994 to reauthorize the program through FY2016, and would revise program requirements to: (1) provide for competitive grants to nonprofit organizations to assist in locating missing patients with Alzheimer's disease and related dementia; (2) expand the program to include locating other missing elderly individuals; and (3) establish a preference in awarding grants to national nonprofit organizations that have a direct link to patients with Alzheimer's disease and related dementias and their families. Currently, grants may be awarded to only such organizations. Separately, Congress provided funding from FY2002 through FY2006 for the Kristen's Act grant program which provided funding for a national clearinghouse and resource center for missing adults generally. Federal funding for Kristen's Act grants ranged from a high of $1.7 million in FY2002, decreasing in each subsequent year to a low of $150,000 in FY2006. The National Center for Missing Adults (NCMA) was the sole recipient of the grant. NCMA continues to operate, with non-federal funds, and takes reports of persons who go missing under a variety of circumstances, including due to a diagnosed medical condition, mental illness or diminished mental capacity, Alzheimer's disease or dementia, or alcohol or substance abuse. NCMA adds profiles and pictures of missing persons to its website ( http://www.missingadults.org ), sends missing person flyers to the family and law enforcement, assists with press releases, helps generate or manage media attention, and maintains routine contact with the families of missing individuals. Authorization for Kristen's Act expired in FY2006. H.R. 632 , which passed the House on February 10, 2009, would reauthorize the grant at $4 million for each of FY2010 through FY2020. Companion legislation, S. 557 , was introduced in the Senate on March 10, 2008. In addition to funding the Kristen's Act grant, H.R. 632 would direct the Attorney General to establish a national "Silver Alert communications network" to assist regional and local search efforts for missing seniors, in coordination with states, local governments, and law enforcement agencies. The bill defines "missing senior" as any individual who is reported to, or identified by, a law enforcement agency as a missing person; and meets the requirements to be designated as a missing senior, as determined by the state in which the individual is reported or identified as a missing person. The bill further directs the Department of Justice (DOJ) to appoint a National Coordinator of the network to: (1) establish voluntary guidelines for states to use in developing alert programs to recover missing seniors; (2) develop protocols for recovering missing seniors and for notifying law enforcement agencies that a senior is missing; and (3) implement an advisory group to assist states, local governments, law enforcement agencies, and other entities involved in the network, among other activities. The bill authorizes such sums as necessary for these purposes. No time period is specified. In addition, H.R. 632 would authorize appropriations of $5 million annually for FY2009 through FY2013 for grants to states to develop and enhance Silver Alert plans. The grants would be distributed by DOJ on an equitable basis throughout the United States. The federal share of the grant would not exceed 50%. The focus of this report is on those state alert systems for missing adults. CRS sought to obtain detailed information from states about their alert systems to better inform Congress about their activities as well as analyze the similarities and differences among various state alert systems. In general, these alert systems are intended to rapidly disperse information about a missing person to law enforcement entities, and often the public. This type of alert system is different from the federally funded Safe Return program in that Safe Return maintains a database of individuals who have been pre-identified as being at risk of wandering due to Alzheimer's disease and related dementia and choose to enroll in the program. In the event that an individual enrolled in the Safe Return program does go missing, Safe Return can provide information and a physical description of the missing individual, which can assist family members in filing a missing persons report and help law enforcement agencies, regardless of whether the state has an alert system, in search and recovery efforts. Provided that the missing individual is wearing identification, Safe Return can also facilitate reuniting missing persons with their caregivers. Based on requests from some Members of Congress for information regarding the administration of alert systems for missing adults, CRS sought to identify states that were believed to have missing adult alert systems and contact those states to obtain further information. Using information from a variety of sources, including recent news articles, policy publications, and discussions with various stakeholders from organizations such as the Alzheimer's Association and Project Lifesaver International, Inc., CRS identified 11 states with alert systems for missing adults—Colorado, Delaware, Florida, Georgia, Kentucky, North Carolina, Ohio, Oklahoma, Rhode Island, Texas, and Virginia. CRS did not conduct a search of state statutes or survey all 50 states to determine whether each state had implemented an alert system for missing adults. Thus, the 11 identified states may not be an exhaustive list of all states with alert systems for vulnerable missing adults. For the 11 selected states, CRS reviewed authorizing legislation, executive orders, and regulations to obtain program data on these state alert systems. CRS also contacted officials in each of the states to obtain additional information. Based on key areas of interest in state alert systems for missing adults that have been expressed by some Members of Congress, CRS prepared a detailed list of questions for state officials covering the following attributes (see Appendix A for a copy of the questions submitted to state officials): 1. Legal authority—whether authority for implementation and administration of the alert system was established by the state through statute, executive order, and/or regulations. 2. Target population—information on the characteristics of those who may go missing and the population eligible to be the subject of an alert. 3. Administrative responsibility—the entity or entities responsible for implementation of and administering the alert system and any administrative coordination with the state's AMBER Alert program. 4. Training—any training provided to law enforcement agencies and other stakeholders on the use of the alert system. 5. Process for activating alerts—includes information on: eligible entities authorized to file an actionable missing persons report; criteria for activating an alert; communication mechanisms for disseminating the alert; target audiences; and duration of the alert. 6. Interstate coordination—any state protocols for alert systems to coordinate with other states when an eligible missing person is believed to have crossed state lines. 7. System costs—costs associated with implementing the alert system as well as any costs for ongoing administration of the system. 8. Use of the system—the history of utilization of the alert system including any available data on the number of alerts that have been activated. 9. Outcomes—any available data on: the characteristics of those missing individuals who are the subject of an alert; circumstances related to their disappearance; and outcomes related to any search and recovery efforts. Between September 2008 and March 2009, questions were electronically submitted to the state official identified by CRS as responsible for or most knowledgeable about the missing adult alert system in that state. All 11 states responded and, when necessary, CRS followed up with state officials for clarification. Officials provided varying levels of detail about their systems. For some states, CRS was unable to obtain information about the number of alerts activated and/or the costs associated with the alert system. Alert systems for vulnerable missing adults appear to be a recent but growing initiative. Among the 11 states CRS identified with active alert systems, Colorado and Georgia were the first to implement an alert system for missing vulnerable adults in 2006. Since then, nine other states have adopted the systems. Eight of the 11 states are in the South (Delaware, Florida, Georgia, Kentucky, North Carolina, Oklahoma, Texas, and Virginia), one state is in the West (Colorado), one state is in the Midwest (Ohio), and one state is in the Northeast (Rhode Island). See Figure 1 for a U.S. map with the 11 states identified by CRS as having missing adult alert systems. Table 1 provides a general overview of the alert systems implemented in the 11 states identified by CRS as having active programs. State alert systems were authorized either by law or executive order, with most states passing a law to create the alert system for missing adults. The administration of state alert systems for missing vulnerable adults appears to be a cooperative effort among state and local law enforcement agencies. These alert systems are intended to rapidly disseminate information to other law enforcement agencies and the public through various media outlets (e.g., television, radio, print media, lottery terminals, electronic highway signs, trucker alert systems) about a missing person by providing descriptive information about the missing person or vehicle, in the event a missing person is believed to be driving. For some states, the impetus for legislation to establish the alert system came as a result of public attention surrounding missing person investigations that involved adults with mental or cognitive impairment. Multiple states reported that they modeled their missing adult alert systems after their state AMBER Alert systems for abducted children. States indicated that while their alert systems for missing adults are similar to their AMBER Alert systems, AMBER alerts were more widely disseminated. Generally, the same state-level agencies administer or are involved in administering both alert systems, and in some cases, the two systems share one budget. Most states reported that training on the use of the alert system for missing adults is provided to state and/or local law enforcement agencies with some states providing education to the public and other stakeholders. States have defined their target population for their alert systems differently. Some states include age as a factor for activating an alert, such as the population age 65 and older. Other factors include whether the individual has a cognitive, physical, or developmental disability, or a severe mental health impairment. In general, the process for activating an alert begins with the local law enforcement agency taking a missing persons report (see Figure 2 ). In order for an alert to then be activated, entities at the local and state level, depending on the state's protocol, must ensure that the criteria for activating an alert have been met. States may require that certain individuals file a missing persons report in order to activate the alert system. In most states, verification that the individual has a mental or cognitive impairment can be through a family member, caregiver, or guardian. One difference among states with alert systems is the designated entity responsible for activating the alert. In six states, a lead state agency is responsible for activating alerts at the request of a local law enforcement agency. The remaining five states have localized models for the dissemination of alerts where the local law enforcement agency activates the alerts locally and/or regionally and may seek assistance from the state law enforcement agency to disseminate the alert statewide. In general, the entity responsible for activating an alert will disseminate the missing person's information to other law enforcement agencies and various media outlets to alert the public. When the public is alerted about the missing information, generally information is publicized on how to contact law enforcement with tips or information. Most states have some mechanisms in place for coordinating alerts with other states to recover individuals who were believed to have crossed state lines during their disappearance. Several states indicated there was no additional cost to implement the alert system or that implementation costs were absorbed by the existing budget for the AMBER alert program or another program. Some states provided data on the actual costs of operating the alert system. Data from these states estimated that the annual cost of operating an alert system was between $40,000 and $182,000. However, these estimates exclude costs to local law enforcement agencies or other stakeholders that may be involved in helping to administer the alert system. Ten out of 11 states reported having used the alert system, the exception being Delaware. Although some states reported no information about the number of alerts that have been activated, states that did report this information reported activating anywhere between one (Rhode Island) and 82 alerts (North Carolina) since implementation of their alert system. However, the number of alerts a state has activated is likely affected by how long the system has been active, the process and criteria for activating the alerts, the state's identified target population for the alert, and whether the system is generally accepted by law enforcement agencies and other stakeholders as a viable tool to assist in the recovery of missing vulnerable adults. Most states were able to provide information about the outcomes of recovery efforts for these missing persons with the majority of states reporting that individuals were found recovered, though almost every state reported at least one individual who was found deceased. States provided varying levels of detail about their alert systems. This section summarizes information provided by state officials, including (1) legal authority; (2) target population; (3) administrative responsibility; (4) training; (5) process for activating alerts; (6) interstate coordination; (7) system costs; (8) use of the system; and (9) outcomes. These attributes are described in tables for each state in Appendix B . Missing adult alert systems appear to be recent initiatives. Among the 11 states CRS identified, two states implemented their alert systems for missing adults in 2006, four states implemented alert systems in 2007, and five states implemented them in 2008. States that adopted these alert systems may have been more likely to be located near states that also have an alert system. In fact, Virginia state officials indicated that their alert system was developed as a result of similar efforts underway in other states. The majority of states with alert systems for missing adults derived their authority to establish the program from enacted law, with two exceptions. In 2006, Oklahoma created a Silver Alert program through a non-binding resolution adopted by the state House of Representatives. In 2008, Florida's governor signed an executive order to establish the state's Silver Alert Plan. In some cases, the impetus for legislation to establish the alert system came as a result of public attention surrounding missing person investigations that involved adults with mental or cognitive impairment. For example, Georgia's system was established in 2006 in response to a patient with Alzheimer's disease who went missing from her home in 2004. Ohio indicated that their system was developed in response to several incidents throughout the country, as well as elsewhere in Ohio, that involved missing older individuals or individuals with mental impairment. Other states indicated that the need to focus on the senior population as well as advocacy efforts on behalf of seniors was an important consideration for implementation of an alert system. Florida's executive order states that the senior population is growing and that the state needed to implement a standardized system to aid in the search of seniors who go missing. Colorado's authorizing law (S.B. 06-057) states that the program will aid in the recovery of missing seniors within the first few hours of their disappearance, a critical time frame for those with cognitive impairment. In general, state alert systems for missing adults are targeted at a vulnerable population of adults due to advanced age, cognitive, physical, or developmental disability, or a combination of age and disability. However, states have defined their target populations differently. Table 2 describes the target populations for state alert systems based on age and disability status. Four states (Colorado, Rhode Island, Texas, and Virginia) have alert systems that exclusively target older adults, defined as either 60 or 65 years of age or older with an "impaired mental condition" or "cognitive impairment." Florida and Ohio target older adults, but also provide conditions for activating alerts on behalf of missing younger adults. The remaining five states (Delaware, Georgia, Kentucky, North Carolina, Oklahoma) have alert systems that can be activated on behalf of adults of any age. In all states, alert systems for missing adults are activated on behalf of adults who are disabled due to a mental or cognitive impairment. At least three states activate alerts on behalf of persons with physical disabilities or with severe mental health conditions. Oklahoma activates alerts on behalf of adults with physical disabilities. Georgia will activate an alert for an adult with a developmental disability. And in addition to targeting missing seniors and persons with a disability, Delaware's alert system targets missing suicidal persons. Three states (Georgia, Ohio, and Virginia) provided language defining cognitive or mental impairment (see Table 3 ). Verification of a cognitive impairment or other disability is often included as part of the state's criteria for activating an alert (see discussion of Criteria for Activating Alert below). Six states (Delaware, Florida, Kentucky, North Carolina, Ohio, and Virginia) indicated that the reporting party attests to the missing person's condition and that this information is then verified by the investigating officer (no further information was provided about how the officer verifies the information). Other states (Oklahoma, Rhode Island, and Texas) require further documentation, such as prescription medications or medical records, in order to verify an individual's condition. Texas reported requiring documentation from a medical or mental health provider regarding the missing senior's condition. To verify an impaired mental condition in Colorado, family members must sign a statement stating that the missing person is mentally impaired. In Georgia verification that the individual has a cognitive impairment or other disability can be made through a family member, caregiver, or guardian, with no further verification by local law enforcement or additional documentation required. Administration of a state's alert system is often a cooperative effort among state and local law enforcement agencies. Statewide agencies in six states (Colorado, Georgia, North Carolina, Ohio, Rhode Island, and Texas) take the lead in administering the program and activate alerts at the request of a local law enforcement agency. For example, in North Carolina, the Center for Missing Persons within the state's Department of Crime Control and Safety activates alerts. In Texas, the Governor's Division of Emergency Management activates alerts; however, a local law enforcement agency also has the option of issuing an alert locally or regionally, if they are in area that has a regional alert program for missing seniors. Both Ohio and Texas reported having steering committees that provide guidance to the administering state agencies concerning the alert systems. The committees are comprised of local and state law enforcement agencies and other stakeholders. In four other states (Delaware, Kentucky, Oklahoma, and Virginia), the local law enforcement agency takes the lead in administering the program and activates the alert locally or regionally, but can also seek assistance from the state law enforcement agency to disseminate the alert statewide or coordinate the alert with other states, if necessary (see section on Interstate Coordination below). Similarly, local law enforcement agencies in Virginia will administer and activate alerts locally and can make requests to the Virginia State Police to activate an alert regionally or statewide. In Oklahoma, local law enforcement agencies administer and activate alerts but may seek assistance from the state's Department of Public Safety in order to disseminate an alert to multiple law enforcement agencies throughout the state. Finally, Florida's system of administration is somewhat different from the other states. The state's Silver Alert Plan is administered by the state Missing Endangered Persons Information Clearinghouse, within the Florida Department of Law Enforcement (FDLE). A Silver Alert is activated when the local law enforcement agency requests assistance from the Florida Department of Law Enforcement for an alert in multiple regions of the state via electronic highway signs. Alerts may be activated by the state only for persons who are believed to be driving and only alert the public through electronic highway signs and the FLDE website. Separately, local law enforcement agencies may activate a Silver Alert locally based on criteria established by the local law enforcement agencies. The 11 states provided information about coordination between their missing adult alert systems and AMBER Alert systems for abducted children. AMBER Alert systems are voluntary partnerships—between law enforcement agencies, broadcasters, and transportation agencies—to activate messages in a targeted area when a child is abducted and believed to be in grave danger (see Figure 3 ). Generally, states responded that the same state-level agency administers or is involved with both the AMBER alert and missing adult alert systems, and in some cases, the two systems share a budget. For example, Texas indicated that its Silver Alert Network and its AMBER Alert system are administered by the Governor's Division of Emergency Management, but operate as separate programs. Further, multiple states reported that they modeled their alert systems for missing adults after their AMBER Alert systems. States also reported that law enforcement agencies often disseminate the information to the public through various media using the same communication mechanisms. State officials identified two major distinctions between missing adult alert and AMBER alert systems. First, five of the states (Colorado, Delaware, Florida, Kentucky, and Texas) indicated that AMBER Alerts are more widely disseminated than alerts for missing adults. For example, Texas officials indicated that both the missing adult alerts and AMBER Alerts are distributed via the media and on billboards and lottery machines. However, AMBER Alerts in the state are additionally distributed through venues including the National Center for Missing and Exploited Children's Secondary Notification System, which notifies numerous stakeholders—law enforcement agencies, public service entities, internet and wireless providers, trucking companies, and others—about the missing child alert. Second, at least seven of the states (Colorado, Georgia, North Carolina, Ohio, Oklahoma, Texas, and Virginia) use emergency alert system (EAS) technology to report AMBER Alerts, and not alerts about missing adults. (Note that the states were not prompted to provide information about the EAS, and the other four states did not.) The EAS sends emergency messages to the public with the cooperation of broadcast radio and television and most cable television stations. The Federal Communication Commission (FCC) is designated by the Federal Emergency Management Administration (FEMA) to manage broadcaster involvement in EAS. The FCC currently provides technical standards and support for EAS, rules for its operation, and enforcement within the broadcasting and cable industries. According to the FCC, states and localities are not permitted to use the EAS to broadcast an alert about a missing adult. States provided varying levels of detail about the type of training and education law enforcement agencies and the public received about the state's alert system for missing vulnerable adults. Eight of the 11 states (Colorado, Delaware, Georgia, Ohio, North Carolina, Rhode Island, Texas, and Virginia) reported that training was provided to state and/or local enforcement agencies. In four of these states, training or educational materials were also provided to the public and other stakeholders. For example, the Colorado Bureau of Investigation provided training or educational materials to law enforcement agencies, the public, media, and the state Alzheimer's Association chapter. Virginia State Police provided training to local law enforcement on the activation criteria and the procedures for activating the alert, while the Attorney General's office provided information to the public about the alert system. Florida state officials reported that funding is currently not available for training, but if funds become available, training on procedures for activating the system will be targeted to law enforcement and transportation officials. Finally, Kentucky and Oklahoma state officials reported that they were uncertain whether local law enforcement agencies received training, and did not provide any further information. There is wide variation among states with respect to the process for activating alerts for vulnerable adults in the 11 states. The following describes the process for activating an alert. This process includes information on: (1) filing an actionable missing persons report; (2) criteria for activating an alert; (3) communication mechanisms for disseminating the alert; (4) target audiences; and (5) duration of the alert. In general, the process for activating an alert originates with the local law enforcement agency taking a missing persons report. Seven states (Delaware, Georgia, North Carolina, Oklahoma, Rhode Island, Texas, Virginia) specified that certain individuals must file a missing persons report in order to activate the state or local alert system. For example, in Georgia a family member or caretaker must file a missing person's report. North Carolina requires a parent, spouse, legal guardian or custodian, or person responsible for the supervision of the missing individual to file the missing person's report. Other states identified medical personnel, long-term care ombudsman, a long-term care facility, cohabitants, and neighbors or close friends among those eligible to file a missing persons report in order to active an alert. Four states (Colorado, Florida, Kentucky, and Ohio) indicated that any individual can file a missing persons report in order to activate an alert. Once the appropriate individual has filed a missing persons report with the local law enforcement agency, the agency must review the report to determine if the state's criteria for activating an alert have been met. In addition to determining whether or not the missing person meets any age or disability criteria for activating an alert system (see section on Target Population above), all states reported additional criteria. Four criteria for activating an alert that are common across the 11 states include (1) the person's status is unknown; (2) the person's disappearance poses a credible threat to his or her health or safety; (3) there is sufficient information to provide information to law enforcement agencies and/or the public about the missing individual; and (4) the person is domiciled in or a resident of the state in which they went missing. Table 4 summarizes the presence of these four criteria by state. States with alert systems for missing vulnerable adults have certain criteria for activating an alert that are somewhat similar across the states. Most states reported that a person's whereabouts must be unknown in order for an alert to be activated. In some states, local law enforcement have conducted a missing person's investigation and verified that the person is missing. Almost all states, the exception being North Carolina, indicated that the person's disappearance must either pose a credible threat to his or her health and safety or that the missing person is in immediate danger of serious bodily injury or death. Six of the 11 states reported that the alert may only be activated if there is sufficient information about the person's disappearance. For example, in Texas and Georgia there must be sufficient information to disseminate to the public and in Oklahoma submitting information to the public or media would assist in locating the person. Only a few states require that alerts be activated on behalf of persons who are domiciled or a resident of the state. In Colorado and Texas, the missing person must have been domiciled in the state. To activate an alert in Delaware, the missing person must be a Delaware resident. In addition to these four criteria, states may have other criteria that must be met before an alert is activated. For example, Florida only activates statewide alerts on electronic highway signs for those individuals who are missing and believed to be driving a vehicle, thus the state first requires activation of a local or regional alert and a description of a vehicle or tag number. Florida also requires the missing person's information be entered into the Florida Crime Information Center. North Carolina requires the local law enforcement agency to report the incident to the North Carolina Center for Missing Persons. Rhode Island reported that the person must have last been seen in the state in order for an alert to be activated. As discussed above, one difference among states with alert systems is the designated entity responsible for activating the alert. Among the 11 states, six states (Colorado, Georgia, North Carolina, Ohio, Rhode Island, and Texas) have a lead state agency that is responsible for activating alerts at the request of a local law enforcement agency. In the remaining five states (Delaware, Florida, Kentucky, Oklahoma, and Virginia) the local law enforcement agency activates the alert locally or regionally and can seek assistance from the state law enforcement agency to disseminate the alert statewide or to another state, if necessary. For example, in Oklahoma, local law enforcement agencies activate alerts to law enforcement entities via the Oklahoma Law Enforcement Telecommunication System (OLETS), a communication system operated by the state's Department of Public Safety, which facilitates communication about missing adult alerts to law enforcement agencies throughout the state. In general, the entity responsible for activating the alert will disseminate descriptive information about the missing person to other law enforcement entities and the public through agreements with designated media and other information outlets. States identified television, radio, newsprint, lottery terminals, electronic highway signs, and trucker alert systems among those entities involved in further disseminating information about the missing person. States reported that this descriptive information may be disseminated electronically by e-mail or by facsimile. Some states will use the National Law Enforcement Telecommunications System (NLETS) or a similar state-named system (e.g., OLETS) to disseminate information about the missing person, this may be through a "be on the lookout" message to law enforcement agencies. Multiple states automatically authorize the use of electronic highway signs for dissemination of the alert, while other states use electronic highway signs on a case-by-case basis. Two states, Florida and North Carolina, reported the ability to use a reverse 911 system that leaves a recorded telephone message with information about the missing person and whom to contact with information. Once an alert has been activated and information has been disseminated to local law enforcement and the media, local law enforcement agencies in all states are asked to "be on the lookout" for the missing person and media outlets are encouraged, but not required, to provide the public with information on the missing person and their disappearance. States that post information in lottery terminals and on electronic highway signs provide information about the missing person to the public through these forms of communication. When information is disseminated to the public, information on how to contact law enforcement with tips or information is also included. States may include one or more contact numbers for the public to utilize such as the telephone number for the local law enforcement agency directing the search or the state alert system's coordinating office, emergency telephone systems such as 911 or 511, or the telephone number for state highway patrol. Some states impose certain conditions related to the timing and duration of an alert that has been activated, while others do not. In general, states do not have a waiting period prior to the activation of an alert. One state, Texas, requires that the activation of an alert be implemented within 72 hours of the person's disappearance. Five states (Florida, Ohio, Oklahoma, Texas, and Virginia) reported certain time constraints regarding the duration of active alerts. Oklahoma and Texas activate alerts for up to 24 hours; however, the requesting agency in Texas has the option to ask for an extension. In addition, time durations could also differ if a law enforcement agency decided to issue an alert locally or through an existing regional program. In Virginia, alerts can be activated for up to 12 hours, while Ohio evaluates the need for the alert after 48 hours and each 24 hours thereafter. The electronic highway signs in Florida are activated for six hours; however, information on the Florida Department of Law Enforcement's (FDLE) web-site can be posted as long as the person is missing. The remaining six states (Colorado, Delaware, Georgia, Kentucky, North Carolina, and Rhode Island) do not impose a time limit for the activation of alerts, but may give various stakeholders discretion regarding the duration of the alert. In Rhode Island and Delaware, the media outlets can determine how long they will broadcast the alert. Georgia will discontinue the alert at the family's discretion. North Carolina does not impose a time period for activation of the alert, but reported that alert information on electronic highway signs is activated for up to 12 hours. The 11 states were asked about whether they coordinated with other states to recover individuals who are believed to have crossed state lines during their disappearance. Most of the states have some mechanisms in place for coordinating with other states. Notably, most also share a border with at least one other state with an alert system. If needed, officials said they would send information about a missing adult from their state through national or interstate law enforcement communication systems. Colorado, Florida, Georgia, Texas, and Virginia reported that they would use NLETS. Delaware would disseminate information about a missing resident to fusion centers in nearby states, which are comprised of relevant law enforcement agencies in a particular jurisdiction that share information. Ohio officials said that information would be conveyed to other states through "law enforcement computer systems," but did not specify which systems. Florida, Georgia, and North Carolina indicated that their missing persons clearinghouses could coordinate with clearinghouses in other states. Rhode Island reported that it would coordinate with the other state's state law enforcement agency. Officials in a few of the states noted possible constraints in reporting residents missing, since most other states do not appear to have alert systems. Some officials suggested that states without the systems could ask law enforcement officials to "be on the lookout" for a missing individual. At least four states have requested other states (all of which are featured in the report) to activate alerts on behalf of residents (though this information was provided only by the states that were asked to activate the alert). Nearly all states, with the exception of Texas, reported that an alert could be activated on behalf of a missing individual from another state. Texas officials said that a missing senior who came from another state would not meet one of the alert criteria – that the individual is domiciled in Texas, meaning that he or she is a full-time resident of the state. However, a local law enforcement agency could coordinate a public notification response within the affected areas for an individual not domiciled in the state, if permitted by the local authorities, without requesting assistance from the state alert network. For instance, a local law enforcement agency could enlist the assistance of media, public agencies, and other local entities. Further, officials in at least four regions could seek assistance from regional alert networks which have been established to recover missing adults. As discussed above, Colorado and Delaware include residency as part of their alert criteria; nonetheless, these states indicated that an alert could be issued on behalf of an individual who is not a resident. Finally, nearly all states require that reports of missing persons be entered into the National Crime Information Center (NCIC) Missing Person File. The NCIC is used by law enforcement agencies in all states to inquire about criminal and missing person cases. For instance, if a law enforcement officer comes across a missing individual, the officer can search the NCIC database for any information about the individual that may have been entered by a law enforcement agency in that state or another state. All states provided data about costs related to state-level agencies that carry out (or assist in carrying out) alerts for missing adults. For states that provided detailed information, cost estimates ranged from about $40,000 to $182,000 to operate the alert systems annually. No states provided information about any costs to local law enforcement agencies or other stakeholders that may be involved in helping to administer the alert system. Colorado and Florida specified that the costs for implementing and administering the missing adult alert systems have been absorbed, in part, by the budget for the AMBER Alert system. Colorado additionally reported that there are ongoing costs for personnel and maintenance of both systems, but these costs were not specified. Florida reported that the administrative costs for both the AMBER and missing adult alerts include the salaries of on-call missing adult clearinghouse staff. The approximate cost is $40,000 per fiscal year. Georgia, North Carolina, and Ohio explained that funds are not set aside specifically for their adult alert systems, but that the cost of administration is absorbed by the budgets of the agencies that administer the alerts. North Carolina estimated that the cost to the missing person's clearinghouse, the agency that administers the alert, is $125,000 annually. Officials in Ohio reported that an upgrade to their AMBER Alert and missing person alert technology will cost approximately $100,000 at some future point. Virginia and Texas provided more detailed cost information. Texas reported costs associated with the Governor's Division of Emergency Management (GDEM) and the Texas Missing Persons Clearinghouse, which jointly administer the alert system (and does not include costs to other agencies). The approximate cost to the GDEM for coordinating the program with its existing AMBER Alert and Blue Alert programs and providing training on these programs was approximately $92,000, which excludes initial operating costs. The GDEM has a coordinator to administer the alert system, along with the state's other alert systems. This position, along with ongoing costs for training and coordination activities are funded in state FY2009 through a grant ($47,280) and internal operating expenses for the GDEM ($45,000). The Missing Persons Clearinghouse, which provides investigative support to the GDEM, has two analysts dedicated to the alert system. Actual expenses, including salaries, operations, and travel for state FY2008, were approximately $90,000. In total, the approximate cost annually to Texas for the alert system is about $182,000. Virginia officials provided cost data for the state police to activate regional or statewide alerts (local alerts are activated by local law enforcement agencies). In state FY2007, the cost was $30,000 for implementing the program, and an additional $30,000 for staff time and technology. The estimated ongoing costs are $25,000 annually. The ongoing costs are for staff time to administer the system, including handling and processing requests for the alert, activating the alert, assessing the alert after it has been activated, posting and removing information to the Virginia State Police Department missing persons website, and creating posters. According to state officials, the state will need about $50,000 to implement technology for the alert system and $45,000 annually for training, outreach, and staff support. Delaware, Rhode Island, and Oklahoma reported that no costs for the states are associated with the alert system. This appears to be, in part, because the alerts in Delaware and Oklahoma are administered and activated primarily by local law enforcement agencies, with some assistance from the state police or department of public safety. Kentucky did not provide any funding information, which also may be due to the fact that alerts are locally managed. Nearly all states, with the exception of Delaware, reported that alerts have been activated. Kentucky and Oklahoma do not keep records of alerts activated by local law enforcement agencies, but estimated that no more than 10 alerts have been activated in each state. The other eight reporting states provided the number of alerts activated, even if only at the state level, and most provided information about the outcomes of missing individuals. States reported activating between one (Rhode Island) and 82 alerts (North Carolina) as of the time they were surveyed. As previously mentioned, the number of alerts is likely affected by when the systems were implemented, the size of the state's population, and criteria for activating the alerts. Most states provided some information about the circumstances around a missing person's disappearance and their recovery. All states reported that the majority of the individuals were found alive, though at least one individual was found deceased in nearly every state, except Rhode Island. Five states (Florida, North Carolina, Ohio, Texas, and Virginia) indicated how the missing individuals were traveling. Florida's missing adult alert is activated only for individuals who are driving; therefore, all 32 (100%) missing individuals for whom alerts were activated were driving. In North Carolina, of the 82 alerts activated, 43 (52.4%) were on behalf of individuals who were driving and 39 (47.6%) had wandered away. Of those 39 individuals, three took a plane to another state, two were last seen on bikes, one took a bus to another state, and one took a taxi. Of the 14 individuals for whom alerts were activated in Ohio, nine (64.3%) of the individuals were driving. In Texas, of 71 alerts activated, 58 (81.7%) of the individuals were driving and 13 (18.3%) individuals wandered from their home or another location. Of the seven individuals for whom alerts were activated in Virginia, one (14.3%) was believed to have been driving. Two states (Florida and Georgia) provided information about where the missing individuals were found. Of the seven individuals in Florida who were recovered as a result of the alert system, six were located a few counties away from their home county. In Georgia, of the 78 alerts for individuals who were found, one was located in another state with family and the other 77 were located within their home city or county. Six states (Florida, Georgia, North Carolina, Rhode Island, Texas, and Virginia) were able to report whether the alerts aided in the recovery of missing individuals. Half of those states reported that the alert systems have been instrumental in recovering missing adults while the other states reported that the alerts did not help in recovery efforts. Florida officials stated that seven of 32 individuals (21.9%) were recovered based on tips provided by drivers who had seen electronic messages on the highway about the missing adults. According to officials in Georgia, the alert aided in the recovery of all individuals who were recovered alive (which was all but one individual). In Texas, of the 77 alerts activated, they contributed to the recovery of 21 senior citizens (27.3%). Rhode Island has activated one alert, and according to state officials, the alert did not assist in the individual's recovery. Officials in North Carolina reported that the alerts did not directly assist in the recovery of the missing individuals; however, family members of the missing individuals and the law enforcement agencies that recommended the alert be activated are pleased with the design of the program. Finally, Virginia officials reported that the alert did not assist in the recovery of the seven individuals who went missing and for whom alerts were activated. This report describes the detailed findings of 11 states with active alert systems for missing adults. Findings from this study suggest that there is an existing patchwork of state alert systems with wide variation in target populations and administrative procedures for activating alerts. These systems are similar to alert systems for abducted children (AMBER Alerts), but target adults who are vulnerable to going missing due to cognitive or mental impairment, developmental or physical disabilities, and certain mental health conditions. Although the systems in each state vary, in all states either local or state law enforcement agencies are responsible for activating the alerts. Often these law enforcement agencies involve multiple stakeholders in the process of recovering those who go missing, including other local law enforcement agencies, the state highway patrol, the public through various media outlets, and the state's missing persons clearinghouse. As the nation prepares for an aging population and likely increase in the number of individuals living in the community with cognitive impairment or other forms of disability, Congress may want to consider whether there is a role for the federal government in further developing state alert systems. For example, the federal government could provide funding to facilitate the expansion of alert systems to additional states. Similar to the federal role for state AMBER Alert programs, the federal government could assist in developing minimum guidelines for a missing adult alert system as well as provide states with technical support and training. Establishing a uniform network of state alert systems in every state could assist states and localities, in the event that a person is believed to be missing, with any necessary coordination across state lines. Further, the federal government could also play a role in assisting states with developing their systems so that data are more uniformly collected about the use and efficacy of state alert systems. Finally, the federal government could disseminate information about best practices for states looking to implement alert systems. The following sections discuss various issues for Congress in considering the role of the federal government, if any, in state alert systems for vulnerable missing adults. These issues are: autonomy and individual rights; creating a uniform identity; training; coordination across states; efficacy of alerts; use of alerts; and support to family caregivers. The use of any alert system for missing adults may challenge the legal rights of an individual, in this case an adult, who may choose to go missing. Unlike the AMBER Alert program which was established to alert law enforcement and the public when a child is missing and criminal activity may be involved, it is not a crime for an adult to wander from home or purposely go missing. To attempt to balance the rights of an individual with the concerns of family members or caregivers, states with alert systems have established specific criteria that must be met in order to activate a missing adult alert. In general, states have targeted missing individuals who are particularly vulnerable due to a credible threat to the individual's health and safety. Also, as previously mentioned, timing can be a critical factor in locating individuals with cognitive or mental impairment who wander either on foot or in a vehicle and may be without basic provisions or medicine, or exposed to the elements for extended periods. Concerns about violating an individual's privacy with respect to filing a missing person's report appear to outweigh the perceived benefits among various stakeholders including family members, law enforcement officials, and policymakers. While states were not explicitly asked for information about whether reports of missing persons were credible, state officials in one state, Texas, indicated that all alerts activated by the state were based on legitimate reports of missing vulnerable seniors. In general, states felt the criteria they had established contained appropriate safeguards to ensure that missing persons were in fact missing due to a cognitive impairment or some other disabling condition. The popularity of state AMBER Alert systems appears to provide a platform for states to develop their missing adult alerts. Naming the missing adult alert system as a Senior, Silver, or Gold Alert may be an attempt by states to create a "brand" identity for the system similar to that of state AMBER Alerts. For example, three states use the word "Senior" in the title of their system: Colorado's Missing Senior Citizen Alert Program; Rhode Island's Missing Senior Citizen Alert Program; and Virginia's Senior Alert System. Another four states refer to their alert systems as a "Silver Alert," which is likely a reference to an older person (i.e., someone with grey or silver hair). However, the senior or silver reference may also be misleading in that it may not accurately describe the target population for these alert systems. In some states with a "Silver Alert" or "Senior Alert" system, alerts can also be activated on behalf of missing persons aged 18 to 59. Other states refer to their alert systems as Gold or Golden Alert or Missing Adult Alert. These named programs tend not to specify age criteria for activating an alert. The use of a name to create a specific brand identity for the alert system could also serve to distinguish the alert system from AMBER Alerts or other types of alerts. Further, creating a brand identity could be done to prompt law enforcement entities and the public to respond to the alert in a specific way that may be different from the response for other types of alerts. Similar to AMBER Alert, the federal government may want to consider a uniform name or identity for state alert systems for missing vulnerable adults to assist states in implementing alert systems, coordinating alerts across states, and educating various stakeholders about the system. Most states with alert systems reported that law enforcement agencies have been trained on the procedures for activating missing adult alerts in their respective states. However, in some states where a local law enforcement agency activates the alert, it was not known whether there was uniform training at the local level. In addition, states were not asked the extent to which these alert systems train law enforcement and other public safety officials in techniques to assist in recovering persons with cognitive or mental impairments. Some advocates argue that specific training on Alzheimer's disease and related dementia can be effective in both identifying and recovering these individuals in the event they go missing. Moreover, persons who wander away from home may easily attract the attention of law enforcement through auto accidents or erratic driving, indecent exposure, shoplifting, and other deviant behavior. Often these individuals can not think, act, or communicate in a way that can assist them. However, proper training in identifying and communicating with an individual who has a mental or cognitive impairment can help to ensure that these individuals are returned safely to their home. Pending legislation ( H.R. 632 and S. 557 ) to assist states develop and coordinate missing adult alert systems would include a training component where a federal coordinator, working in collaboration with the Administration on Aging and the Missing Alzheimer's Disease Patient Alert program, would provide training opportunities and educational resources to law enforcement and other entities. Some states with alert systems reported that they might have difficulty coordinating with another state that lacks a similar system. States may also have challenges coordinating with states that have alert systems with different criteria for activating an alert. Although state and local governments have taken the lead in implementing alert systems, the federal government could play a role in coordinating efforts when a missing individual is believed to have crossed state lines as well as assist in the development of formal agreements or protocols for the use of interstate alerts. The federal government could model any policies to coordinate across state lines on the AMBER Alert program, which provides training and technical assistance to states on a number of issues related to abducted children. This training addresses how jurisdictions, including those in different states, can work together to recover children who are abducted, among other topics. Through conference and training exercises, state AMBER Alert coordinators, state and local law enforcement agencies, and other stakeholders have opportunities to meet and exchange ideas, which may further facilitate coordination. In addition, the DOJ has issued recommended guidelines for activating AMBER Alerts to encourage states and localities to adopt similar alert criteria. Existing legislation ( H.R. 632 and S. 557 ) that would create a similar network of state missing adult alert systems seeks to provide greater coordination between states for missing adult cases by establishing a Silver Alert Coordinator position at the DOJ. The purpose of the position is to help establish voluntary guidelines for states in developing Silver Alert plans that will promote compatible and integrated Silver Alert systems throughout the United States. It is not clear how effective state alert systems are in recovering missing vulnerable adults. At least a few of the states with alert systems did not maintain detailed outcomes data on the alerts that had been activated to date, and many could not report whether the alert was useful. In states where alerts are activated at the local level, aggregating data on the outcomes of these alerts may be more complicated than in states that have a designated agency at the state level that activates alerts. Furthermore, tracking outcomes from alerts is an administrative task that may require additional technology and resources, which states may not have the funding to support. Further, only three (Florida, Georgia, and Texas) of six states that reported whether the alerts were effective could say for certain that the reports aided in the recovery in the missing individual. For Georgia, the alert aided in all cases, while in Florida and Texas the alerts aided in fewer than 30% of all cases. The federal government could play a role in developing guidelines for data collection and outcomes measures as well as assisting states with developing technology and infrastructure necessary for reporting on the use and effectiveness of their alert systems. Some states expressed that overuse of alerts for vulnerable adults could desensitize the public to alerts in general, including AMBER Alerts. State officials in Oklahoma and Virginia, both of which administer missing adult alert systems locally with some state-level involvement, commented that the Emergency Alert System, which may be used for AMBER Alerts, should not be used for missing adult alerts so that the public does not become desensitized to AMBER Alerts (note that the FCC does not allow the system to be used for purposes related to missing persons except for abducted children). Officials in Virginia further stated that the EAS is best for missing children because they are more likely to have been removed from their communities, whereas missing vulnerable adults tend to wander on foot in close proximity to the place they were last seen. This is consistent with the Alzheimer's Association's statement that most wandering adults with the disease are found within one mile of their home. State officials concerned about using scarce law enforcement resources to recover missing vulnerable adults raised the issue of whether activating the alert system was the best use of these resources. Some states have expressed concern as to whether the alert systems should be used only in select circumstances and/or for select populations. In response to these concerns, states may choose to activate alerts regionally or statewide only in the case where an individual is believed to be driving, given that they can readily travel outside of their community. Alert systems for vulnerable adults can assist local and state law enforcement agencies in the recovery of a missing adult; however, they often fail to address the circumstances that led to the person's disappearance. As previously mentioned, it is not uncommon for people with cognitive impairment resulting from Alzheimer's disease to wander away from home and become lost. According to the Alzheimer's Association, six out of ten people with Alzheimer's disease will wander during the course of the disease, sometimes frequently. Some state and local law enforcement agencies have integrated the Alzheimer's Association's Safe Return program into their routines. Other law enforcement agencies are working in their communities to provide electronic monitoring services for certain individuals who are susceptible to going missing close to home and may not be visible to the public. Missing alert systems for vulnerable adults could benefit from developing formal linkages with these programs, where they exist, and assist with disseminating information to the community about accessing these programs. Proposed legislation would authorize funding for grants to states and local governments to carry out programs that provide electronic monitoring services to elderly individuals that could assist in their recovery if they go missing. In the event that a state activates an alert for a missing vulnerable person and that individual is recovered alive, state alert systems may benefit from engaging community social services agencies or, in the case the individual is a senior, partnering with state units on aging and local area agencies on aging, funded under the Older Americans Act. These agencies or organizations could conduct caregiver assessments with the aim of preventing future wandering behavior. The caregiver assessment process could identify and link appropriate services and support for family caregivers such as back-up support, in cases of emergency, counseling, or respite care. Many of these services are already available to caregivers through federal funding that supports the National Family Caregiver Support Program (NFCSP). Caregiver assessments would also elicit information about the caregiver's health, willingness to provide care, and training and support needs. Through the assessment process family caregivers could learn about the resources available to them in their communities including the Alzheimer's Association's Safe Return Program or Project Lifesaver International, Inc., which has developed a program to track missing vulnerable adults through electronic technology. State alert systems for missing vulnerable adults appear to be an emerging trend, with alert systems developed in at least 11 states. As a result, Congress is considering legislation that would provide the federal government with a role in assisting states to develop these systems nationwide. Most states with existing alert systems have modeled their program after the AMBER Alert program. All state systems target persons with cognitive or mental impairments; however, there is wide variation in the specific target population and procedures for activating alerts. While states will continue to be faced with the challenge of balancing individual rights with efforts that can assist the most vulnerable of residents, states may benefit from federal efforts that could facilitate interstate coordination for missing persons believed to have crossed state lines. In addition, federal efforts could model the federal role in developing state AMBER Alerts systems by providing states with minimum guidelines, technical assistance, and training. State alert systems may also benefit from coordinating with existing federal, state, and local initiatives that can assist in locating vulnerable adults that go missing. In the event that the alert system assists in recovering a missing vulnerable adult, family caregivers may benefit from referral to the Safe Return Program, funded in part by federal appropriations under the Missing Alzheimer's Disease Patient Alert grant, or Project Lifesaver International, Inc. These alert systems could also educate and assess family caregivers about the needs of vulnerable adults and provide linkages to available community resources in an effort to prevent future wandering behavior. Appendix A. Questions for State Officials Appendix B. Detailed Tables of State Programs

A patchwork of alert systems to recover vulnerable missing adults is developing through the country. These systems, administered at the state and local levels, are intended to alert law enforcement entities and the public that adults with cognitive impairment or other disabilities are missing and may need assistance. The alerts are activated on behalf of targeted groups of individuals—such as those with cognitive or mental impairment (e.g., Alzheimer's disease and other forms of dementia), developmental disabilities, or suicidal tendencies—who may be at high risk of going missing and unable to make their way home or to a safe place. Recent media attention to cases of vulnerable missing adults has prompted policymakers to consider whether the federal government should expand its role in helping these individuals. Currently, the federal Missing Alzheimer's Disease Patient Alert program funds a service that provides enrollees—individuals with Alzheimer's or dementia—with a bracelet indicating that the individual is memory impaired, including a toll-free, 24-hour emergency response number to call if the person is found wandering or lost. Some Members of Congress have expressed interest in assisting states to create and expand alert systems for missing adults. In the opening weeks of the 111th Congress, the House passed legislation (H.R. 632) to establish a grant program to encourage states to develop, expand, and coordinate these alert systems. A companion bill (S. 557) was introduced in the Senate shortly thereafter. The proposed program is similar to a federal grant program that funds training and technical assistance for what are known as AMBER (America's Missing: Broadcast Emergency Response) Alert systems. Each state has developed an AMBER Alert system to assist in the recovery of children who are believed to have been abducted. In response to the increased congressional focus on alert systems for missing adults, the Congressional Research Service (CRS) gathered data on 11 states (Colorado, Delaware, Florida, Georgia, Kentucky, North Carolina, Ohio, Oklahoma, Rhode Island, Texas, and Virginia) that were known to have developed such systems. CRS conducted a review of state laws, regulations, or executive orders that established the systems, and contacted officials in each of the states to learn more about how the systems were administered. CRS found that most of the systems were established only recently, since 2006. This report provides an overview of the alert systems in these 11 states, including (1) the legal authority to establish the systems; (2) the target population for the alerts; (3) administrative responsibility for the alerts, including coordination with AMBER Alerts; (4) training of law enforcement agencies and other entities about the alerts; (5) the process for activating alerts; (6) coordination of alerts with other states; (7) system costs; (8) use of the systems; and (9) any information about outcomes of the individuals for whom alerts were activated. The last section of the report provides a discussion of issues for Congress to consider with respect to the federal role, if any, in developing state alert programs for missing adults. For example, some states with alert systems noted that they might have difficulty coordinating with another state that lacks a similar system. States may also have challenges coordinating with states that have alert systems with different criteria that must be met before an alert is activated. The federal government may be able to help establish protocols to coordinate cross-state alerts and to assist in establishing formal agreements or protocols for the use of interstate alerts. This report will not be updated.

govreport

This report describes and analyzes annual appropriations for the Department of Homeland Security (DHS) for FY2017. It compares the enacted FY2016 appropriations for DHS, the Barack Obama Administration's FY2017 budget request, the Donald J. Trump Administration's requests for additional funding, and the appropriations measures developed in response. This report identifies additional informational resources, reports, and products on DHS appropriations that provide additional context for the discussion, and it provides a list of Congressional Research Service (CRS) policy experts whom clients may consult with inquiries on specific topics. The suite of CRS reports on homeland security appropriations tracks legislative action and congressional issues related to DHS appropriations, with particular attention paid to discretionary funding amounts. The reports do not provide in-depth analysis of specific issues related to mandatory funding—such as retirement pay—nor do they systematically follow other legislation related to the authorization or amending of DHS programs, activities, or fee revenues. Discussion of appropriations legislation involves a variety of specialized budgetary concepts. The Appendix to this report explains several of these concepts, including budget authority, obligations, outlays, discretionary and mandatory spending, offsetting collections, allocations, and adjustments to the discretionary spending caps under the Budget Control Act ( P.L. 112-25 ). A more complete discussion of those terms and the appropriations process in general can be found in CRS Report R42388, The Congressional Appropriations Process: An Introduction , coordinated by [author name scrubbed], and the Government Accountability Office's A Glossary of Terms Used in the Federal Budget Process . Generally, the homeland security appropriations bill includes all annual appropriations provided for DHS, allocating resources to every departmental component. Discretionary appropriations provide roughly two-thirds to three-fourths of the annual funding for DHS operations, depending on how one accounts for disaster relief spending and funding for overseas contingency operations. The remainder of the budget is a mix of fee revenues, trust funds, and mandatory spending. Except in summary discussions and when discussing total amounts for the bill as a whole, all amounts contained in the suite of CRS reports on homeland security appropriations represent budget authority and are rounded to the nearest million. However, for precision in percentages and totals, all calculations were performed using unrounded data. Data used in this report for FY2016 and FY2017 amounts are derived from a single source. Normally, this report would rely on previous fiscal year enacted legislation and reports, as well as House and Senate legislative efforts in response to the Administration's budget request. However, due to the implementation of the Common Appropriations Structure for DHS (see below), this report relies on the Consolidated Appropriations Act, 2017 ( P.L. 115-31 ) and the accompanying explanatory statement, which was printed in the May 3, 2017, Congressional Record . Division F of this act is the Department of Homeland Security Appropriations Act, 2017. Information on the second supplemental appropriation for DHS components is drawn from P.L. 115-56 . On February 9, 2016, the Obama Administration released its budget request for FY2017. The Administration requested $40.62 billion in adjusted net discretionary budget authority for DHS for FY2017, as part of an overall budget that the Office of Management and Budget (OMB) estimated at the time to be $66.2 billion (including fees, trust funds, and other funding that is not annually appropriated or does not score against discretionary budget limits). The request amounted to a $332 million, or 0.8%, decrease from the $40.96 billion enacted for FY2016 through the Department of Homeland Security Appropriations Act, 2016 ( P.L. 114-113 , Division F). The Obama Administration also requested discretionary funding for DHS components that does not count against discretionary spending limits set by the Budget Control Act (BCA; P.L. 112-25 ) and is not reflected in the above totals. The Administration requested an additional $6.7 billion for the Federal Emergency Management Agency (FEMA) in disaster relief funding, as defined by the BCA, and in the budget request for the Department of Defense, a transfer of $163 million in Overseas Contingency Operations/Global War on Terror (OCO) designated funding to the U.S. Coast Guard. On May 26, 2016, the Senate Committee on Appropriations reported out S. 3001 , accompanied by S.Rept. 114-264 . According to the committee report, S. 3001 included $41.2 billion in adjusted net discretionary budget authority for FY2017. This was $578 million (1.4%) above the level requested by the Administration, but $246 million (0.6%) above the enacted level for FY2016. The Senate committee-reported bill included the Administration-requested levels for disaster relief funding and OCO funding covered by BCA adjustments—the latter as an appropriation in the DHS appropriations bill rather than the requested transfer. On June 22, the House Committee on Appropriations reported out H.R. 5634 , accompanied by H.Rept. 114-668 . H.R. 5634 included $41.04 billion in adjusted net discretionary budget authority for FY2017. This was $426 million (1.0%) above the level requested by the Administration, and $95 million (0.2%) above the enacted level for FY2016. The bill reported by the House committee included the Administration-requested levels for disaster relief funding. The House Appropriations Committee chose to provide the OCO funding as a transfer from the Department of Defense budget as requested. No further action was taken on these measures in 2016, and they expired at the end of the 114 th Congress on January 3, 2017. On September 29, 2016, President Obama signed into law P.L. 114-223 , which contained a continuing resolution that funded the government through December 9, 2016, at the same rate of operations as FY2016, minus 0.496%. The continuing resolution contained three sections providing specific authority to DHS to carry out key functions. All of these authorities had been requested by the Administration: Section 130:  As described above, this was a new provision allowing DHS to obligate funds in the account and budget structure of the CAS as laid out in a report submitted to the appropriations committees prior to the start of FY2017. Authorization to implement the CAS structure as outlined in the FY2017 request was originally laid out in the FY2016 Department of Homeland Security Act; Section 130 allowed modifications to the structure developed since that time. Section 131: This was a new provision similar to ones provided in past years to allow DHS to maintain the staffing levels of certain components. Section 131 allowed resources provided under the CR to be apportioned at the rate needed to maintain the staffing levels of TSA screeners and CBP personnel attained at the end of FY2016. The Obama Administration, in their request for anomalies in the CR, indicated that TSA required an anomaly because TSA repurposed funding provided for FY2016 to allow for hiring of additional screeners and converting a number of part-time screeners to full-time screeners. The Administration indicated that it would not be able to sustain that level of effort operating under a CR without the anomaly. Section 132: This was a provision extending special procurement authorities for research and development activities at DHS, known as "other transaction authority." This provision has been carried in many CRs covering DHS, including most recently as Section 129 of the FY2016 CR, P.L. 114-53 . A second continuing resolution was signed into law on December 10, 2016 ( P.L. 114-254 ), funding the government through April 28, 2017, at the same rate of operations as FY2016, minus 0.1901%. The second continuing resolution amended the first, leaving the three DHS-specific provisions above in effect, while adding a fourth. The new DHS-specific provision, Section 163, was similar to Section 131, but was broader in both the components of DHS it applied to and the flexibility it provided. The Obama Administration requested flexibility not only to maintain staffing levels of CBP and ICE, but also to maintain border security and fulfill immigration enforcement priorities. In their request, they specifically noted this flexibility was for both salaries and non-pay expenses, and was needed to "respond to unpredictable surges in migration." Congress chose to broaden the requested flexibility, extending it to the TSA and U.S. Secret Service, "to ensure border security, fulfill immigration enforcement priorities, maintain aviation security activities, and carry out the mission associated with the protection of the President-elect." A third short-term continuing resolution ( P.L. 115-30 ) was signed into law on April 28, 2017, which extended the second continuing resolution through May 5, 2017, and provided a temporary extension of health benefits for miners. No other provisions affected DHS, and the continuing resolutions and the flexibilities they provided were superseded by the Department of Homeland Security Appropriations Act, 2017. On March 16, 2017, the Trump Administration submitted an amendment to the FY2017 budget request, which included a request for $3 billion in additional funding for DHS. Congress addressed this request at the same time as it resolved annual appropriations for the federal government, through the Consolidated Appropriations Act, 2017 (signed into law as P.L. 115-31 on May 5, 2017). The act included both annual and supplemental appropriations for DHS as Division F, which is titled the Department of Homeland Security Appropriations Act, 2017. The first five titles of Division F provided annual appropriations for DHS in response to the Obama Administration's request as submitted. The bill included $41.3 billion in adjusted net discretionary budget authority in annual appropriations, as well as $6.7 billion in funding for the costs of major disasters under the Stafford Act and $163 million in funding for overseas contingency operations. A sixth title responded to the Trump Administration's request for $3 billion in additional funding for DHS. Title VI included over $1.1 billion in supplemental appropriations for U.S. Customs and Border Protection, Immigration and Customs Enforcement, and the U.S. Secret Service. The explanatory statement accompanying the act noted that "the language and allocations contained in the House and Senate reports [ H.Rept. 114-668 and S.Rept. 114-264 ] carry the same weight as language included in this explanatory statement unless specifically addressed to the contrary" in the act or the statement. Such language is common in appropriations conference reports, but it is especially important in cases like this one where there is no direct procedural link between the House and Senate committee-reported bills from a previous Congress and the consolidated appropriations act. On September 1, 2017, the Trump Administration requested $7.85 billion in supplemental funding for FY2017, including $7.4 billion for the DRF. On September 6, the House passed the relief package requested by the Administration as an amendment to H.R. 601 . On September 7, the Senate passed an amended version, which included the House-passed funding as well as an additional $7.4 billion for disaster relief through another department, a short-term increase to the debt limit, and a short-term continuing resolution that would fund government operations into FY2018. The House passed the Senate amended version of the bill on September 8, 2017, which became P.L. 115-56 . When DHS was established in 2003, components of other agencies were brought together over a matter of months, in the midst of ongoing budget cycles. Rather than developing a new structure of appropriations for the entire department, Congress and the Administration continued to provide resources through existing account structures when possible. In H.Rept. 113-481 , accompanying the House version of the FY2015 Department of Homeland Security Appropriations Act, the House Appropriations Committee wrote, "In order to provide the Department and the Committees increased visibility, comparability, and information on which to base resource allocation decisions, particularly in the current fiscal climate, the Committee believes DHS would benefit from the implementation of a common appropriation structure across the Department." It went on to direct the DHS Office of the Chief Financial Officer "to work with the components, the Office of Management and Budget (OMB), and the Committee to develop a common appropriation structure for the President's fiscal year 2017 budget request." In an interim report in 2015, DHS noted that operating with "over 70 different appropriations and over 100 Programs, Projects, and Activities ... has contributed to a lack of transparency, inhibited comparisons between programs, and complicated spending decisions and other managerial decision-making." Section 563 of Division F of P.L. 114-113 (the FY2016 Department of Homeland Security Appropriations Act) provided authority for DHS to submit its FY2017 appropriations request under the new common appropriations structure (or CAS), and implement it in FY2017. Under the act, the new structure was to have four categories of appropriations: Operations and Support; Procurement, Construction and Improvement; Research and Development; and Federal Assistance. Most of the FY2017 DHS appropriations request categorized its appropriations in this fashion. The exception was the Coast Guard, which was in the process of migrating its financial information to a new system. The Senate Appropriations Committee did not use the new structure, instead drafting its annual DHS appropriations bill and report using the same structure as was used in FY2016. In explaining its actions, the committee wrote the following: As proposed, the new structure would reduce controls and congressional oversight to a degree that is unacceptable to this Committee. It is disappointing that the Department failed to address the Committee's concerns before transmitting the budget request in this structure. At the same time, the Committee continues to believe that the goal of following funds from planning through execution is critical to departmental oversight of the components as well as establishing a capability to make tradeoffs in resource allocation and budget development decisions. As such, the Committee is willing to undertake the effort necessary, working with the Department and the House Committee on Appropriations, to transition from the current structure to a more common appropriations structure, specifically in common accounts, consistent with the guidance provided in fiscal year 2016. Under the account level, a structure closer to the current PPAs would maintain controls and transparency regarding congressional priorities and the offices and officials responsible for execution of funds. The House Appropriations Committee used the new structure, and noted the following in its report: Pursuant to P.L. 114-113 , the fiscal year 2017 budget was presented in a new structure that included four common appropriations accounts for every DHS component. Establishing and implementing this structure required significant time and effort by the entire financial management staff of DHS and its components, for which they are to be commended. As the use of this new structure matures and becomes more disciplined, the Committee believes the agency's leadership, as well as congressional stakeholders, will be better positioned to: 1) conduct more effective oversight of DHS components; 2) better track the life cycle costs of DHS acquisition programs; and, 3) recommend more informed trade-offs among programs when faced with limited resources. No authoritative crosswalk between the House Appropriations Committee proposal in the CAS structure and Senate Appropriations Committee proposal in the legacy structure is publicly available. Section 130 of the Continuing Appropriations Act, 2017 ( P.L. 114-223 ) included specific authority for DHS to obligate resources provided under the continuing resolution in a revised structure, reflected in a table provided to the appropriations committees by the DHS CFO prior to the end of the fiscal year. The explanatory statement for the Division F of the Consolidated Appropriations Act, 2017, included a "detail table," outlining the new structure of DHS appropriations, as well as Programs, Projects, and Activities (PPAs)—the next level of funding detail below the appropriation level. The Administration requested FY2018 funding for DHS in essentially the same structure. If historical trends continue, it is likely that within this general structure, small changes at the PPA level will continue to occur from year to year. A visual representation of this new structure follows in Figure 1 , which illuminates the proportion of these funding categories for each component, as well as the department as a whole. On the left are the five appropriations categories of the revised CAS with a black bar representing the total FY2017 funding levels enacted for DHS for each. A sixth catch-all category is included for budget authority associated with the legislation that does not fit the CAS categories, and a seventh category is included for appropriations for the U.S. Coast Guard, which has not transitioned its accounting system to the CAS format. Colored lines flow to the DHS components listed on the right, showing the amount of funding provided through each category to each component. Appropriations measures for DHS typically have been organized into five titles. The first four are thematic groupings of components, while the fifth provides general direction to the department, and sometimes includes provisions providing additional budget authority. The Department of Homeland Security Appropriations Act, 2017 not only introduced a restructuring of appropriations, it also provided direction to the department and its components differently than in previous years. In previous years, the legislative language of many appropriations included directions to components or specific conditions on how the budget priority it provided could be used. Similarly, general provisions provided directions or conditions to one or more components. In the FY2017 act, a number of these provisions within appropriations and component-specific general provisions were grouped at the ends of the titles where their targeted components are funded, and identified as "administrative provisions." Other general provisions, including those affecting multiple components, restrictions on uses of funds in the act, and rescissions of previously appropriated funds, remain in Title V. As noted above, for FY2017 a sixth title provided additional appropriations for several components, in response to evolving situations. It also addressed a March 16, 2017, amendment of the FY2017 budget request by the Trump Administration, seeking additional budget authority for various appropriations. The following sections present textual and tabular comparisons of FY2016 enacted and FY2017 requested and enacted appropriations for the department. The structure of the appropriations and programs, projects, and activities (PPAs) reflects the organization outlined in the explanatory statement accompanying the Department of Homeland Security Appropriations Act, 2017. As the House and Senate appropriations committees did not release the recommendations for funding included in S. 3001 or H.R. 5634 realigned to this structure, authoritative comparisons below the component level of those bills is not possible. The tables summarize the appropriations provided for each component, subtotaling the resources provided through the appropriations legislation and recommended in the accompanying explanatory statement. The "FY2017 Request" column reflects the FY2017 budget request by the Obama Administration for annual appropriations, and the Trump Administration's requests for supplemental FY2017 funding from its letters of March 16, 2017, and September 1, 2017. Where supplemental appropriations were requested or provided for a given component, those are displayed after discussion of annual appropriations, and separate totals are provided for each. Following the methodology used by the appropriations committees, totals of "appropriations" do not include resources provided by transfer or under adjustments to discretionary spending limits (i.e., for overseas contingency operations for the Coast Guard or the cost of major disasters under the Stafford Act for the Federal Emergency Management Agency). Those amounts are included in the budget authority totals. A subtotal for each component of total estimated resources that would be available under the legislation and from other sources (such as fees, mandatory spending, and trust funds) for the given fiscal year is also provided. At the bottom of each table, totals indicate the total for the title on its own, funding through general provisions and supplemental appropriations (when such were requested or provided), the total for the title's components in the entire bill, and the projected total FY2017 funding for the title's components from all sources (such as fees not governed by the bill, trust funds, etc.). Departmental Management and Operations, the smallest of the first four titles, contains appropriations for the departmental management accounts, Analysis and Operations (A&O), and the Office of the Inspector General (OIG). For FY2016, these components received almost $1.50 billion in net discretionary budget authority through the appropriations process. The Obama Administration requested $1.46 billion in FY2017 net discretionary budget authority for components included in this title. The appropriations request was $37 million (2.5%) less than was provided for FY2016. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $1.25 billion in net discretionary budget authority. This was $209 million (14.3%) less than requested by the Obama Administration and $246 million (16.5%) less than was provided in FY2016. Table 1 shows these comparisons in greater detail. As the management directorate and Office of the Inspector General are funded in part with resources from outside Title I, a separate line is included for those components showing a total for exclusively what is provided within Title I, above the line providing the total annual appropriation. Security, Enforcement, and Investigations, comprising roughly three-quarters of the funding appropriated for the department, contains appropriations for U.S. Customs and Border Protection (CBP), Immigration and Customs Enforcement (ICE), the Transportation Security Administration (TSA), the Coast Guard (USCG), and the U.S. Secret Service (USSS). In FY2016, these components received $33.22 billion in net discretionary budget authority through the appropriations process. The Obama Administration requested $32.26 billion in FY2017 net discretionary budget authority for components included in this title, as part of a total budget for these components of $40.04 billion for FY2017. The appropriations request was $957 million (2.9%) less than was provided for FY2016. The first five titles of the Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $33.50 billion in net discretionary budget authority. This was $1.24 billion (3.8%) more than requested by the Obama Administration and $280 million (0.8%) more than was provided in FY2016. The components included in this title received $1.14 billion in additional net discretionary budget authority in Title VI of the act. This was $1.76 billion (60.7%) less than requested by the Trump Administration. Table 2 shows these comparisons in greater detail. Protection, Preparedness, Response, and Recovery, the second largest of the first four titles, contains appropriations for the National Protection and Programs Directorate (NPPD), the Office of Health Affairs (OHA), and the Federal Emergency Management Agency (FEMA). In FY2016, these components received $6.38 billion in net discretionary budget authority and $6.71 billion in specially designated funding for disaster relief through the appropriations process. The Obama Administration requested $5.71 billion in FY2017 net discretionary budget authority for components included in this title, and $6.71 billion in specially designated funding for disaster relief as part of a total budget for these components of $19.82 billion for FY2017. The appropriations request was $718 million (11.2%) less than was provided for FY2016 in net discretionary budget authority. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $6.67 billion in net discretionary budget authority. This was $957 million (16.8%) more than requested, and $239 million (4.2%) more than was provided in FY2016. The act also included the requested disaster relief funding. In addition, the Trump Administration requested $7.4 billion in supplemental appropriations for FEMA for FY2017, which was enacted as a part of P.L. 115-56 . Table 3 shows these comparisons in greater detail. As some annually appropriated resources are provided for FEMA from outside Title III, a separate line is included showing a total for exclusively what is provided within Title III, above the line providing the total annual appropriation. Title IV, Research and Development, Training, and Services, the second smallest of the first four titles, contains appropriations for the U.S. Citizenship and Immigration Services (USCIS), the Federal Law Enforcement Training Center (FLETC), the Science and Technology Directorate (S&T), and the Domestic Nuclear Detection Office (DNDO). In FY2016, these components received $1.50 billion in net discretionary budget authority. The Obama Administration requested $1.63 billion in FY2017 net discretionary budget authority for components included in this title, as part of a total budget for these components of $5.52 billion for FY2017. The appropriations request was $134 million (8.9%) more than was provided for FY2016. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $1.50 billion in net discretionary budget authority. This was $137 million (8.4%) less than requested, and $3 million (0.2%) less than was provided in FY2016. Table 4 shows these comparisons in greater detail. As noted above, the fifth title of the act contains general provisions, the impact of which may reach across the entire department, impact multiple components, or focus on a single activity. Rescissions of prior-year appropriations—cancellations of budget authority that reduce the net funding level in the bill—are found here. For FY2016, Division F of P.L. 114-113 included $1.51 billion in rescissions. For FY2017, the Administration proposed rescinding $420 million in prior-year funding. Senate Appropriations Committee-reported S. 3001 included $1.23 billion in rescissions, while House Appropriations Committee-reported H.R. 5634 included $1.20 billion. Division F of P.L. 115-31 included $1.48 billion in rescissions. Most of the DHS budget is outside of the defense budget function (050). As a result, most of the department competes with the rest of the federal nondefense budget for nondefense discretionary spending allocations under the budget controls imposed by the Budget Control Act. However, more than $2.0 billion of the FY2017 budget authority enacted for the department is classified as defense discretionary spending—roughly $1.5 billion of which is for the National Protection and Programs Directorate (NPPD). In noting the minority party's concern over the level of funding in the House version of the bill to support government-wide cybersecurity funding, House Appropriations Committee Ranking Member Nita Lowey and Homeland Security Subcommittee Ranking Member Lucille Roybal-Allard wrote in their additional views that the subcommittee's limited defense allocation resulted in underfunding of such activities, and that "to ensure that upgrades to federal cyber networks are deployed on time," the subcommittee's allocation of defense discretionary spending would need to be increased so that additional funding could be provided in the final enacted annual appropriations vehicle. The Obama Administration proposed a 1.6% pay increase for all civilian federal employees and members of the military in its FY2017 budget request. Almost all DHS employees are considered civilians, with the significant exception of Coast Guard military personnel. Executive Order 13756 issued by President Barack Obama on December 27, 2016, provided a pay adjustment of 2.1% for civilian federal employees, allocated as 1.0% base pay and an average 1.1% locality pay. The pay increase became effective on January 8, 2017. Section 601 of the National Defense Authorization Act for Fiscal Year 2017 also provided a 2.1% pay increase, which covers Coast Guard military personnel. The FY2016 Homeland Security Appropriations Act included a new general provision that had been carried in both House- and Senate-reported bills. The provision temporarily prohibited the obligation of appropriated funds for any structural pay reform that affects more than 100 full-time positions or costs more than $5 million in a single year. This prohibition would last until the end of the 30-day period that begins when the Secretary notifies Congress about (1) the number of FTE positions affected by the change, (2) funding required for the change for the current year and through the Future Years Homeland Security Program, (3) the justification for the change, and (4) an analysis of the compensation alternatives to the change that the department considered. This provision was repeated in the House and Senate committee-reported bills for FY2017 and in P.L. 115-31 . Stating that hiring remains the department's "most daunting management challenge," resulting in "a vicious cycle of bloated and unrealistic budget requests, unfilled mission needs, poor morale, and higher attrition," the Senate report expressed the committee's belief that hiring process steps need to be regularly monitored to ensure transparency and the accountability of DHS officials. The Senate committee noted Customs and Border Protection's approach as a model for streamlining the hiring process and directed DHS to continue developing metrics on hiring, attrition, and the overall process that are consistent and repeatable. The report directed DHS to provide a briefing on the strategy to reduce hiring times, provide quarterly metrics by component, and progress toward eventual monthly reporting of metrics within 60 days after the act's enactment. The House committee report directed the Office of the Under Secretary for Management (USM) to continue to provide updates to the committee on a corrective action plan on hiring and hiring metrics. Reiterating the Senate committee's concerns, the report stated that "most components are still unable to meet their hiring goals, particularly when faced with continued high attrition levels." According to the report, the lengthy hiring process continues to prevent DHS from signing the most capable applicants and discourages potential recruits from applying. The committee directed the USM to brief the House and Senate Appropriations Committees, within 90 days after the act's enactment, on progress in taking the following actions and any others needed to reform the hiring process: Conduct any necessary polygraph examinations as early as possible in the personnel security process in order to avoid unnecessary background investigation, medical clearance, and other hiring-related expenses; Reevaluate current polygraph disqualifiers; Maximize the use of existing background investigations for applicants who are current federal employees or members of the U.S. Military unless specific fitness factors precluded the acceptance of a previous suitability/fitness determination; Reevaluate fitness factors to improve consistency across the Department, as appropriate, and better promote current reciprocity in acceptance of existing security clearances. The explanatory statement that accompanied P.L. 115-31 reiterated the instructions included in the Senate and House committee reports by directing DHS "to continue working with every component to develop metrics on hiring, attrition, the processes used to bring staff on board, and a hiring corrective action plan." The department is to brief the committees within 90 days after the act's enactment on the "strategy to decrease the number of days it takes to hire new employees." Among the information to be provided in the briefing are "quarterly hiring metrics by component," "progress toward monthly metrics reporting," and "progress made to establish reciprocity with other agencies on polygraph examinations and security clearances." CBP is to "continue monthly reporting of hiring gains and attrition losses." Stating that skills in cost analysis, modeling, and statistics are "in small supply" within the DHS workforce, the House committee report advised the department that it should consider conducting an analysis of skills and capabilities across the department to determine whether adequate resources are dedicated to its budget and acquisition and management functions. The report also noted that DHS must "recognize that the private sector is a critical partner in filling capability gaps." The Senate committee report continued to require DHS to provide monthly data, by component, on the use of paid administrative leave that extends beyond a one-month period. To better understand the assignment of employees to details in other departments, agencies, and entities, for periods longer than three years, the Senate committee directed the department to provide data on such long-term assignments, by home office or component, the receiving office or component, employee grade levels, and underlying authority. The information must also include data on details which are reimbursable and be submitted within 120 days after the act's enactment date. P.L. 115-31 and the explanatory statement that accompanied it did not address this matter, and therefore, the direction stands. The Senate committee report directed DHS, including components, to include a statement within text, audio, or video advertisements (including Internet advertisements) that such advertisements are printed, published, or produced and disseminated at taxpayer expense. An advertisement would be exempt from this requirement if it would adversely impact safety or security or impede an agency from carrying out its statutory authority. P.L. 115-31 and the explanatory statement that accompanied it did not address this matter, and therefore, the direction stands. Several DHS components have specific limitations placed on their funding for "reception and representation expenses." These limits range from $2,000 for the Office of the Under Secretary for Management in Senate-reported S. 3001 to $34,425 for Customs and Border Protection in both Senate and House committee-reported bills. Thirteen such limitations, totaling $169,655, appear in Senate committee-reported S. 3001 and 12 such limitations, totaling $154,655, appear in House committee-reported H.R. 5634 . The House committee report indicated that this $15,000 reduction was made in the amount allowed for reception and representation expenses for the Office of the Secretary and Executive Management "because of DHS's continued failure to fill the position of Assistant Secretary for Policy despite repeated congressional directives, and because the budget request assumed the enactment of new TSA fees totaling $880,000,000 that will almost certainly be unavailable as offsetting collections." The Senate Appropriations Committee report continued to require quarterly reports on obligations for all reception and representation expenses and stated that the funds should not be used "to purchase unnecessary collectibles or memorabilia." In the Department of Homeland Security Appropriations Act, 2017, 13 such limitations appear, totaling $164,655. The explanatory statement restates the House position thusly: A decrease of $5,000 is assessed to the Secretary's ORR funds due to the assumption of $880,000,000 in unauthorized fee revenue in the fiscal year 2017 budget request that artificially reduced the amount of net discretionary appropriations required to fully fund the Transportation Security Administration. DHS should be prepared for additional decrements to ORR funds and other headquarters activities in the future should future requests include similar proposals. For additional perspectives on FY2017 DHS appropriations, see the following: CRS Report R44604, Trends in the Timing and Size of DHS Appropriations: In Brief ; CRS Report R44611, Comparing DHS Component Funding, FY2017: Fact Sheet ; CRS Report R44052, DHS Budget v. DHS Appropriations: Fact Sheet ; CRS Report R44661, DHS Appropriations FY2017: Departmental Management and Operations ; CRS Report R44666, DHS Appropriations FY2017: Security, Enforcement, and Investigations ; CRS Report R44660, DHS Appropriations FY2017: Protection, Preparedness, Response, and Recovery ; and CRS Report R44658, DHS Appropriations FY2017: Research and Development, Training, and Services . Readers also may wish to consult CRS's experts directly. The following table lists names and contact information for the CRS analysts and specialists who contribute to CRS DHS appropriations reports. Budget Authority, Obligations, and Outlays Federal government spending involves a multistep process that begins with the enactment of budget authority by Congress. Federal agencies then obligate funds from enacted budget authority to pay for their activities. Finally, payments are made to liquidate those obligations; the actual payment amounts are reflected in the budget as outlays. Budget authority is established through appropriations acts or direct spending legislation and determines the amounts that are available for federal agencies to spend. The Antideficiency Act prohibits federal agencies from obligating more funds than the budget authority enacted by Congress. Budget authority also may be indefinite, as when Congress enacts language providing "such sums as may be necessary" to complete a project or purpose. Budget authority may be available on a one-year, multiyear, or no-year basis. One-year budget authority is available for obligation only during a specific fiscal year; any unobligated funds at the end of that year are no longer available for spending. Multiyear budget authority specifies a range of time during which funds may be obligated for spending, and no-year budget authority is available for obligation for an indefinite period of time. Obligations are incurred when federal agencies employ personnel, enter into contracts, receive services, and engage in similar transactions in a given fiscal year. Outlays are the funds that are actually spent during the fiscal year. Because multiyear and no-year budget authorities may be obligated over a number of years, outlays do not always match the budget authority enacted in a given year. Additionally, budget authority may be obligated in one fiscal year but spent in a future fiscal year, especially with certain contracts. In sum, budget authority allows federal agencies to incur obligations and authorizes payments, or outlays, to be made from the Treasury. Discretionary funded agencies and programs, and appropriated entitlement programs, are funded each year in appropriations acts. Discretionary and Mandatory Spending Gross budget authority , or the total funds available for spending by a federal agency, may be composed of discretionary and mandatory spending. Discretionary spending is not mandated by existing law and is thus appropriated yearly by Congress through appropriations acts. The Budget Enforcement Act of 1990 defines discretionary appropriations as budget authority provided in annual appropriations acts and the outlays derived from that authority, but it excludes appropriations for entitlements. Mandatory spending , also known as direct spending , consists of budget authority and resulting outlays provided in laws other than appropriations acts and is typically not appropriated each year. Some mandatory entitlement programs, however, must be appropriated each year and are included in appropriations acts. Within DHS, Coast Guard retirement pay is an example of appropriated mandatory spending. Offsetting Collections Offsetting funds are collected by the federal government, either from government accounts or the public, as part of a business-type transaction such as collection of a fee. These funds are not considered federal revenue. Instead, they are counted as negative outlays. DHS net discretionary budget authority , or the total funds that are appropriated by Congress each year, is composed of discretionary spending minus any fee or fund collections that offset discretionary spending. Some collections offset a portion of an agency's discretionary budget authority. Other collections offset an agency's mandatory spending. These mandatory spending elements are typically entitlement programs under which individuals, businesses, or units of government that meet the requirements or qualifications established by law are entitled to receive certain payments if they establish eligibility. The DHS budget features two mandatory entitlement programs: the Secret Service and the Coast Guard retired pay accounts (pensions). Some entitlements are funded by permanent appropriations, and others are funded by annual appropriations. Secret Service retirement pay is a permanent appropriation and, as such, is not annually appropriated. In contrast, Coast Guard retirement pay is annually appropriated. In addition to these entitlements, the DHS budget contains offsetting Trust and Public Enterprise Funds. These funds are not appropriated by Congress. They are available for obligation and included in the President's budget to calculate the gross budget authority. 302(a) and 302(b) Allocations In general practice, the maximum budget authority for annual appropriations (including DHS) is determined through a two-stage congressional budget process. In the first stage, Congress sets overall spending totals in the annual concurrent resolution on the budget. Subsequently, these totals are allocated among the appropriations committees, usually through the statement of managers for the conference report on the budget resolution. These amounts are known as the 302(a) allocations . They include discretionary totals available to the House and Senate Committees on Appropriations for enactment in annual appropriations bills through the subcommittees responsible for the development of the bills. In the second stage of the process, the appropriations committees allocate the 302(a) discretionary funds among their subcommittees for each of the appropriations bills. These amounts are known as the 302(b) allocations . These allocations must add up to no more than the 302(a) discretionary allocation and form the basis for enforcing budget discipline, since any bill reported with a total above the ceiling is subject to a point of order. The 302(b) allocations may be adjusted during the year by the respective Appropriations Committee issuing a report delineating the revised suballocations as the various appropriations bills progress toward final enactment. No subcommittee allocations are developed for conference reports or enacted appropriations bills. Table A-1 shows comparable figures for the 302(b) allocation for FY2016, based on the adjusted net discretionary budget authority included in Division F of P.L. 114-113 , the Obama Administration's request for FY2017, and the House and Senate subcommittee allocations for the Homeland Security appropriations bills for FY2017. The Budget Control Act, Discretionary Spending Caps, and Adjustments The FY2012 appropriations bills were the first appropriations bills governed by the Budget Control Act, which established discretionary security and non-security spending caps for FY2012 and FY2013. The bill also established overall caps that govern the actions of appropriations committees in both chambers. Subsequent legislation, including the Bipartisan Budget Act of 2013, amended those caps. Most of the budget for DHS is considered nondefense spending. In addition, the Budget Control Act allows for adjustments that would raise the statutory caps to cover funding for overseas contingency operations/Global War on Terror, emergency spending, and, to a limited extent, disaster relief and appropriations for continuing disability reviews and control of health care fraud and abuse. Three of the four justifications outlined in the Budget Control Act for adjusting the caps on discretionary budget authority have played a role in DHS's appropriations process. Two of these—emergency spending and overseas contingency operations/Global War on Terror—are not limited. The third justification—disaster relief—is limited. Under the Budget Control Act, the allowable adjustment for disaster relief is determined by the Office of Management and Budget (OMB), using the following formula: Limit on disaster relief cap adjustment for the fiscal year = Rolling average of the disaster relief spending over the last ten fiscal years (throwing out the high and low years) + the unused amount of the rolling average from the previous fiscal year. The disaster relief allowable adjustment for FY2017 was $8.129 billion, and was used to provide $6.713 billion for FEMA's Disaster Relief Fund and $1.416 billion for the Department of Housing and Urban Development's (HUD's) Community Development Fund. With the disaster relief allowable adjustment exhausted for the fiscal year, the emergency designation was exercised in P.L. 115-56 to provide $7.4 billion for FEMA's Disaster Relief Fund, $450 million for Small Business Administration disaster loans, and $7.4 billion to HUD's Community Development Fund in the wake of Hurricane Harvey. The adjustment for overseas contingency operations was exercised in P.L. 115-31 , Division F, to provide $163 million to the U.S. Coast Guard.

This report discusses the FY2017 appropriations for the Department of Homeland Security (DHS). Its primary focus is on funding approved by Congress through the appropriations process. It includes an Appendix with definitions of key budget terms used throughout the suite of Congressional Research Service reports on homeland security appropriations. It also directs the reader to other reports providing context for and additional details regarding specific component appropriations and issues engaged through the FY2016 appropriations process. The Obama Administration requested $40.62 billion in adjusted net discretionary budget authority for DHS for FY2017. The request amounted to a $332 million, or 0.8%, decrease from the $40.96 billion enacted for FY2016 through the Department of Homeland Security Appropriations Act, 2016 (P.L. 114-113, Division F). On May 26, 2016, the Senate Committee on Appropriations reported out S. 3001, accompanied by S.Rept. 114-264. S. 3001 included $41.2 billion in adjusted net discretionary budget authority for FY2017. This was $578 million (1.4%) above the level requested by the Obama Administration, but $246 million (0.6%) above the enacted level for FY2016. On June 22, the House Committee on Appropriations reported out H.R. 5634, accompanied by H.Rept. 114-668. H.R. 5634 included $41.04 billion in adjusted net discretionary budget authority for FY2017. This was $426 million (1.0%) above the level requested by the Administration, and $95 million (0.2%) above the enacted level for FY2016. Direct comparisons of certain aspects of the funding provided by the committee legislation have been complicated by a congressionally mandated restructuring of the department's appropriations. On September 29, 2016, President Obama signed P.L. 114-223 into law, which contained a continuing resolution that funded the government at the same rate of operations as FY2016, minus 0.496%, through December 9, 2016. A second continuing resolution was signed into law on December 10, 2016 (P.L. 114-254), funding the government at the same rate of operations as FY2016, minus 0.1901%, through April 28, 2017. This report discusses anomalies in the continuing resolution that specifically addressed DHS. On March 16, 2017, the Trump Administration submitted an amendment to the FY2017 budget request, which included a request for $3 billion in additional funding for DHS. Congress chose to address this request in the Consolidated Appropriations Act, 2017 (signed into law as P.L. 115-31 on May 5, 2017), which would include both annual and supplemental appropriations for DHS as Division F. The bill included $41.3 billion in adjusted net discretionary budget authority in annual appropriations, as well as $6.7 billion in funding for the costs of major disasters under the Stafford Act and $163 million in funding for overseas contingency operations. Title VI included over $1.1 billion in supplemental appropriations for U.S. Customs and Border Protection, Immigration and Customs Enforcement, and the U.S. Secret Service. On September 1, 2017, the Trump Administration requested $7.85 billion in supplemental funding for FY2017, including $7.4 billion for the DRF. On September 6, the House passed the relief package requested by the Administration as an amendment to H.R. 601. On September 7, the Senate passed an amended version as part of a broader relief package. The House passed the Senate amended version of the bill on September 8, which was signed into law as P.L. 115-56.

govreport

The September 11, 2001, attacks on the World Trade Center and the Pentagon have drawn attention to the security of many institutions, facilities, and systems in the United States, including the nation's water supply and water quality infrastructure. These systems have long been recognized as being potentially vulnerable to terrorist attacks of various types, including physical disruption, bioterrorism/chemical contamination, and cyber attack. Damage or destruction by terrorist attack could disrupt the delivery of vital human services in this country, threatening public health and the environment, or possibly causing loss of life. Further, since most water infrastructure is government-owned, it may serve as a symbolic and political target for some. This report presents an overview of this large and diverse sector, describes security-related actions by the government and private sector since 9/11, and discusses additional policy issues and responses, including congressional interest. The potential for terrorism is not new. In 1941, Federal Bureau of Investigation Director J. Edgar Hoover wrote, "It has long been recognized that among public utilities, water supply facilities offer a particularly vulnerable point of attack to the foreign agent, due to the strategic position they occupy in keeping the wheels of industry turning and in preserving the health and morale of the American populace." Water infrastructure systems also are highly linked with other infrastructure systems, especially electric power and transportation, as well as the chemical industry which supplies treatment chemicals, making security of all of them an issue of concern. These types of vulnerable interconnections were evident, for example, during the August 2003 electricity blackout in the Northeast United States: wastewater treatment plants in Cleveland, Detroit, New York, and other locations that lacked backup generation systems lost power and discharged millions of gallons of untreated sewage during the emergency, and power failures at drinking water plants led to boil-water advisories in many communities. Likewise, natural disasters such as the 2005 Gulf Coast hurricanes and 2007 Mississippi River floods caused extensive and costly damage to multiple infrastructure systems—transportation, water, electric power, and telecommunications. Broadly speaking, water infrastructure systems include surface and ground water sources of untreated water for municipal, industrial, agricultural, and household needs; dams, reservoirs, aqueducts, and pipes that contain and transport raw water; treatment facilities that remove contaminants from raw water; finished water reservoirs; systems that distribute water to users; and wastewater collection and treatment facilities. Across the country, these systems comprise approximately 77,000 dams and reservoirs; thousands of miles of pipes, aqueducts, water distribution, and sewer lines; 168,000 public drinking water facilities (many serving as few as 25 customers); and about 16,000 publicly owned wastewater treatment facilities. All of these systems and facilities must be operable 24 hours a day, seven days a week. Ownership and management are both public and private; the federal government has ownership responsibility for hundreds of dams and diversion structures, but the vast majority of the nation's water infrastructure is either privately owned or owned by non-federal units of government. The federal government has built hundreds of water projects, primarily dams and reservoirs for irrigation development and flood control, with municipal and industrial water use as an incidental, self-financed, project purpose. Many of these facilities are critically entwined with the nation's overall water supply, transportation, and electricity infrastructure. The largest federal facilities were built and are managed by the Bureau of Reclamation (Reclamation) of the Department of the Interior and the U.S. Army Corps of Engineers (Corps) of the Department of Defense. Reclamation reservoirs, particularly those along the Colorado River, supply water to millions of people in southern California, Arizona, and Nevada via Reclamation and non-Reclamation aqueducts. Reclamation's inventory of assets includes 471 dams and dikes that create 348 reservoirs with a total storage capacity of 245 million acre-feet of water. Reclamation projects also supply water to 9 million acres of farmland and other municipal and industrial water users in the 17 western states. The Corps operates 276 navigation locks, 11,000 miles of commercial navigation channel, and approximately 1,200 projects of varying types, including 609 dams. It supplies water to thousands of cities, towns, and industries from the 9.5 million acre-feet of water stored in its 116 lakes and reservoirs throughout the country, including service to approximately 1 million residents of the District of Columbia and portions of northern Virginia. The largest Corps and Reclamation facilities also produce enormous amounts of power. For example, Hoover and Glen Canyon dams on the Colorado River represent 23% of the installed electrical capacity of the Bureau of Reclamation's 58 power plants in the West and 7% of the total installed capacity in the Western United States. Similarly, Corps facilities and Reclamation's Grand Coulee Dam on the Columbia River provide 43% of the total installed hydroelectric capacity in the West (25% nationwide). Still, despite its critical involvement in such projects, especially in the West, the federal government is responsible for only about 5% of the dams whose failure could result in loss of life or significant property damage. The remaining dams belong to state or local governments, utilities, and corporate or private owners. A fairly small number of large drinking water and wastewater utilities located primarily in urban areas (about 15% of the systems) provide water services to more than 75% of the U.S. population. Arguably, these systems represent the greatest targets of opportunity for terrorist attacks, while the larger number of small systems that each serve fewer than 10,000 persons are less likely to be perceived as key targets by terrorists who might seek to disrupt water infrastructure systems. However, the more numerous smaller systems also tend to be less protected and, thus, are potentially more vulnerable to attack, whether by vandals or terrorists. A successful attack on even a small system could cause widespread panic, economic impacts, and a loss of public confidence in water supply systems. Attacks resulting in physical destruction to any of these systems could include disruption of operating or distribution system components, power or telecommunications systems, electronic control systems, and actual damage to reservoirs and pumping stations. A loss of flow and pressure would cause problems for customers and would hinder firefighting efforts. Further, destruction of a large dam could result in catastrophic flooding and loss of life. Bioterrorism or chemical attacks could deliver widespread contamination with small amounts of microbiological agents or toxic chemicals, and could endanger the public health of thousands. While some experts believe that risks to water systems actually are small, because it would be difficult to introduce sufficient quantities of agents to cause widespread harm, concern and heightened awareness of potential problems are apparent. Factors that are relevant to a biological agent's potential as a weapon include its stability in a drinking water system, virulence, culturability in the quantity required, and resistance to detection and treatment. Cyber attacks on computer operations can affect an entire infrastructure network, and hacking in water utility systems could result in theft or corruption of information, or denial and disruption of service. Water infrastructure system designers, managers, and operators have long made preparing for extreme events a standard practice. Historically, their focus has been on natural events—major storms, blizzards, and earthquakes—some of which could be predicted hours or longer before they occurred. When considering the risk of manmade threats, operators generally focused on purposeful acts such as vandalism or theft by disgruntled employees or customers, rather than broader malevolent threats by terrorists, domestic or foreign. The events of September 11, 2001, changed this focus. Federal dam operators went on "high-alert" immediately following the 9/11 terrorist attacks. Reclamation closed its visitor facilities at Grand Coulee, Hoover, and Glen Canyon dams. Because of potential loss of life and property downstream if breached, security threats are under constant review, and coordination efforts with both the National Guard and local law enforcement officials are ongoing. The Corps temporarily closed all its facilities to visitors immediately after 9/11, although locks and dams remained operational; most closed facilities later re-opened, but security continues to be reassessed. Following a heightened alert issued by the federal government in February 2003, Reclamation implemented additional security measures which remain in effect at dams, powerplants, and other facilities, including limited access to facilities and roads, closure of some visitor centers, and random vehicle inspections. Although officials believe that risks to water and wastewater utilities are small, operators have been under heightened security conditions since 9/11. Local utilities have primary responsibility to assess their vulnerabilities and prioritize them for necessary security improvements. Most (especially in urban areas) have emergency preparedness plans that address issues such as redundancy of operations, public notification, and coordination with law enforcement and emergency response officials. However, many plans were developed to respond to natural disasters, domestic threats such as vandalism, and, in some cases, cyber attacks. Drinking water and wastewater utilities coordinated efforts to prepare for possible Y2K impacts on their computer systems on January 1, 2000, but these efforts focused more on cyber security than physical terrorism concerns. Thus, it was unclear whether previously existing plans incorporate sufficient procedures to address other types of terrorist threats. Utility officials are reluctant to disclose details of their systems or these confidential plans, since doing so might alert terrorists to vulnerabilities. Water supply was one of eight critical infrastructure systems identified in President Clinton's 1998 Presidential Decision Directive 63 (PDD-63) as part of a coordinated national effort to achieve the capability to protect the nation's critical infrastructure from intentional acts that would diminish them. These efforts focused primarily on the 340 large community water supply systems which each serve more than 100,000 persons. The Environmental Protection Agency (EPA) was identified as the lead federal agency for liaison with the water supply sector. In response, in 2000, EPA established a partnership with the American Metropolitan Water Association (AMWA) and American Water Works Association (AWWA) to jointly undertake measures to safeguard water supplies from terrorist acts. AWWA's Research Foundation contracted with the Department of Energy's Sandia National Laboratory to develop a vulnerability assessment tool for water systems (as an extension of methodology for assessing federal dams). EPA supported a project with the Sandia Lab to pilot test the physical vulnerability assessment tool and develop a cyber vulnerability assessment tool. An Information Sharing and Analysis Center (ISAC) supported by an EPA grant became operational under AMWA's leadership in December 2002. It allows for dissemination of alerts to drinking water and wastewater utilities about potential threats or vulnerabilities to the integrity of their operations that have been detected and viable resolutions to problems. Research on water sector infrastructure protection has been underway for some time. The Department of the Army conducts research in the area of detection and treatment to remove various chemical agents. The Federal Emergency Management Agency (FEMA) has led an effort to produce databases of water distribution systems and to develop assessment tools for evaluating threats posed by the introduction of a biological or chemical agent into a water system. The Centers for Disease Control and Prevention is developing guidance on potential biological agents and the effects of standard water treatment practices on their persistence. However, in the 2001 report of the President's Commission on Critical Infrastructure Protection, ongoing water sector research was then characterized as a small effort that leaves a number of gaps and shortfalls relative to U.S. water supplies. This report stated that gaps exist in four major areas, concerns that remain relevant and continue to guide policymakers. Threat/vulnerability risk assessments, Identification and characterization of biological and chemical agents, A need to establish a center of excellence to support communities in conducting vulnerability and risk assessment, and Application of information assurance techniques to computerized systems used by water utilities, as well as the oil, gas, and electric sectors, for operational data and control operations. For some time, less attention was focused on protecting wastewater treatment facilities than drinking water systems, perhaps because destruction of them likely represents more of an environmental threat (i.e., by release of untreated sewage) than a direct threat to life or public welfare. Vulnerabilities do exist, however. Large underground collector sewers could be accessed by terrorist groups for purposes of placing destructive devices beneath buildings or city streets. Pipelines can be made into weapons via the introduction of a highly flammable substance such as gasoline through a manhole or inlet. Explosions in the sewers can cause collapse of roads, sidewalks, and adjacent structures and injure and kill people nearby. Damage to a wastewater facility prevents water from being treated and can impact downriver water intakes. Destruction of containers that hold large amounts of chemicals at treatment plants could result in release of toxic chemical agents, such as chlorine gas, which can be deadly to humans if inhaled and, at lower doses, can burn eyes and skin and inflame the lungs. Since the 2001 terrorist attacks, many water and wastewater utilities have switched from using chlorine gas as disinfection to alternatives which are believed to be safer, such as sodium hypochlorite or ultraviolet light. However, some consumer groups remain concerned that many wastewater utilities, including facilities that serve heavily populated areas, continue to use chlorine gas. To prepare for potential accidental releases of hazardous chemicals from their facilities, more than 2,800 wastewater and drinking water utilities, water supply systems, and irrigation systems already are subject to risk management planning requirements under the Clean Air Act. Still, some observers advocate requiring federal standards to ensure that facilities using dangerous chemicals, such as wastewater treatment plants, use the best possible industry practices (practices that are referred to as Inherently Safer Technologies, or ISTs) to reduce hazards. In 2007, the U.S. Chemical Safety and Hazard Investigation Board issued a safety bulletin recommending that the Department of Transportation increase regulation of wastewater and drinking water treatment plants and other types of facilities that receive chlorine gas by railcar to require that they install remotely operated emergency isolation devices to unload chlorine railcars, for rapid shutdown in the event of leakage or other failure. In 2006, the Government Accountability Office (GAO) reported on a survey of security measures at 200 of the nation's largest wastewater utilities. GAO found that many have made security improvements since the 2001 terrorist attacks. Most utilities said they had completed, or intended to complete, a plan to conduct some type of security assessment, although there is no federal mandate to do so. More than half of responding facilities indicated they did not use potentially dangerous gaseous chlorine as a wastewater disinfectant. However, the report noted that these utilities have made little effort to address collection system vulnerabilities, due to the technical complexity and expense of securing collection systems that cover large areas and have many access points. Some told GAO investigators that taking other measures, such as converting from gaseous chlorine, took priority over collection system protections. In a 2007 follow-on study, GAO reported that actual and projected capital costs to convert from chlorine gas to alternative disinfection methods range from about $650,000 to just over $13 million. Factors affecting conversion costs included the type of alternative method; the size of the facility; and labor, building, and supply costs, which varied considerably. There are no federal standards or agreed-upon practices within the water infrastructure sector to govern readiness, response to security incidents, and recovery. EPA is not authorized to require water infrastructure systems to implement specific security improvements or meet particular security standards. Efforts to develop voluntary protocols and tools are ongoing since the 2001 terrorist attacks. Wastewater and drinking water utility organizations are implementing computer software and training materials to evaluate vulnerabilities at large, medium, and small utility systems, and EPA has provided some grant assistance to drinking water utilities for vulnerability assessments. Out of funds appropriated in 2002 ( P.L. 107-117 ), EPA awarded grants to nearly 900 large and medium drinking water utilities to conduct vulnerability assessments. EPA also has targeted grants to "train the trainers," delivering technical assistance to organizations such as the Rural Community Assistance Program and the Water Environment Federation that, in turn, can assist and train personnel at thousands of medium and small utilities throughout the country. Rural and small systems also have received support from the U.S. Department of Agriculture. With financial support from EPA, drinking water and wastewater utility and engineering groups developed three security guidance documents, issued in 2004, that cover the physical design of online contaminant monitoring systems, and physical security enhancements of drinking water, wastewater, and stormwater infrastructure systems. The documents provide voluntary guidelines for assisting utilities that have completed vulnerability assessments to mitigate vulnerabilities of their systems through the design, construction, operation, and maintenance of both new and existing systems. Based on the three guidance documents, these groups also have drafted training materials and a set of voluntary standardized best engineering practices that recommend measures to protect water and wastewater infrastructure against a range of threats, including terrorist attacks and other sources of potential harm, such as accidents, chemical contamination, and natural disasters. EPA has taken a number of organizational and planning steps to strengthen water security. The agency created a National Homeland Security Research Center within the Office of Research and Development to develop the scientific foundations and tools that can be used to respond to attacks on water systems. The Center conducts applied research on ways to protect and prevent, mitigate, respond to, and recover from security events. EPA also created a Water Security Division in the Office of Water, taking over activities initiated by a Water Protection Task Force after the 9/11 terrorist attacks. This office provides guidance and tools to utilities as they assess and reduce vulnerabilities of their systems. It trains water utility personnel on security issues, supports the WaterISAC, and implements the agency's comprehensive research plan. In 2004 EPA issued a Water Security Research and Technical Support Action Plan, identifying critical research needs and providing an implementation plan for addressing those needs. A preliminary review of the Research and Action Plan by a panel of the National Research Council identified some gaps, suggested alternative priorities, and noted that the Plan was silent on the financial resources required to complete the research and to implement needed countermeasures to improve water security. Subsequently, in 2007, the National Research Council concluded that EPA has developed useful contaminant information and exposure assessment tools in several key areas, but that other areas, such as physical and cyber security, contingency planning, and wastewater security, have shown weaker or somewhat disjointed progress. An overarching issue is making water security information accessible to those who might need it . GAO has issued two reports discussing how future federal funding can best be spent to improve security at drinking water and wastewater utilities. Both reports are based on the views of subject matter experts identified by GAO. In the drinking water report, specific activities judged by the experts to be most deserving of federal support included physical and technological upgrades, education and training for staff and responders, and strengthening key relationships between water utilities and others such as law enforcement and public health agencies. In the wastewater report, the experts cited the replacement of gaseous chemicals used in the disinfection process with less hazardous alternatives as a key activity deserving of federal funds, along with improving local, state, and regional collaboration, and support facilities' vulnerability assessments. Asked how federal funds should be allocated, both groups of experts favored giving priority to utilities that serve critical assets (such as public health institutions, government, and military bases) and to utilities serving areas with large populations. A key focus of EPA's activities since 2005 has been the Water Sector Initiative. Initially known as WaterSentinel, it is a pilot project that could serve as a model for water utilities throughout the country. Its purpose is to test and demonstrate contamination warning systems at drinking water utilities and municipalities. EPA awarded grants to install and evaluate early warning systems in five cities under this program (Cincinnati, New York, San Francisco, Dallas, and Philadelphia). More broadly, EPA has expanded its security activities in two ways. First, its focus has enlarged from the post-9/11 emphasis on terrorism to an "all hazards" approach, emphasizing to water utilities that issues of risk identification and risk reduction also include natural disasters (which were the focus of much of the industry's attention before 2001) and protection of hazardous chemicals. Second, EPA supports the establishment of intrastate mutual aid and assistance agreements, known as Water/Wastewater Agency Response Networks (WARNS), to facilitate flow of personnel and resources during response to emergencies. They are intended to provide mechanisms for establishing emergency contacts and facilitating short-term emergency assistance to restore critical operations. Mutual aid agreements existed in California and Florida before the 2005 Gulf hurricanes, and more formal efforts to establish similar programs in all 50 states followed on those disasters. So far, WARNS have been established in about 20 states, according to EPA. The agency also has developed a variety of guidance documents and other information resources to support drinking water and wastewater utility preparedness, response, and recovery. A Vulnerability Self-Assessment Tool (VSAT), a risk assessment software tool to assist drinking water and wastewater owners and operators in performing security threats and natural hazards risk assessments, as well as updating emergency response plans. A Water Contaminant Information Tool (WCIT), a secure online database with information for federal, state, and local agencies and emergency responders about chemical, biological, and radiochemical contaminants of concern for the water sector. A scenario-based Tabletop Exercise Tool for Water Systems (TTX Tool) that addresses emergency preparedness and response for a number of potential natural hazards and manmade incidents. A Water Health and Economic Analysis Tool (WHEAT) to assist drinking water utilities in quantifying public health impacts, utility financial costs, and regional economic impacts of an adverse event. Currently this two examines two scenarios: release of hazardous gas, or loss of operating assets in a drinking water distribution system. Officials have been reassessing federal infrastructure status and vulnerabilities for several years. The Bureau of Reclamation's site security program is aimed at ensuring protection of Reclamation's 252 high- and significant-hazard dams and facilities and 58 hydroelectric plants. After September 11, Reclamation committed to conducting vulnerability and risk assessments at 280 high-priority facilities. Risk assessments at these facilities were completed between FY2002 and FY2006. These assessments resulted in recommendations now being implemented to enhance security procedures and physical facilities, such as additional security staffing, limited vehicle and visitor access, and coordination with local law enforcement agencies. The Corps implements a facility protection program to detect, protect, and respond to threats to Corps facilities and a dam security program to coordinate security systems for Corps infrastructure. It also implements a national emergency preparedness program which assists civilian governments in responding to all regional/national emergencies, including acts of terrorism. Both agencies participate in the Interagency Committee on Dam Safety (ICODS), which is part of the National Dam Safety Program that is led by FEMA. A 2003 White House report presented a national strategy for protecting the nation's critical infrastructures and identified four water sector initiatives: identify high-priority vulnerabilities and improve site security; improve monitoring and analytic capabilities; improve information exchange and coordinate contingency planning; and work with other sectors to manage unique risks resulting from interdependencies. The strategy was intended to focus national protection priorities, inform resource allocation processes, and be the basis for cooperative public and private protection actions. The Department of Homeland Security (DHS, established in P.L. 107-297 ) has a mandate to coordinate securing the nation's critical infrastructure, including water infrastructure, through partnerships with the public and private sectors. It is responsible for detailed implementation of core elements of the national strategy for protection of critical infrastructures. One of its tasks is to assess infrastructure vulnerabilities, an activity that wastewater and drinking water utilities have been doing since the 9/11 attacks, under their own initiatives and congressional mandates ( P.L. 107-188 ; see " Legislative Issues ").The legislative reorganization did not transfer Corps or Reclamation responsibilities for security protection of dams and other facilities or EPA's responsibilities to assist drinking water and wastewater utilities. In 2003, President Bush issued Homeland Security Presidential Directive/HSPD-7 which established a national policy for the federal government to identify, prioritize, and protect critical infrastructure as a part of homeland security. The directive called for DHS to integrate all security efforts among federal agencies and to complete a comprehensive national plan for critical infrastructure protection. In 2006, DHS issued a National Infrastructure Protection Plan (NIPP), proposing a framework of partnerships between private industry sectors and the government that would work together to secure the nation's vital resources. For example, EPA would work with water treatment and wastewater systems, while dams would cooperate with DHS. The Department updated the NIPP in February 2009. The plan is intended to provide the unifying structure for the integration of a wide range of efforts for the enhanced protection and resiliency of the nation's critical infrastructure and key resources into a single national program. The Department established the Critical Infrastructure Partnership Advisory Council (CIPAC) to coordinate federal infrastructure protection programs with similar activities of the private sector, and state, local, and tribal governments. In 2004, CIPAC established a Government Coordinating Council (GCC) and non-government coordinating council for each sector. The CIPAC Water Sector Committee includes representatives from both the Water GCC (federal members) and the Water Sector Coordinating Council (WSCC). The WSCC consists of 24 members from state and local agencies, water utilities, and water affinity organizations. In response to the original NIPP, DHS and the GCCs, in conjunction with the Sector Coordinating Councils, prepared 17 sector-specific plans which were completed in 2007. The plans identify sector profiles and assets, assess risks, prioritize infrastructure, identify sector protection plans and measures of progress. The water sector plan for wastewater and drinking water focuses on four goals: (1) sustaining protection of public health and the environment; (2) recognize and reduce risks; (3) maintain a resilient infrastructure; and (4) increase communication, outreach, and public confidence. The sector plan for dams, including federal dams, is one of 10 that DHS determined presents security sensitivity issues if widely distributed; thus, those 10 plans were not released to the public. In an early review of the sector plans, GAO found that the drinking water and wastewater sector plan was more developed than that of many other sectors, largely because the sector has a 30-year history of protection and cooperation, but for that reason, the plan did not provide added value for the sector. In the NIPP, DHS described a plan to develop a risk analysis method that would include a uniform means of measuring risk and assessing consequences across infrastructure sectors. Some drinking water and wastewater treatment industry officials commented that this plan, known as the Risk Analysis and Management for Critical Asset Protection (RAMCAP), raised concern that it could force some facilities to conduct new, or revise existing, vulnerability assessments. Drinking water industry officials are said to be concerned that a new method may not recognize vulnerability assessments that many drinking water utilities have already completed under requirements of the 2002 Bioterrorism Preparedness Act (see " Legislative Issues "). This is a particular concern for small and rural utilities, many of which have used simpler security models to complete their vulnerability assessment plans and would prefer to build on that model to conduct RAMCAP and similar activities. While physical security of facilities is a key concern, cyber security issues continue to draw attention, as well. The Water Sector Coordinating Council has developed guidance on protecting potentially vulnerable drinking water and wastewater systems from targeted cyber attack or accidental cyber events and has hosted workshops for utility employees who are responsible for control system security. The Homeland Security Department's involvement in water security concerns has been growing, although under HSPD-7, EPA continues as the lead federal agency to ensure protection of drinking water and wastewater treatment systems from possible terrorist acts and other sabotage. Since early 2004, DHS has been preparing guidance documents on how each infrastructure sector, including water systems, can protect itself from security threats. For some time, the two agencies have been working to clarify their roles in providing security to water utilities. One of the functions of the Water Sector Coordinating Council is to be a point of contact for DHS to vet potential water security policies, allowing one-stop shopping for federal officials. In 2003, DHS created an information-sharing network, called the Homeland Security Information Network (HSIN). Both it and the existing WaterISAC share the goal of providing security information to water utilities, but they differ in some respects. The WaterISAC is a private, subscription service (although it receives some federal funding) that provides information to about 450 water utilities and others on security matters. It is the primary communication tool in the water sector. The HSIN, a software program, is a free, federally funded platform for information sharing. It is not limited to the water sector, and it provides no information by itself; it acts as a bulletin board where DHS, EPA, and utilities can post security-related information. Distinct from the HSIN and the WaterISAC is the Water Security Channel (WaterSC), launched in 2004 as a free service of the WaterISAC, which disseminates EPA and DHS general security bulletins at the request of those agencies to more than 8,400 utilities, state agencies, engineering firms, and researchers. Congress and other policymakers have considered a number of initiatives in this area, including enhanced physical security, communication and coordination, and research. Regarding physical security, a key question is whether protective measures should be focused on the largest water systems and facilities, where risks to the public are greatest, or on all, since small facilities may be more vulnerable. A related question is responsibility for additional steps, because the federal government has direct control over only a limited portion of the water infrastructure sector. The distributed and diverse nature of ownership (federal, non-federal government, and private) complicates assessing and managing risks, as does the reality of limited resources. The adequacy of physical and operational security safeguards is an issue for all in this sector. One possible option for federal facilities (dams and reservoirs maintained by Reclamation and the Corps) is to restrict visitor access, including at adjacent recreational facilities, although such actions could raise objections from the public. Some operators of non-federal facilities and utilities are likewise concerned. As a precaution after the 9/11 attacks, New York City, which provides water to 9 million consumers, closed its reservoirs indefinitely to all fishing, hiking, and boating and blocked access to some roads. Policymakers have examined measures that could improve coordination and exchange of information on vulnerabilities, risks, threats, and responses. This is a key objective of the WaterISAC and also of the Department of Homeland Security, which includes, for example, functions of the National Infrastructure Protection Center (NIPC) of the FBI that brings together the private sector and government agencies at all levels to protect critical infrastructure, especially on cyber issues. One issue of interest is how the Department is coordinating its activities with ongoing security efforts by other federal agencies and non-federal entities that operate water infrastructure systems, including its implementation of the comprehensive national plan required by Presidential Directive/HSPD-7. For some time, the two agencies have been working to clarify their roles in providing security to water utilities and in other areas and have negotiated agreements concerning joint research projects and coordination for specific field operations. Nevertheless, in the conference report accompanying the FY2005 Consolidated Appropriations Act, Congress directed EPA to enter into a memorandum of understanding (MOU) with DHS to define the relationship of the two entities with regard to the protection and security of the nation. The memorandum was expected to specifically identify areas of responsibilities and the potential costs (including which entity pays, in whole or part) for meeting such responsibilities. EPA responded to this directive in November 2005 by issuing a report that identified general authorities that govern EPA's and DHS's respective actions, ongoing projects that reflect coordination, and existing project-specific MOUs. This EPA report on roles and responsibilities still may not resolve the potential for duplication and overlap among agencies. Currently, for example, policies are being developed both by DHS and EPA, although both agencies are represented on DHS's Water Sector Committee through the CIPAC process. Information sharing and dissemination even in this one sector are occurring through several different mechanisms: DHS supports the Homeland Security Information Network (HSIN), while drinking water and wastewater utilities also may receive security-related advisories from two other sources, the WaterISAC and the Water Security Channel. Some have questioned the multiple advisory groups, on top of existing entities, and in particular the potential that the several mechanisms for sharing homeland security information could transmit inconsistent information and make the exchange of information more complicated, not less. Others are optimistic that the systems and groups will sort themselves out into compatible and complementary networks of information sharing, but that process could take considerable time. In its March 2006 report, GAO commented on these multiple information services designed to communicate information to the water sector, but also acknowledged EPA's and DHS's ongoing efforts to coordinate their activities to advance water sector security. GAO recommended that DHS and the Water Sector Coordinating Council identify areas where information-sharing networks supported by EPA and DHS (especially the WaterISAC and HSIN) could be better coordinated to avoid operational duplications and overlap and to ensure that security threat information is provided to water systems on a timely basis. Water utility industry groups responded to GAO's recommendation by saying that such coordination efforts are, in fact, underway. DHS-EPA coordination again received congressional attention in the 110 th Congress. In its draft report on FY2009 funding for DHS, the House Appropriations Committee included report language urging DHS to work with EPA on water security issues. The report encouraged the National Protection and Programs Directorate of DHS to work with EPA "to improve federal outreach to water system managers, increase support and guidance on implementation of risk assessment techniques, and publicize effective protective measures that can be taken to increase water system security." Beyond the water sector itself, there is interest in larger coordination issues involving cross-sector interdependencies of critical infrastructures. As noted previously, water utilities are dependent on electric power to treat and distribute power, and electric power is essential to collecting and treating wastewater. Adequate and uninterrupted supply of water is necessary to support municipal firefighting. When disasters occur, what affects power also affects water supply, also affects sanitary services, also affects communications capability. The National Infrastructure Advisory Council, which provides the President, through DHS, with advice on infrastructure security, reportedly is currently engaged in a regional resilience study focused on the Philadelphia region that is examining interdependencies of water and other critical sectors (e.g., energy, telecommunications, transportation). Another information issue concerns the extent of EPA's ability to collect and analyze security data from water utilities, especially information in vulnerability assessments submitted under the Bioterrorism Preparedness Act (discussed below). EPA officials believe that the act permits reviewing utility submissions for overall compliance and allows aggregation of data but precludes the agency from asking for or analyzing data showing changes in security levels, as a safeguard against unintended release of such information. Others, including EPA's Inspector General, believe that EPA has the authority and responsibility to review and analyze the information in order to identify and prioritize threats and to develop plans to protect drinking water supplies. Among the research needs being addressed real-time monitoring of water supplies, and development of information technology. The cost of additional protections and how to pay for them are issues of great interest, and policymakers continue to consider resource needs and how to direct them at public and private sector priorities. A critical issue for drinking water and wastewater utilities is how to pay for physical security improvements, since currently there are no federal funds dedicated to these purposes, and utilities generally must pay for improvements using the same revenue or funding sources also needed for other types of capital projects. Since the September 11, 2001 attacks, Congress has conducted oversight on a number of these issues and considered legislation to address various policy issues, including government reorganization, and additional appropriations. Since the 9/11 terrorist attacks, Congress has provided appropriations to the Corps, the Bureau, and EPA for security-related programs and activities to protect water infrastructure. For both the Bureau of Reclamation and the Army Corps of Engineers, appropriations immediately after 9/11 were intended to support risk assessment of needed security improvements, followed by implementation of measures to ensure the safety and security of the public, Reclamation and Corps employees, and the facilities. For example, since FY2004, both agencies have implemented physical hardening and other protective measures, as well as personnel and information security. Both agencies continue to assess and reassess security needs at their facilities as part of ongoing efforts to ensure their long-term security. Reclamation's security budget includes a law enforcement program (guards and surveillance), facility fortification, studies, and review. For several years, Reclamation's security activities focused on five National Critical Infrastructure (NCI) dam facilities: Hoover, Shasta, Grand Coulee, Glen Canyon, and Fulsom; in recent years, other facilities also have received recommended security upgrades. Physical security enhancements at Reclamation facilities are intended to protect those facilities from terrorist threats, other criminal activities, and unauthorized operation of water control systems, thus reducing the high risk rating at critical assets. Several independent and internal reviews were conduction of Reclamation's site security program (including a review by Sandia National Laboratory, Interior's Office of Inspector General, and the National Academy of Sciences). As a result, Reclamation implemented improvements to all components of its program, including personnel security, information security, facility security, operations security, and law enforcement. The Corps' budget covers recurring security costs (i.e., guards and monitoring) for its administrative buildings and other general use facilities. The Corps also funds certain project-specific facility security upgrades. Funding appropriated to EPA has supported a number of activities. Significant portions of appropriations in FY2002 and FY2003 were for EPA grants for vulnerability assessments carried out by large and medium-size drinking water systems, to assist them in complying with requirements of the Public Health Security and Bioterrorism Preparedness and Response Act ( P.L. 107-188 , discussed below). EPA appropriations also supported training and development of voluntary industry practices for security, and grants to states and territories to coordinate activities for critical water infrastructure security efforts. EPA also provides support for water security information sharing for drinking water and wastewater utilities through the WaterISAC and the Water Security Channel. EPA has supported two special initiatives since FY2006: the Water Alliance for Threat Reduction (WATR), to train utility operators at the highest risk systems; and a related pilot program, the Water Sector Initiative, to design, deploy, and test biological or other contamination warning systems at drinking water. In May 2002, Congress approved the Public Health Security and Bioterrorism Preparedness and Response Act ( P.L. 107-188 ). Title IV of that act required drinking water systems serving more than 3,300 persons to conduct vulnerability analyses and to submit the assessments to EPA. The legislation authorized grant funding to assist utilities in meeting these requirements. Legislation authorizing Reclamation to contract with local law enforcement to protect its facilities also was enacted during the 107 th Congress ( P.L. 107-69 ). In 2001, the House and Senate considered but did not enact legislation authorizing a six-year grant program for research and development on security of water supply and wastewater treatment systems ( H.R. 3178 , S. 1593 ). Some of the drinking water research provisions in these bills were included in the Bioterrorism Preparedness Act. In 2002, the House approved a bill authorizing $220 million in grants and other assistance for vulnerability assessments by wastewater treatment utilities ( H.R. 5169 ), but the Senate did not act on a related bill ( S. 3037 ). In the 108 th Congress, legislation authorizing vulnerability assessment grants to wastewater utilities was approved by the House ( H.R. 866 , identical to H.R. 5169 in the 107 th Congress). The Senate Environment and Public Works Committee approved related legislation ( S. 1039 ). No further action occurred, due in part to concerns expressed by some that the legislation did not require that vulnerability assessments be submitted to EPA, as is the case with drinking water assessments required by the 2002 Bioterrorism Preparedness Act. Wastewater security issues again received some attention in the 109 th Congress. In May 2006, the Senate Environment and Public Works Committee approved S. 2781 , legislation similar to S. 1039 in the 108 th Congress. It would have encouraged wastewater utilities to conduct vulnerability assessments and authorized $220 million to assist utilities with assessments and preparation of site security plans. It also included provisions responding to GAO's March 2006 report that found that utilities have made little effort to address vulnerabilities of collection systems, which may be used by terrorists to introduce hazardous substances or as access points for underground travel to a potential target. S. 2781 would have authorized EPA to conduct research on this topic. During consideration of the bill, the Senate committee rejected an amendment that would have required, rather than encouraged, treatment works to conduct vulnerability assessments and also would have required high-risk facilities to switch from using chlorine and similar hazardous substances to other chemicals that are often referred to as "inherently safer technologies." Similar legislation was introduced in the 110 th Congress ( S. 1968 ). In the 111 th Congress, H.R. 2883 , the Wastewater Treatment Works Security Act of 2009, was introduced to require wastewater utilities that use or store substances of concern to carry out assessments and develop site security plans, in compliance with EPA guidelines. The bill would have authorized $1 billion in grants for vulnerability assessments, security enhancements, or worker training programs. No similar bill was introduced in the 112 th Congress. Another issue of interest has been the concerns of a number of water supply and power users of Bureau of Reclamation facilities about paying for security costs at these facilities. Since 9/11, Reclamation has increased security and anti-terrorist measures at federal multi-purpose dams. From 2002 through 2004, all of the incremental security costs were paid by the federal government. However, since 2005, the Administration has requested that users should fully reimburse government for the guards and patrols portion of site security costs. In the Administration's view, project beneficiaries have had several years to adjust their expectations, budgets, and planning for current guard and patrol levels and that post-9/11 cost increases should now be considered project O&M expenses subject to allocation among project purposes and reimbursement from beneficiaries. Many users argued that security costs for which the general public is the beneficiary, including obligations for national defense, should properly be the federal government's responsibility. The issue is especially a concern for beneficiaries of Reclamation's five high-priority dams, such as Hoover and Grand Coulee, which have the largest security needs, because these users are being asked to pay a proportionally higher share of total security costs than users of other Reclamation facilities. Hearings on the issue were held by the House Natural Resources Committee, in June 2006, and the Senate Energy and Natural Resources Committee, in July 2007. A compromise on the issue is reflected in legislation enacted in 2008. Section 513 of the Consolidated Natural Resources Act of 2008 ( P.L. 110-229 ) requires water and power users to pay for the cost of security guards, but sets an $18.9 million cap on the amount to be paid by users, indexed for inflation. Since FY2009, Reclamation's budget has included this annual reimbursability ceiling. The issue of security of wastewater and drinking water utilities also was debated in connection with legislation dealing with chemical manufacturing plant security. During consideration of comprehensive chemical plant security bills during the 109 th Congress, some proposed that water systems (drinking water and wastewater) be included in the legislation because many store or use extremely hazardous substances, such as chlorine gas, that can injure or kill citizens if the chemicals are suddenly released (see page 5 ). However, water system officials argued that the water sector should be excluded, because facilities have already undertaken vulnerability assessments (as required for many drinking water systems under the 2002 Bioterrorism Act, and as many wastewater utilities have done voluntarily). Further, they argued that requirements in the legislation were potentially duplicative of Risk Management Plan provisions in the Clean Air Act, which apply to more than 2,800 of the largest water systems. As part of a bill providing FY2007 appropriations for the Department of Homeland Security, Congress included provisions authorizing DHS to establish risk-based and performance-based security standards at the nation's chemical plants (the Chemical Security Act, Section 550 of P.L. 109-295 ). Under the legislation, chemical plants are required to conduct vulnerability assessment and create and implement site security plans based on identified vulnerabilities. The chemical plant security provisions in P.L. 109-295 agreed to exclude water systems from the new requirements. Implementing regulations were promulgated by DHS in 2007, the Chemical Facility Anti-Terrorism Standards (CFATS). However, under the statute, the temporary DHS rules were scheduled to sunset on September 30, 2009, after three years. At a House Homeland Security Committee oversight hearing in 2007, DHS Assistant Secretary for Infrastructure Protection Bob Stephan said that the water sector's exclusion from the Chemical Security Act created a "regulatory gap," because chemicals that are covered by the act, including chlorine, are found at unregulated wastewater and drinking water facilities, as well as regulated conventional chemical plants. He also said that DHS is reviewing ways to boost safeguards at water utilities that use large amounts of gaseous chlorine. Similarly, in 2008, EPA and DHS officials testified in support of eliminating the current exemption for wastewater and drinking water facilities from chemical security regulations. Water utilities oppose being included in DHS's CFATS rules, arguing that it could lead to costly new mandates. The debate also has raised the issue of federal agency roles and leadership, such as whether EPA should be granted a formal consultative role in development and implementation of DHS chemical security rules. Some were concerned that legislation would create uncertainty about coordination between EPA and DHS and whether EPA's lead role for the water utility sector would be altered. Each Congress since the 110 th has considered legislation to extend and modify P.L. 109-295 , including to make the chemical security standards permanent. Since the CFATS authority in P.L. 109-295 expired in September 2009, Congress has been extending the standards on a year-to-year basis. During this period there have been several competing proposals: to create permanent DHS rules for wastewater and drinking water facilities; or to create permanent DHS security rules for chemical plants and wastewater facilities but exempt drinking water plants; or to require EPA to establish risk-based security rules for drinking water plants and for EPA and DHS to consult on security at co-managed drinking water and wastewater facilities; or to leave the existing exemption in place and designate in statute that EPA is the lead agency for drinking water and wastewater security. Water utilities have urged congressional committees not to create a dual or split regulatory arrangement between two agencies, arguing that EPA has long-standing expertise in water and wastewater security issues. A controversial issue debated in connection with some of these proposals is whether to require facilities that handle chemicals to take action to reduce the consequences of a terrorist attack, such as using different chemicals, or changing to safer processes for their operations—so-called inherently safer technology (IST). Under some proposals, regulated drinking water and wastewater treatment facilities in high-risk categories could be directed by states or EPA to implement methods to reduce the consequences of a chemical release from an intentional act if doing so is feasible, would significantly reduce risk, would not increase interim storage of a substance of concern at the facility, and would not render the facility unable to comply with applicable requirements of the SDWA or CWA. Supporters have said that including water facilities would close a major security gap and would strengthen chemical facility antiterrorism standards and incorporate best practices. Opponents have said that doing so would impose costly mandates while doing little to further security. Water utility officials endorse giving EPA the lead on water security, but oppose any mandate for IST. Legislative proposals addressing these issues in the 112 th Congress included H.R. 901 , approved by the House Homeland Security Committee; H.R. 908 , approved by the House Energy and Commerce Committee; and S. 473 , approved by the Senate Homeland Security and Government Affairs Committee. These bills differed in a number of respects but reflected apparent consensus regarding water utility issues: all of the bills would have preserved the existing exemption from the DHS CFATS program, and none would have mandated inherently safer technology. Further, none would have altered EPA's lead role for the water utility sector. Separate Senate legislation, S. 711 , did include provisions to require inherently safer technology and would have added coverage of wastewater and drinking water facilities in CFATS. None of these bills was enacted by the 112 th Congress. However, a provision of the Continuing Appropriations Act, 2013 ( P.L. 112-175 ) extended authority for the existing CFATS program through March 27, 2013. Since the terrorist attacks of 2001, wastewater and drinking water utilities have been engaged in numerous activities to assess potential vulnerabilities and strengthen facility and system protections. Congressional oversight of this sector's homeland security activities has been limited but could be of interest in the 113 th Congress.

Damage to or destruction of the nation's water supply and water quality infrastructure by terrorist attack or natural disaster could disrupt the delivery of vital human services in this country, threatening public health and the environment, or possibly causing loss of life. Interest in such problems increased after the September 11, 2001, terrorist attacks in the United States. Across the country, water infrastructure systems extend over vast areas, and ownership and operation responsibility are both public and private, but are overwhelmingly non-federal. Since the attacks, federal dam operators and local water and wastewater utilities have been under heightened security conditions and are evaluating security plans and measures. There are no federal standards or agreed-upon industry practices within the water infrastructure sector to govern readiness, response to security incidents, and recovery. Efforts to develop protocols and tools are ongoing since the 9/11 terrorist attacks. This report presents an overview of this large and diverse sector, describes security-related actions by the government and private sector since 9/11, and discusses additional policy issues and responses, including congressional interest. Policymakers have been considering a number of initiatives, including enhanced physical security, better communication and coordination, and research. A key issue is how additional protections and resources directed at public and private sector priorities will be funded. In response, Congress has provided some appropriations for security at water infrastructure facilities (to assess and protect federal facilities and support security assessment and risk reduction activities by non-federal facilities) and passed a bill requiring drinking water utilities to conduct security vulnerability assessments (P.L. 107-188). When Congress created the Department of Homeland Security (DHS) in 2002 (P.L. 107-297), it gave DHS responsibilities to coordinate information to secure the nation's critical infrastructure, including the water sector. Under Homeland Security Presidential Directive-7, the Environmental Protection Agency (EPA) is the lead federal agency for protecting drinking water and wastewater utility systems. Recent congressional interest has focused on two legislative issues: (1) security of wastewater utilities, and (2) whether to include water utilities in chemical plant security regulations implemented by DHS. Congress has considered legislation to encourage wastewater treatment works to conduct vulnerability assessments and develop site security plans, but none has been enacted. Congress also has considered legislation to extend DHS's Chemical Facilities Anti-Terrorism Standards and, as part of that debate, whether to preserve an existing exemption for water utilities from chemical facility standards or to include them in the scope of DHS security rules. For now, the exemption from DHS standards remains in place. Since the terrorist attacks of 2001, wastewater and drinking water utilities have been engaged in numerous activities to assess potential vulnerabilities and strengthen facility and system protections. Congressional oversight of this sector's homeland security activities has been limited but could be of interest in the 113th Congress.

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The federal government currently provides support for career and technical education through the Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins III; P.L. 105-332 ). The act authorized funding for vocational and technical education through FY2003, although the Congress continued to provide funding under the act through FY2006. The 109 th Congress has passed and the President has signed the Carl D. Perkins Career and Technical Education Improvement Act of 2006 (Perkins IV; P.L. 109-270 ), which reauthorizes and amends the Perkins Act. The House version of the legislation (the Vocational and Technical Education for the Future Act, H.R. 366 ) was introduced on January 26, 2005. On March 17, 2005, the House Committee on Education and the Workforce reported H.R. 366 ( H.Rept. 109-25 ). By a vote of 416 to 9, the House passed H.R. 366 on May 4, 2005. The Senate version of the legislation was introduced as S. 250 on February 1, 2005. The Senate Committee on Health, Education, Labor, and Pensions (HELP) reported S. 250 on March 9, 2005, without a written committee report. The Senate passed S. 250 by a vote of 99 to 0 on March 10, 2005. The House substituted H.R. 366 for the Senate version of S. 250 and passed S. 250 (House version) on July 12, 2006, without objection. On July 20, 2006, the conferees met and agreed to file the conference report. The conference report ( H.Rept. 109-597 ) was filed on July 25, 2006. The Senate agreed to the conference report by unanimous consent on July 26, 2006. The House, by a vote of 399 to 1, agreed to the conference report on July 29, 2006. The President signed the bill on August 12, 2006, P.L. 109-270 . This report analyzes selected changes that P.L. 109-270 made to Perkins III. It begins with a detailed analysis of changes to funding formulas—both state allotments and within state allocations. Following this discussion, the report analyzes changes in accountability requirements, including changes to the core indicators of performance and data reporting, and related sanctions. Changes to state and local plans and uses of funds are then considered. The next section of the report examines changes made to the tech-prep program. The report concludes with changes made to the general provisions of the bill, most notably with respect to the equitable participation of private school students in career and technical education programs. Table 1 provides a general comparison of some of the key changes made by Perkins IV. Each of these changes is discussed in detail in a subsequent section of this report. It should be noted that the act provides funding to eligible agencies and eligible recipients. An eligible agency is the state board that functions as the sole state agency responsible for the administration or supervision of career and technical education in a specific state. An eligible recipient receives funding from the eligible agency and includes, for example, local educational agencies and public or nonprofit private institutions of higher education that offer career and technical education courses leading to various outcomes, such as an industry-recognized credential. P.L. 109-270 , the Carl D. Perkins Career and Technical Education Improvement Act of 2006, amends and revises the Perkins Act. It authorizes "such sums as may be necessary" for FY2007-FY2012 for Perkins Act programs and activities. The act refers to career and technical education (CTE) rather than vocational and technical education. Perkins IV retains the overall purpose of the act, making only technical changes. P.L. 109-270 also retains the overall structure of the Perkins Act. Sections 1 through 9 deal with certain overarching provisions, such as purposes of the act (Section 2), definitions that apply throughout the act (Section 3), and authorization of appropriations (Section 9). Title I of the act authorizes and specifies the central provisions of the act dealing with assistance to states for career and technical education. Title I-A deals with allotments and allocations. Title I-B specifies state provisions. Title I-C details local provisions. Title II of the act authorizes the tech-prep program. Title III contains general provisions related to federal administration of the program (Part A) and state administration (Part B). Section 9 of P.L. 109-270 authorizes appropriations for Title I of the act, except for three sections that have separate authorizations: Section 114, dealing with national activities; Section 117, authorizing funding for tribally controlled postsecondary career and technical institutions; and Section 118, authorizing funds for occupational and employment information. Perkins IV, like previous versions of the act, requires the Secretary of Education (Secretary) to reserve amounts for certain purposes from funds appropriated under Section 9. However, as shown in Table 2 , Perkins IV makes several changes in these reservations to reflect certain changes in the act. The amount reserved for assistance for outlying areas has been reduced from 0.2% of funds appropriated under Section 9 to 0.13%. This reduced percentage reflects the fact that two freely associated states (FASs)—Micronesia and the Marshall Islands—are no longer eligible for Perkins funding because the United States and these FASs have signed an agreement to extend their Compacts of Free Association. In addition, P.L. 109-270 increases the amount of direct grants to outlying areas (Section 115). Under Perkins III, Guam received a direct grant of $500,000 and American Samoa and the Northern Marianas each received direct grants of $190,000. Remaining funds were then distributed to the Pacific Regional Educational Laboratory (PREL), which would make grants to these three outlying areas and to eligible FASs. Under current law, direct grants are $660,000 for Guam and $350,000 each for American Samoa and the Northern Marianas. For the first fiscal year after the enactment of Perkins IV (FY2007), the Secretary distributes remaining funds to PREL as before. In subsequent years, remaining funds are divided equally among the three outlying areas. Finally, Palau receives a direct grant of $160,000 for as long as it is eligible for Perkins funding. As Table 2 illustrates, the percentage reserved for assistance for Indians and Native Hawaiians under Section 116 has not changed. However, the reservation for incentive grants has been repealed. These funds are now distributed to states under the " State Allotment Formula " discussed below. Of funds appropriated under Section 9, Perkins IV, slightly more than 98% is allotted to states based on the formula detailed in Section 111. The underlying formula is identical in Perkins III and Perkins IV: Funds are initially allotted based on three population groups (population ages 15 to 19, 20 to 24, and 25 to 65). These initial allotments are adjusted by states' per capita income (PCI), such that states with below average PCIs tend to receive somewhat increased grants, and those with above average PCIs tend to receive somewhat decreased grants. Perkins IV maintains the state allotment formula used under Perkins III unless "additional funds" are available above the FY2006 funding level. If funding allotted to states contains no "additional funds," the formula is unchanged. That is, the initial formula factors are applied, subject to the minimum grant provisions and to the provision that holds states harmless at 100% of their FY1998 grant amount. Assuming appropriations are level funded at the FY2006 amount, states with growing populations, such as Arizona and North Carolina, will tend to receive increased grants. States at their FY1998 grant amounts, such as Vermont and Wyoming, will continue to receive those grant amounts. Other states' grants will tend to decline, as funding shifts to states with more rapidly growing populations. P.L. 109-270 modifies the state allotment formula when there are "additional funds" above the amount allotted to states for FY2006. "Additional funds" are defined as amounts in excess of funds allotted to states for FY2006, plus the amount set-aside for incentive grants for FY2006 and $827,671. These additions to the amount allotted to states in the base year ensure that funds previously reserved for incentive grants and funds previously reserved for outlying areas no longer eligible for funding (the specified dollar amount) are not considered "additional funds," which trigger the formula changes discussed below. Table 3 illustrates how "additional funds" would be calculated assuming a 1% overall increase in FY2006 appropriations under Section 9. First the FY2006 state grant amount would be calculated by subtracting the set-asides from the total appropriation ($1.182 billion minus $26.5 million = $1.156 billion), which was the amount allotted by formula to states for FY2006. Next the amount for incentive grants ($6.384 million) and $827,671 are added to the state formula amount. This results in the FY2006 "base" amount of $1.163 billion. Any funds in excess of this base amount is defined as new money, which is allotted as described below. In Table 3 , this amount is $1.175 billion (the amount allotted to states by formula) minus $1.163 billion (the FY2006 base amount) which equals $11.631 million (the additional funds). Up to one-third of the "additional funds" (about $3.88 million based on the example in Table 3 ) would be allotted to states (except for the Virgin Islands) with FY2006 grants that are less than the minimum grant amount of ½% of the current-year funds allotted to states. Based on the example, these would be states with FY2006 grants less than $5.87 million (i.e., ½% of the amount allotted to states—$1.175 billion), which would be Alaska, Delaware, District of Columbia, Hawaii, Maine, Montana, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont, and Wyoming. The "additional funds" for these "qualifying" states would be allotted in proportion to how much below the minimum grant amount of ½% each state's FY2006 grant is. For example, Vermont and Wyoming, with FY2006 grants of $4.2 million, would receive larger amounts of funding than Maine and Rhode Island, which received FY2006 grants of nearly $5.8 million. As a result of this allotment procedure, none of these states could receive more than the minimum grant amount of ½% of the current amount allotted to states. The remaining funds (at least two-thirds of the "additional funds" or about $7.75 million based on the above example) would be allotted to the other states based on the underlying formula, except that no state would receive a grant less than its FY1998 grant. The Perkins Act specifics how funds received by states must be allocated with respect to the percentage reserved at the state level and the percentage subsequently distributed to the local level. It also specifies how funds must be distributed at the local level. As under prior law, Section 112 requires states to distribute at least 85% of state grant funds to the local level (i.e., to eligible recipients, such as local educational agencies (LEAs) and community colleges). States may reserve up to 10% of the funds distributed to the local level for eligible recipients in rural areas and in areas with high percentages or high numbers of career and technical education students. States have complete discretion in how much of local funding is distributed for career and technical education at the secondary level versus postsecondary career and technical education. States may reserve up to 5% of their grants (or $250,000 if that amount is greater) for "administration of the State plan." P.L. 109-270 continues to require states to match administrative funds "on a dollar-for-dollar basis." States may use up to 10% of the state grant for state leadership functions. Perkins IV continues to specify substate formulas for distribution of Perkins grant funds to eligible recipients (Sections 131 and 132). The act does not change the distribution of funds for eligible postsecondary institutions (e.g., community colleges) and consortia of such institutions. Funds continue to be distributed based on each eligible institution's number of Pell grant recipients and recipients of assistance from the Bureau of Indian Affairs. For example, if an eligible institution accounted for 10% of all such recipients among all eligible institutions in a state, that institution would receive 10% of the funds the state set-aside for postsecondary career and technical education. P.L. 109-270 does change the substate formula for distribution of funds for secondary school CTE programs, although this change should have no practical impact. Under prior law, 30% of funds designated for secondary education programs were to be distributed based on school districts' shares of resident population ages 15 to 19; and 70% of funds were to be distributed based on shares of individuals ages 15 to 19 from poor families. The act permitted the Secretary to waive this formula if a state could demonstrate "that a proposed formula more effectively targets funds on the basis of poverty" (Section 131(c)(1)). Because population and poverty data for the 15 to 19 age group are not available at the school district level, the Secretary has waived the application of this formula (apparently for all states). Instead, the Secretary has allowed states to use resident population and poverty data for ages 5 to 17, which is available at the school district level because these data are used to allot grants under Title I-A of the Elementary and Secondary Education Act (ESEA). P.L. 109-270 codifies this procedure in law: 30% of funds designated for secondary education programs is distributed based on school districts' shares of resident population ages 5 to 17; 70% is distributed based on shares of residents ages 5 to 17 who are from poor families. Section 114 of the Perkins Act authorizes certain national programs and activities, such as a national assessment of vocational education, research, and dissemination. Such sums as may be necessary to conduct these activities are authorized for FY2007 through FY2012. Similar to Perkins III, an independent advisory panel advises the Secretary on the evaluation and assessment of CTE programs funded under the act. Perkins IV, however, includes greater specification of membership on the independent advisory panel. The contents of the assessment are similar under Perkins III and Perkins IV, but Perkins IV adds additional requirements. For example, in examining teacher preparation and qualifications, it is recommended that this include whether CTE faculty meet teacher certification or licensing requirements. The evaluation must also consider career and technical education achievement, in addition to academic achievement and employment outcomes. It must also examine the "extent and success of the integration of rigorous and challenging academic and career and technical education" and the outcomes of such integration on academic and technical proficiency achievement. The assessment must also determine whether CTE programs are preparing students for employment in occupations in which mathematics and science skills are critical. An interim report on the assessment must be submitted to Congress on or before January 1, 2010. A final report must be submitted on or before July 1, 2011. With respect to the conduct of research, the Secretary shall make a competitive award to a single entity or consortium of entities to establish a single national research center. Under Perkins III, multiple national research centers could be supported. Under Perkins IV, the center's research must focus on conducting scientifically based research and evaluation. This work, among other goals, must address the education, employment and training needs of CTE participants, including special populations. It must also focus on improving the implementation of CTE programs that are "integrated with coherent and rigorous content aligned with challenging academic standards." The research and evaluation must also be used to improve the preparation and professional development of CTE staff, including the recruitment and retention of staff. Section 118 of the Perkins Act authorizes the Secretary to provide assistance and funding to state-designated entities that collect and disseminate occupational and employment information. These entities are jointly designated in each state by the Governor and the state agency that oversees career and technical education. Perkins IV adds a state application process that requires the jointly designated state entity to submit an application to the Secretary at the same time the state submits its state plan under Section 122 (see discussion in subsequent section). The application must include information as required by the Secretary, as well as information based on trends provided in accordance with Section 15 of the Wagner-Peyser Act. Perkins IV also alters authorized state-level activities under Section 118. For example, Perkins III states that designated entities must provide programs to assist "individuals" to improve career and occupational decision making. Perkins IV changes the language to "students (and parents, as appropriate)." A possible impact of such changes would be to target occupation and employment information programs rather than to make such programs available to the population in general. Other changes include an emphasis on preparing relevant staff to provide parents and students with exposure to high skill, high wage, or high demand occupations, and to assist state entities in creating educational resources and training that include information on these types of occupations. In Perkins IV, Congress acted to strengthen and substantially change accountability requirements (Section 113) and the associated sanctions for failing to meet these requirements (Section 123). Highlights of these changes include the following: specifies separate core indicators of performance for the secondary and postsecondary levels; links established between secondary core indicators of performance and ESEA; requires eligible recipients to accept state-adjusted levels of performance or negotiate their own adjusted levels of performance with the eligible agency for each of the core indicators of performance at the secondary and postsecondary levels; requires annual data reported on eligible agencies' and recipients' progress in meeting their core indicators of performance to be disaggregated as required for data reporting under ESEA; requires eligible agencies and recipients to meet at least 90% of an adjusted level of performance for each core indicator of performance, or be required to write an improvement plan; allows the Secretary to withhold only state leadership and administrative funds from eligible agencies that fail to make progress or show improvement, but no longer allows funds withheld to be redistributed to other eligible agencies; and permits eligible agencies to withhold funds from an eligible recipient, but requires the funds be used by the eligible agency to provide services to students who would otherwise have received services from the eligible recipient. Perkins IV establishes six explicit core indicators of performance at the secondary level. Both eligible agencies and eligible recipients are required to establish measures for each of the indicators. Many of the core indicators of performance included in Perkins IV are similar to those required under Perkins III but include several modifications, such as establishing links to ESEA. It should be noted that Perkins was last reauthorized in 1998, prior to the reauthorization of ESEA that included the new requirements of the No Child Left Behind Act. Under Perkins III, eligible agencies were required to include measures of "student attainment of challenging state established academic ... proficiencies" in their identification of core indicators of performance. The first core indicator of performance under Perkins IV must measure student attainment of challenging academic content standards and student academic achievement standards. The standards used in this measure must be the ones adopted by the state under Title I-A of the ESEA (Section 1111(b)(1) and (b)(3)). Student attainment of these standards must be based on the state determined levels of proficiency for assessments required under Title I-A of the ESEA in math, language arts, and, beginning with the 2007-2008 school year, science. Similar to Perkins III, the second core indicator of performance must measure student attainment of career and technical skill proficiencies. Unlike Perkins III, however, it does not require the student attainment of "challenging" career and technical skill proficiencies. Perkins IV specifies, however, that measures of student attainment may include student achievement on technical assessments that are aligned with industry-recognized standards, if such assessments are available and relevant. The third core indicator of performance is also similar to an indicator included in Perkins III. Eligible agencies must measure student rates of attainment of a secondary school diploma. They must also measure student rates of attainment of a General Education Development (GED) credential or state recognized equivalent for a high school diploma, including alternative standards for individuals with disabilities. States must also measure student rates of attainment of a proficiency credential, certificate, or degree in conjunction with a secondary school diploma, if the state makes this option available to students. Based on the most recent performance data available, only 17 states offered the latter option to students. The fourth core indicator of performance requires eligible agencies to measure student graduation rates as required under Title I-A of the ESEA. Under the ESEA, graduation rates for secondary students are defined as the "percentage of students who graduate from secondary school with a regular diploma in the standard number of years" (Section 1111(b)(2)(C)(vi)). Thus, students who take longer than the standard number of years to graduate, earn a GED in lieu of a regular diploma, or earn some type of alternative high school diploma would not be counted as graduates under this measure. Perkins III did not include a similar core indicator of performance. The last two core indicators of performance are nearly identical to those included in Perkins III. The eligible agency must measure student placement in postsecondary education or advanced training, placement in military service, and placement in employment. The eligible agency must also measure student participation in and completion of CTE programs that lead to employment in non-traditional fields. Perkins IV includes five core indicators of performance at the postsecondary level. Both eligible agencies and eligible recipients are required to establish measures for each of the indicators. Several of the core indicators of performance included in Perkins IV are similar to those required under Perkins III. Similar to Perkins III, the first core indicator of performance must measure student attainment of "challenging" career and technical skill proficiencies. Perkins IV specifies, however, that measures of this attainment may include student achievement on technical assessments that are aligned with industry-recognized standards, if such assessments are available and relevant. The second and third core indicators of performance focus on completion and retention at the postsecondary level. The second core indicator of performance requires measures of student attainment of an industry-recognized credential, a certificate, or a degree. The third core indicator of performance requires measures of student retention in postsecondary education or transfer to a bachelor's degree program. While Perkins III addressed completion and retention, it was not as specific as Perkins IV. For example, it did not require measures of student transfers. The fourth core indicator of performance, similar to Perkins III, requires measures of student placement in military service or placement or retention in employment. Perkins IV adds placement in apprenticeship programs to the required measures. It also specifies that measures of employment must include student placement in high-skill, high-wage, or high-demand occupations or professions. The final core indicator of performance is identical to the final core indicator of performance at the secondary level. Eligible agencies and recipients must measure student participation in and completion of CTE programs that lead to employment in non-traditional fields. Eligible agencies and eligible recipients are required to negotiate adjusted levels of performance for each of the core indicators for which they will be held responsible. For eligible agencies, this process is essentially identical to the process used under Perkins III. Based on input from eligible recipients, the eligible agency establishes levels of performance for each of the core indicators in its state plan. The eligible agency then negotiates adjusted levels of performance for the core indicators with the Secretary for the first two program years and then reaches agreement prior to the third program year and the fifth program year for adjusted levels of performance for the relevant time period. As under Perkins III, the agreement on the state adjusted levels of performance must take into account the state adjusted levels of performance established by other eligible recipients, while considering the characteristics of the participants served and the specific services offered, as well as the extent to which the levels will promote continuous improvement on the core indicators of performance. Under Perkins IV, eligible recipients will also be required to establish levels of performance for each of the core indicators in their local plans. Eligible recipients have the option of accepting the state adjusted levels of performance as their own or negotiating with the eligible agency to establish new local adjusted levels of performance. If an eligible recipient chooses to negotiate its adjusted levels of performance, the process will mirror the process at the state level. The agreement on the local adjusted levels of performance must take into account the local adjusted levels of performance established by other eligible recipients, while considering the characteristics of the participants served and the specific services offered, as well as the extent to which the levels will promote continuous improvement on the core indicators of performance. Each eligible agency will continue to be required to submit an annual report detailing its progress in meeting its adjusted levels of performance on the core indicators of performance to the Secretary. Perkins IV also requires eligible recipients to submit annual reports describing their progress in meeting their indicators to the eligible agency. Under Perkins IV, eligible agencies and eligible recipients are required to disaggregate the data for each of the indicators of performance, including any additional indicators selected by the eligible agency or recipient, based on the categories of students included in Title I-A of the ESEA for data reporting purposes. That is, data must be disaggregated by race, ethnicity, gender, disability status, migrant status, English proficiency, and status as economically disadvantaged (ESEA, Section 1111(h)(1)(C)(i)). After disaggregating the data, eligible agencies and recipients must identify and quantify any discrepancies or gaps in performance between the specific categories of students and overall student performance. Under Perkins IV, if a state fails to meet at least 90% of an adjusted level of performance for any of the core indicators, it is required to develop and implement a program improvement plan. This plan must give special consideration to performance gaps identified among categories of students. Perkins III required a state to develop and implement a program improvement plan if it failed to meet the state adjusted levels of performance. In practice, this meant that states only had to develop an improvement plan if they missed their adjusted levels of performance in the aggregate (e.g., poor performance in meeting one adjusted level of performance for a core indicator could be compensated for by exceeding the adjusted level of performance for another core indicator). Similar to Perkins III, if the Secretary determines that an eligible agency is not carrying out its state plan appropriately or is not making "substantial progress" in meeting the goals of the act, as determined by the state's adjusted levels of performance, the Secretary may provide technical assistance to the eligible agency to implement improvement strategies. If an eligible agency fails to implement a required improvement plan, fails to make any improvement on the indicators that triggered the improvement plan within the first year of implementation of the improvement plan, or fails to meet at least 90% of the state adjusted level of performance for the same core indicator of performance for three consecutive years, the Secretary may, after providing the eligible agency with an opportunity for a hearing, withhold all or a portion of the eligible agency's funding for state leadership and administration. This is a substantial departure from the sanction provisions contained in Perkins III, under which an eligible agency could be sanctioned for failing to meet its state adjusted levels of performance for two or more consecutive years. The Secretary was also permitted to withhold any funds received by the state under this title, including funds that would otherwise be provided to eligible recipients. Perkins IV requires that funds withheld from an eligible agency be used only to provide technical assistance, assist in the development of an improved state improvement plan, or other relevant improvement activities to benefit the state. The Secretary will no longer be permitted to redistribute funds withheld from one eligible agency to other eligible agencies as was possible under Perkins III. Finally, Perkins IV retains the exception included in Perkins III that allows the Secretary to waive financial sanctions due to "exceptional or uncontrollable circumstances" or a "precipitous and unforseen decline" in the state's financial resources. Under Perkins IV, the requirements for improvement plans and sanctions for eligible recipients are similar to those imposed on eligible agencies. If, after reviewing the eligible recipient's progress in meeting its local adjusted levels of performance, the eligible agency determines that the eligible recipient failed to meet at least 90% of an agreed upon local adjusted level for any of the core indicators of performance, the eligible recipient will be required to develop and implement a program improvement plan. The program improvement plan must provide special consideration to performance gaps identified among categories of students. Under Perkins III, if an eligible agency determined that an eligible recipient was not making substantial progress in achieving the state adjusted levels of performance, the eligible agency was required to assess the educational needs of the eligible recipients, enter into an improvement plan with the eligible recipient, and conduct regular assessments of the eligible recipient's progress in meeting the state adjusted levels of performance. Under Perkins IV, eligible agencies are required to provide technical assistance to eligible recipients failing to meet their responsibilities or make substantial progress in meeting the purposes of the act as determined based on their local adjusted levels of performance. Perkins III did not include specific sanctions to be applied to eligible recipients subsequently failing to show improvement, and no specific sanctions that would result in an eligible recipient losing funding. Perkins IV subjects eligible recipients to similar financial sanctions as imposed on eligible agencies. After providing an opportunity for a hearing, an eligible agency may withhold all or a portion of an eligible recipient's funding if the eligible recipient fails to make any improvement on the indicators that triggered the improvement plan within the first year of implementation of the improvement plan, or fails to meet at least 90% of the state adjusted level of performance for the same core indicator of performance for three consecutive years. Funds withheld must be used to provide services and activities to students in the area that would have otherwise been served by the eligible recipient. Funds may not be redistributed to other eligible agencies. For eligible agencies, both current law and Perkins IV includes an exception to financial sanctions due to exceptional or uncontrollable circumstances. This exception is extended to financial sanctions for eligible recipients. In addition, the eligible agency may opt not to impose sanctions if the small size of the eligible recipient's CTE program affects its performance. Perkins III provided states with flexibility to select performance measures most appropriate for meeting their goals. This resulted in a multitude of definitions and measurement strategies across states, making state-to-state data comparisons virtually impossible. In response, ED awarded a grant for the Performance Measurement Initiative, a project to develop and pilot test new secondary and postsecondary assessment and accountability measures for academic and career and technical programs that build on existing state and local data systems. Perkins IV contains language that may partially address the data comparability issue. It requires that when identifying core indicators of performance and other indicators of performance, states shall, to the extent possible, define the indicators so that they are aligned with similar data collected for other federal and state programs. The usefulness of this requirement, however, may depend upon how it is implemented by states and interpreted by ED. For example, if states rely on definitions used within their states, and these definitions vary from state to state, it may be difficult to obtain comparable data among states. The data comparability issue could also be complicated if some states opt to use federal definitions for measures, while other states use state definitions that do not match the federal definition. As pointed out by ED, however, if the measures of the core indicators of performance selected by each state were valid and reliable, as required by Perkins IV, it would be possible to make comparisons of an individual state's performance from year to year even if the performance of all states could not be compared. To receive funding, all eligible agencies are required to submit a state plan to the Secretary under Section 122. Under Perkins IV, these plans must cover a six-year time period rather than a five-year time period as required under Perkins III. Perkins IV also contains specific transition provisions to provide eligible agencies time to adjust to the new requirements of the law (Section 4). Eligible agencies are permitted to submit a transition plan for the first fiscal year following the enactment of Perkins IV. They will then submit state plans to cover the remaining five years of the authorization. In practice, a timetable for transitioning from the requirements of Perkins III to Perkins IV may resemble the following: April 2007: States submit transition plans to the U.S. Department of Education (ED); 2007-2008 school year: Transition year and baseline data collection; and Summer 2008: Establish adjusted levels of performance (discussed in a subsequent section of the report). In developing the state plan, both Perkins III and Perkins IV require eligible agencies to consult with a variety of interested parties. Perkins IV expands the list of interested parties with whom the eligible agency must consult to include, for example, academic and career and technical education administrators, career guidance and academic counselors, and charter school authorizers. State plans submitted by eligible agencies are required to include specific information. While Perkins IV incorporates many of the same requirements of Perkins III, it modifies several existing requirements and adds several additional requirements. Below is a summary of substantial changes and additions made to the plan contents. Selected key changes are subsequently discussed in greater detail. The state plan must: describe the career and technical programs of study for career and technical content areas that meet specific requirements and how the programs will be developed and implemented; detail how the eligible agency will assist eligible recipients in developing articulation agreements; describe how the eligible agency will publicize career and technical programs of study offered by eligible recipients; include criteria that will be used to determine the extent to which the local plan will promote continuous improvement in academic achievement and technical skill attainment, and identify and address current or emerging occupational opportunities; explain how CTE programs will prepare secondary students, including special populations, to graduate with a diploma; detail how funds will be used to develop or improve CTE courses at the secondary level that will be aligned with the academic content and student achievement standards adopted by the state under ESEA Title I-A, are relevant and challenging at the postsecondary level, and lead to employment in high skill, high wage, or high demand occupations; describe how the eligible agency will ensure that best practices among eligible recipients and tech-prep recipients are shared; detail how academic and career and technical education at the secondary and postsecondary levels will be linked to improve achievement; describe how the eligible agency will report on and evaluate the integration of CTE programs with coherent and rigorous content aligned with state academic standards; describe how professional development will promote the integration of academic content standards and CTE curricula, increase the percentage of teachers meeting licensure or certification requirements, be sustained and of high quality, encourage applied learning, improve instruction for special populations, improve the use of data, and promote integration with professional development activities carried out under Title II of the ESEA and Title II of the Higher Education Act; detail how the recruitment and retention of CTE faculty and the transition to teaching from business and industry will be improved; explain how the transfer of subbaccalaureate CTE students to baccalaureate programs will be facilitated; describe how CTE will be integrated with academics to ensure learning in the core subjects and career and technical subjects; develop a plan for negotiating local adjusted levels of performance; include assurances that the eligible agency will comply with the requirements of the act and its state plan; and describe how data will be reported. Two of the most significant changes include the specification of elements that CTE programs must include and a greater emphasis on academic achievement, particularly evidenced by the links that must be established to academic requirements included in the ESEA. First, CTE programs of study must include both secondary and postsecondary education elements. They must include "coherent and rigorous content aligned with challenging academic standards and relevant career and technical content in a coordinated, nonduplicative progression of courses" aligning secondary and postsecondary education. The programs may also include opportunities for dual or concurrent enrollment or other strategies for students to earn postsecondary credits. Finally, the programs must lead to an industry-recognized credential or certificate at the postsecondary level or an associate's or bachelor's degree. The state plan must also discuss how the state will link CTE with requirements included under the ESEA. For example, the plan must specify how funds will be used to improve or develop new CTE courses that are aligned with student academic achievement standards adopted by the state under the ESEA (Section 1111(b)(1)). The eligible agency must also describe how learning in the core academic subjects defined under the ESEA will be ensured. Section 9101(11) of the ESEA defines the core academic subjects as language arts, mathematics, science, foreign languages, civics and government, economics, art, history, and geography. Similar to Perkins III, states will continue to have the option to submit unified plans under the Workforce Investment Act (WIA; P.L. 105-220 , Section 501). Otherwise, under Perkins IV, states not opting to consolidate their basic state grant funding with their tech-prep funding must fulfill the state plan requirements for the basic state grants program and tech-prep by submitting a single state plan. Perkins IV retains many of the same required and permissible uses of state leadership funds as Perkins III with some modifications and adds several new uses of funds (Section 124). For example, eligible agencies will have to use state leadership funds to provide professional development focused on the use of scientifically based research and data to improve instruction. Professional development must be high quality, sustained, and intensive, and should not be based on one-day or short-term training sessions. In addition, professional development programs must support education programs to ensure that teachers and other staff are able to develop a higher level of academic and industry knowledge and skills in CTE and effectively use applied learning. While Perkins IV retains many of the same permissible uses of funds as Perkins III, there are some notable differences. For example, Perkins IV adds new uses of funds for career guidance and academic counseling, facilitating transitions from subbaccalaureate CTE programs to baccalaureate degree granting institutions, developing assessments of technical skills, developing and enhancing data systems, and improving the recruitment and retention of CTE staff and the transition of individuals from business and industry into CTE. Eligible agencies are also permitted to use state leadership funds to award incentive grants to eligible recipients meeting various criteria, such as exceeding local adjusted levels of performance, developing connections between secondary and postsecondary education, integrating coherent and rigorous content that is aligned with academic standards and technical coursework, or having special populations meet local adjusted levels of performance. Incentive grants may also be awarded to eligible recipients that combine funding with other eligible recipients for innovative initiatives. To receive funding, all eligible recipients are required to submit a local plan to the eligible agency under Section 134. These plans must cover the same time period covered in the state plan. Under Perkins IV, state plans must cover a six-year time period rather than a five-year time period as required under Perkins III. Similar to the contents of state plans, Perkins IV retains many of the provisions for local plan content contained in Perkins III with some modifications, including linkages to ESEA provisions. For example, the local plan must describe how the academic and technical skills of students will be improved through the integration of "coherent and rigorous content aligned with challenging academic standards and relevant career and technical education programs to ensure learning in the core academic subjects" as defined in the ESEA. Other provisions require the eligible recipient to ensure that CTE students will enroll in rigorous and challenging courses in the core academic subjects, and that professional development will be provided to promote the integration of coherent and rigorous content aligned with challenging academic standards and relevant CTE. The local plan must also describe how the eligible applicant will offer at least one career and technical program of study that meets the requirements of these programs as described in the requirements for the state plan, and how the eligible recipient will improve the recruitment and retention of CTE staff and the transition of individuals from business and industry into CTE. Both required and allowable uses of funds are stipulated for local recipients. Many of the uses of funds included in Perkins IV were previously included in Perkins III but have been modified. Among the required uses of funds, significant changes and new uses of funds include, for example, establishing linkages to the core academic subjects defined under the ESEA, establishing linkages between secondary education CTE and postsecondary CTE, providing training to support the effective integration of challenging academics and CTE, providing training to enable staff to use scientifically based research and data to improve instruction, and providing activities specifically to prepare special populations for high skill, high wage, or high demand occupations leading to self-sufficiency. Several new uses of funds were added to the permissible uses of funds. For example, funds may be used to provide career and academic counseling that improves graduation rates, provides information on postsecondary education and career options, and assists postsecondary students, including adult students. They may be used to establish local education and business partnerships including developing adjunct faculty arrangements for industry professionals and obtaining industry experience for teachers. Funds may also be used to develop initiatives that facilitate the transition of students from subbaccalaureate CTE programs into baccalaureate degree programs, including the development of articulation agreements and dual or concurrent enrollment programs. The local recipient may also use funds to develop new CTE courses and programs of study, including for consideration by the eligible agency; courses that prepare individuals for high skill, high wage, or high demand occupations; and courses that create dual or concurrent enrollment opportunities for secondary education students. Local recipients may also pool their funds with at least one other local recipient to support innovative initiatives, such as improving the initial preparation and professional development of CTE staff or improving accountability data collection or reporting. The provisions for administrative costs are identical under Perkins III and IV. Eligible recipients may use up to 5% of their funds for administrative costs. The tech-prep program is authorized under Title II of the Perkins Act. During congressional consideration of Perkins IV, there was debate about whether tech-prep should be retained as a separate program or integrated into the basic state grants program. The compromise that was reached on this issue allows tech-prep to remain a separate program, but adds new provisions that permit eligible agencies to combine their tech-prep funds with their state grant funds. If eligible agencies choose to combine program funds, funds are considered as being allotted under the basic state grants program and must be distributed to eligible recipients in accordance with the formulas pertaining to that program. All eligible agencies that want to receive tech-prep funding, regardless of whether they choose to consolidate funds or not, must describe in their state plan required under Section 122 how tech-prep activities will be coordinated with other activities described in the state plan. Perkins IV also expands the contents of tech-prep programs and establishes a link between the programs and ESEA. Under Perkins IV, a tech-prep program of study is required to build student competence in technical skills and in the core academic subjects as defined under ESEA, as appropriate, through "applied, contextual, and integrated instruction, in a coherent sequence of courses." A tech-prep program of study is also required to integrate academic and career and technical instruction with work-based learning experiences when possible; provide technical preparation in a career field; lead to technical skill proficiency, an industry-recognized credential, a certificate, or a degree in a specific career field; lead to placement in further education or in high skill or high wage employment; and use CTE programs of study, to the extent practicable. Tech-prep programs are also required to use articulation agreements; provide in-service professional development for teachers, faculty, and administrators; and provide professional development on using and accessing data, including student achievement data. Professional development programs for counselors must include a new focus on aiding staff in providing comprehensive career guidance and academic counseling to tech-prep students, including students from special populations. Finally, a tech-prep program must coordinate its activities with activities conducted under Title I of the act. Perkins IV also includes two additional permissible uses of funds. Tech-prep funds may be used to improve career guidance and academic counseling through the use of graduation and career plans. Funds may also be used to develop curricula to aid in transitions between secondary and postsecondary CTE programs. Substantial changes were also made with respect to accountability provisions and associated sanctions. Under Perkins III, tech-prep recipients were not subject to specific accountability requirements or sanctions. Rather, each eligible agency receiving funds was required to report annually to the Secretary on the effectiveness of tech-prep programs. Under Perkins IV, each consortium receiving funding is required to establish and report on the following indicators of performance with respect to tech-prep participants: number of secondary and postsecondary education students served; number and percent of secondary education students who enroll in postsecondary education, enroll in postsecondary education in the same field of study pursued at the secondary level, complete a state or industry-recognized credential or licensure, earn postsecondary credit while enrolled at the secondary level, and enroll in remedial math, writing, or reading courses in postsecondary education; and number and percent of postsecondary education students who are placed in a related field of employment not later than 12 months following graduation from the program, complete a state or industry-recognized credential or licensure, compete a two-year degree or certificate program within the normal time of completion for the program, and complete a bachelor's degree within the normal time of completion for the degree. Each consortium receiving tech-prep funding must enter into an agreement with the eligible agency to meet a minimum level of performance on the aforementioned indicators of performance, as well as on the core indicators of performance established at the secondary and postsecondary levels (see previous discussion). If a consortium does not meet these performance levels for three consecutive years, the eligible agency must require the consortium to resubmit an application for a tech-prep grant. In addition, if grants are made to consortia on a formula basis, the eligible agency may terminate funding to a consortium that fails to meet its performance levels for three consecutive years. Perkins IV authorizes "such sums as may be necessary" for FY2007-FY2012 for tech-prep. The tech-prep demonstration program, however, was not reauthorized. The demonstration program was last funded in FY2005 at $4.9 million. Perkins III permitted eligible agencies and eligible recipients to include secondary education staff in nonprofit private schools in the geographical area served by the eligible agency or recipient to participate in vocational and technical education professional development activities (Section 317). Perkins IV modifies this provision to require, "to the extent practicable, upon written request," eligible agencies and eligible recipients to include the aforementioned private school personnel in career and technical education professional development activities upon written request of the private school personnel. Perkins III did not specifically address the issue of the equitable participation of secondary school students enrolled in nonprofit private schools in programs and activities funded under the act, stating only that students were not barred from participation (Section 313). Perkins IV adds new provisions making it optional, upon written request, for eligible recipients to provide for the "meaningful" participation of these students in career and technical education programs and activities (Section 317). In addition, upon written request, the eligible recipient must consult "in a timely and meaningful manner" with representatives of nonprofit private schools located in the geographical area served by the eligible recipient to discuss the meaningful participation of secondary education students attending these schools in career and technical education programs and activities funded under this act.

The federal government currently provides support for career and technical education through the Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins III; P.L. 105-332). The act authorized funding for vocational and technical education through FY2003, although the Congress continued to provide funding under the act through FY2006. The 109th Congress has reauthorized the Perkins Act. On August 12, 2006, the Carl D. Perkins Career and Technical Education Improvement Act of 2006 was signed into law (Perkins IV; P.L. 109-270). While many aspects of the Perkins Act remain intact, Perkins IV made several key changes to the act: refers to career and technical education rather than vocational and technical education; retains the basic state grant formula for allocating funds to states if appropriations are level funded or decreasing, but implements a modified formula if appropriations increase; establishes separate core indicators of performance for the secondary and postsecondary levels; modifies the required contents of state and local plans, including adding linkages between the Perkins Act and the Elementary and Secondary Education Act, as modified by the No Child Left Behind Act; requires eligible agencies and eligible recipients to meet at least 90% of their adjusted levels of performance on each of their core indicators of performance or be required to develop and implement an improvement plan; allows the Secretary of Education to withhold only state leadership and administrative funds from eligible agencies that fail to make progress or show improvement, but no longer allows funds withheld to be redistributed to other eligible agencies; permits eligible agencies to withhold funds from eligible recipients failing to make progress or show improvement; modifies the required and allowable uses of state leadership funds; modifies the required and allowable uses of local funds; and maintains the tech-prep program as a separate program, but permits eligible agencies to consolidate their funding under the basic state grants program and the tech-prep program. This report will not be updated.

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This report explains the major provisions of the federal estate, gift, and generation-skipping transfer taxes as they apply to transfers in 2014. The enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the estate and generation-skipping transfer taxes over a 10-year period, leaving the gift tax as the only federal transfer tax in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily (through the end of 2012) reinstated the estate and generation-skipping transfer taxes with lower top rates and larger exemptions and reunified the estate and gift taxes. The American Taxpayer Relief Act of 2012 permanently extended the estate tax rules enacted by the 2010 Act except for the top tax rate, which increased from 35% to 40%. The federal estate and gift taxes are unified as they utilize the same rate structure. Federal estate and gift taxes also share a lifetime transfer credit. For 2014, this unified credit covers an applicable amount of $5,340,000 per individual. The federal estate, gift, and generation-skipping transfer tax laws are rather lengthy and complex. This report discusses those major Internal Revenue Code (IRC) and Internal Revenue Service (IRS) regulation provisions which play the dominant role in the determination of estate, gift, and generation-skipping transfer tax liability. This discussion relates only to the taxation of United States citizens and resident aliens while different rules apply to the taxation of nonresident alien individuals. For a discussion on transfer taxes for nonresident aliens, see CRS Report R43576, Estate and Gift Taxes for Nonresident Aliens , by [author name scrubbed]. The federal estate tax is a tax on the estate of a decedent, levied against and paid by the estate. Contrastingly, the inheritance tax is imposed on and paid by the heirs of the decedent based upon the money or property that they receive. The determination of federal estate tax liability involves a series of adjustments and modifications of a tax base known as the "gross estate." Certain allowable deductions reduce the gross estate to the "taxable estate." Then, the total of all lifetime taxable gifts made by the decedent is added to the taxable estate before tax rates are applied. The result is the decedent's estate tax which, after reduction for certain allowable credits, is the amount of tax paid by the estate. This discussion will divide the federal estate tax into three components: the gross estate, deductions from the gross estate, and computation of the tax, including allowable tax credits. The gross estate of a decedent includes the value of all property, real or personal, tangible or intangible, wherever situated, in which the decedent owned an interest on the date of the decedent's death. The gross estate may also include certain interests in property which the decedent had transferred to another person at some time prior to the date of death. Certain types of property may be included in the decedent's gross estate if specific IRC conditions are met. Proceeds from a life insurance policy on the life of the deceased may qualify as part of the gross estate if either the proceeds are payable to or for the use of the estate's executor, or if the decedent held any "incidents of ownership" in the policy on the date of death or gave away such incidents of ownership within three years of the date of death. An incident of ownership is an economic right in the policy, such as the right to cancel the policy, change the beneficiary, or borrow against its cash surrender value. Similarly, the value of a survivor's annuity payable because of the death of the decedent is included in the decedent's gross estate if the deceased had the right to receive a lifetime annuity under the same contract. The value of property owned by the decedent jointly with a right of survivorship in another person, other than the decedent's spouse, may also qualify as part of the gross estate. The contribution of money or money's worth of consideration towards the cost of acquiring the property by someone other than the decedent subsequently reduces the contribution of that property to the gross estate. However, only one-half of the value of property owned jointly with a right of survivorship by a decedent and the surviving spouse, regardless of the relative contributions of the decedent and the surviving spouse, may qualify as part of the gross estate. In a number of instances, the value of a decedent's gross estate encompasses the value of property not owned by the decedent on the date of death. For example, a decedent's gross estate can include the value of lifetime gifts over which the decedent retained a life interest or the power to alter, amend, terminate, or destroy the beneficial enjoyment of the property. Lifetime gifts that do not take effect until the date of death, irrespective of the number of years that have elapsed between the date of the gift and the date of the donor's death, are also included in the donor's gross estate. However, the gross estate does not include property sold during the decedent's lifetime for full and adequate consideration. The decedent's gross estate also includes all property subject to a general power of appointment held by the decedent on the date of death, even if the decedent died without exercising that power. A power of appointment is a right, held by a person other than the owner of property, to determine who will enjoy the ownership of or benefit of the property. A power of appointment is "general" if it may be exercised by its holder in favor of the holder, the holder's estate, the holder's creditors, or the creditors of the holder's estate. If a power cannot be exercised in favor of these classes of persons, it is not a general power of appointment, regardless of the size of the classes of beneficiaries in whose favor the power can be exercised. The property and interests included in the decedent's gross estate are valued at their fair market value on the date of death or, if elected by the executor at his/her discretion, the alternate valuation date. The alternate valuation date is the earlier of either the date of distribution or disposition of the property by the estate or the date six months after the date of death. The "fair market value" of property is the price at which the estate property would change hands between a willing buyer and seller. In such a sale, the buyer and seller should not be compelled to buy or sell. Additionally, both parties should have reasonable knowledge of the relevant facts. The fair market value price does not reflect a forced sale price but the sale price in a market in which the item is most commonly sold to the public. The IRS regulations outline valuation rules for certain types of property such as stocks and bonds, family farms, and closely held businesses where the estate must determine the fair market value under specific conditions. A decedent's taxable estate is determined by reducing the gross estate with allowable deductions, including estate administration expenses, certain debts and losses, the amount of qualified transfers to a surviving spouse, charitable bequests, and state death taxes. The first deduction to which an estate is entitled is for the funeral expenses, administration expenses, claims against the estate, and unpaid mortgages paid by the estate (to the extent not reflected in the reduced value of estate assets). The estate may deduct these payments if they are paid by the estate and are permitted under the laws of the applicable jurisdiction in which the estate is administered. Additionally, the estate may deduct the amount of any casualty or theft losses sustained by the estate during the settlement of the estate, to the extent such losses are not compensated by insurance. The estate may also claim a "marital deduction" for the value of all property passing to the decedent's surviving spouse. Only non-terminable interests passing to the surviving spouse qualify for this marital deduction. Interests that may terminate in favor of another person upon the lapse of time, the occurrence of an event or contingency, or the failure of an event or contingency to occur, generally do not qualify for the estate tax marital deduction. Special exceptions to the terminable interest rule are made for certain transfers in trust of a lifetime income interest if the executor elects to include the value of the trust property in the surviving spouse's gross estate and for certain life estates coupled with a general power of appointment. Certain life insurance settlement options and certain interests conditioned upon survivorship for a reasonable period not exceeding six months also serve as exceptions to the terminable interest rule. A deduction for certain charitable bequests and devises to qualified charitable organizations also reduce the value of the gross estate. Although the rules are not identical, the estate tax charitable deduction functions similarly to its income tax counterpart with the purpose of encouraging charitable contributions. The gross estate is also reduced by the amount of any estate, inheritance, legacy, or succession taxes actually paid to any state or the District of Columbia in respect to property included in the gross estate. Under the unified estate and gift tax system, computation of a decedent's estate tax liability requires a "grossed-up," or a combination, of the decedent's lifetime taxable gifts and the decedent's taxable estate to which the tax rate schedule is then applied. Any available credits are subsequently taken to obtain the decedent's actual estate tax liability (the amount of tax to be paid by the estate). The estate rate schedule is as follows: There are three major estate tax credits presently in effect: the unified transfer tax credit, the credit for foreign death taxes, and the credit for federal estate taxes paid by previous estates. Each credit is a dollar-for-dollar offset against an estate's federal estate tax liability. The unified transfer tax credit is available against both lifetime gift tax liabilities and the estate tax liability. To the extent this credit is used to offset gift taxes, it is unavailable to offset estate taxes. The IRC refers to the credit as an "applicable exclusion amount," that is, the amount of taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2014 is $5,340,000. Each estate may also use credits for foreign death taxes, including estate, inheritance, legacy, or succession taxes actually paid by the estate or any heir with respect to property included in the federal gross estate. This credit is limited to the amount of U.S. estate taxes paid on the same property. The credit is computed as the same proportionate share of the total U.S. estate taxes as the value of the foreign taxed property bears to the total of the U.S. taxable estate. The credit for previously taxed property (PTP credit) is provided to relieve some of the harshness that could otherwise result when an individual dies soon after inheriting property upon which a federal estate tax has already been imposed. The PTP credit is allowed for all or some portion of the federal estate taxes paid on property transferred to the decedent within the past ten years. The PTP credit is graduated according to the amount of time that has elapsed between the date the property was transferred to the decedent and the date of death. The maximum PTP credit is 100% of the previously paid taxes, when the decedent received the property within two years prior to the date of death. The minimum PTP credit is 20% of the previously paid taxes, when the decedent received the property during the ninth or tenth years preceding the date of death. The federal gift tax is a tax imposed on an annual basis on all gratuitous transfers of property made during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor's tax liability on the gift depends upon the value of the "taxable gift." The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The gift tax liability created on the basis of the donor's taxable gifts may be reduced by the available unified transfer tax credit. This discussion will divide the federal gift tax into two components: the taxable gift and the computation of the gift tax. The donor calculates the gift tax liability by first determining the amount of the taxable gift. The amount of the taxable gift is the fair market value of the gift at the time it was made, less certain exclusions and deductions. The major deductions and exclusions are the annual per donee exclusion, the gift tax marital deduction, and the gift tax charitable deduction. Through the annual exclusion, every donor may exclude from his/her federal gift tax base the first $14,000 of cash or property given to each donee annually. An unlimited exclusion is available for gifts of direct payments to the donee's educational institution for tuition expenses or to the donee's medical provider for health care expenses. Under the present interest rule, the annual exclusion is unavailable, however, for gifts of future interests which vest in the donee only upon some future date. The present interest rule often requires complicated drafting techniques to obtain the annual exclusion for the value of a gift of a life insurance policy made in trust, or a gift to a minor, to be held in trust until the minor reaches a certain age. Married couples may double the annual exclusion through "gift-splitting," an arrangement in which one spouse consents to being treated as having made one-half of the gifts made by his or her spouse in that taxable year. The election is made by a notation on the gift tax return, and results in each spouse receiving a $14,000 per donee exclusion for one-half of the value of the same gift. Therefore, married couples may annually exclude $28,000 per donee from their tax liability by gift-splitting. Several deductions are also available for the donor to reduce his/her tax liability. A donor may deduct the value of certain interspousal gifts. Like its estate tax counterpart, the gift tax marital deduction is not allowed for most gifts of terminable interests. A donor may also deduct the value of certain charitable gifts. The value of the gift may be deducted only if the charity is of a type described in the applicable statutory provision, which describes most, but not all, of the charities for which deductible income tax contributions may be made. The division of property incident to a divorce or separation agreement may result in the interspousal transfer of property for consideration which is not adequate for gift tax purposes. Consequently, the IRC provides that interspousal transfers pursuant to a written agreement dividing the property of the spouses and occurring within one year before and two years after a decree of divorce will not be treated as taxable gifts. However, in order to meet this provision, the agreement must settle the marital rights of the spouses or provide for a reasonable allowance for the support of minor children. The renunciation of property given one by another person might be viewed as either the negation of the initial gift, resulting in no gift tax liability, or as a reciprocal gift, resulting in two gift tax liabilities. The gift will be ignored for gift tax purposes if a disclaimer is made in writing before the donee has accepted any benefits of the property and within nine months of the gift's date. The tax liability of a taxable gift is measured initially by the value of the transferred property. The gift tax follows the same progressive rates as the estate tax. The tax is then applied cumulatively to taxable gifts made over the donor's lifetime. The actual computation of the gift tax for each calendar year is completed in three steps. First, the donor's taxable gifts for the calendar year and any preceding calendar periods are totaled and the tentative tax determined. Second, the tentative tax is again calculated using the total taxable gifts for preceding calendar periods. Third, the result from step two is subtracted from the result of step one, and the donor's unused unified tax credit is applied to the remaining amount. The combination of the progressive tax rates and the cumulative computation of the gift tax generates the tax liability of larger gifts at progressively higher rates. The Tax Reform Act of 1986 repealed the original generation-skipping transfer (GST) tax, enacted in 1976, because of its complexity and replaced it with a simplified flat-rate tax. The purpose of the resulting GST tax is the same as its predecessor, to close a loophole in the estate and gift tax system where property could be transferred to successive generations without paying multiple estate or gift taxes. The traditional generation-skipping transfers were trusts established by a parent for the lifetime benefit of the children with the remainder passing to the grandchildren. If properly drafted, an estate or gift tax would not be imposed when the trust corpus passed from the settlor's children to the settlor's grandchildren because the estate tax is not imposed on interests that terminate at death. This discussion will divide the generation-skipping transfer tax into two components: generation-skipping transfers and the computation of the tax. The GST tax is a flat-rate tax. The rate is set at the highest estate tax rate, currently 40%. This tax rate is applied to three different transfer events: a direct skip, a taxable termination, or a taxable distribution. A direct skip is a transfer to a skip person. A skip person is a person assigned to a generation two or more generations below the transferor's. A transfer to a trust is a direct skip if all the interests in the trust are held by skip persons. A taxable termination is a termination by death, lapse of time, release of power, or otherwise of an interest in property held in trust. A taxable termination does not occur if immediately after the termination a non-skip person has an interest in the property or if after the termination, the trust makes a distribution to a skip person. A taxable distribution is a distribution from a trust, other than a taxable termination or direct skip, to a skip person. An important step in determining the GST tax is to assign all persons involved to a specific generation level, as outlined in the IRC. Persons related to the transferor or spouse are assigned along family lines. For example, the transferor, spouse, and brothers and sisters are in one generation, their children in the next, and grandchildren in the next. Lineal descendants of a grandparent of the transferor or spouse are assigned to generations on the same basis. Anyone ever married to a lineal descendant of the transferor's grandparent or the spouse's grandparent are assigned to the level of their spouse who was a lineal descendant. Non-relatives of the transferor are assigned generations measured from the birth of the transferor. Persons not more than 12½ years younger are treated as members of the same generation as the transferor. Each 25-year period thereafter is treated as a new generation. A grandchild of the transferor or spouse is moved up one generation if his parents are deceased at the time of the transfer. The first step in calculating the GST tax is to determine the taxable amount. For direct skips, the taxable amount is the value of the property received by the transferee. The GST tax on direct skips is tax-exclusive, meaning that the amount of tax paid is proportional to the pretax value of the transferred property. Contrastingly, the taxable amount for taxable terminations and distributions is tax-inclusive. The taxable amount for these property transfers is determined by including the tax value with the value of the property before applying the tax rate. The second step in calculating the GST tax is to apply the applicable rate. The applicable rate is the maximum Federal estate tax rate (40% for 2014) and the inclusion ratio of the transfer. The inclusion ratio is figured by subtracting from one ("1") the following fraction: the portion of the GST exemption allocated to the transfer as the numerator and the value of the property transferred as the denominator. To compute the generation-skipping tax, the value of the transfer is multiplied by the tax rate (40%) and by the inclusion ratio. The IRC provides several exemptions and exclusions for the GST tax. Unlike the estate and gift taxes, the GST tax does not use the unified credit. Instead, a $5,340,000 GST exemption is allowed to each individual for generation-skipping transfers during life or at death. The exemption is doubled for married individuals who elect to treat the transfers as made one-half by each spouse. An indirect skip property transfer automatically triggers the GST exemption. An indirect skip occurs when the generation one level below the decedent (e.g., children) receives some beneficial interest in the property before the property passes to the generation two or more levels below (e.g., grandchildren). The exclusions for tuition and medical expense payments from the gift tax also apply to the generation-skipping tax. Additionally, the $14,000 per donee annual exclusion from the gift tax is recognized against taxation of direct skips only (i.e., where the property passes directly to the generation two or more levels below the decedent). The liability for the tax is determined by the type of transfer. In the case of a taxable distribution, the tax is paid by the transferee. The tax on taxable terminations or direct skips from a trust is paid by the trustee. Direct skips, other than those from a trust, are taxed to the transferor.

This report contains an explanation of the major provisions of the federal estate, gift, and generation-skipping transfer taxes as they apply to transfers in 2014. The following discussion provides basic principles regarding the computation of these three transfer taxes. The federal estate and generation-skipping transfer taxes were resurrected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) after a hiatus of one year (2010). The American Taxpayer Relief Act of 2012 (ATRA) permanently extended the estate tax rules enacted by the 2010 Act except for the top tax rate, which increased from 35% to 40% for both the estate and gift taxes. The federal estate tax is a tax levied on the transfer of property at death and measured by the size of the decedent's estate. The tax is computed through a series of adjustments and modifications of a tax base known as the "gross estate." Certain allowable deductions reduce the gross estate to the "taxable estate," to which is then added the total of all lifetime taxable gifts made by the decedent. The tax rates are applied and, after reduction for certain allowable credits, the amount of tax owed by the estate is reached. The federal gift tax is a tax imposed on all gratuitous transfers of property made during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor's tax liability of the gift depends upon the value of the "taxable gift." The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The unified transfer tax credit is available against both gift and estate tax liability. To the extent this credit is used to offset gift taxes, it is unavailable to offset estate taxes. The Internal Revenue Code refers to the credit as an "applicable exclusion amount," that is, the amount of taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2014 is $5,340,000. The generation-skipping transfer tax attempts to close a perceived loophole in the estate and gift tax system where property could be transferred to successive generations without intervening estate or gift tax consequences. There are two basic forms of generation-skipping transfers: the indirect skip, where the generation one level below the decedent receives some beneficial interest in the property before the property passes to the generation two or more levels below; and the direct skip, where the property passes directly to the generation two or more levels below the decedent. The generation-skipping transfer tax is imposed at a flat rate of 40% with an available exclusion of $5,340,000. While it is of the same value, this exclusion is separate from the unified transfer tax credit available for the estate and gift taxes.

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Border and Transportation Security (BTS) is a pivotal function in protecting the Americanpeople from terrorists and their instruments of destruction. While BTS may be difficult to attain, thefederal government has put into place multiple programs and policies to achieve this goal. The threereports in this series attempt to provide an understanding of the complex problems faced in seekingenhanced border and transportation security, suggest a framework to better understand existingprograms and policies, and explore some possible new directions and policy options. As noted in the first report (1) in this series, homeland security efforts can be seen as a series ofconcentric circles or screens, with the outer screen being that of preventive efforts launched outside the country -- before terrorists or their weapons can reach the country. The continuum of activitiesto provide homeland security then moves through progressively smaller circles starting from moredistant efforts to closer and more localized measures, ending with emergency preparedness andresponse. Thus, the process starts with prevention abroad and progresses through the other stagesas needed. As the first report in this series observes, border management is a complex task and currentprograms and policies in place to strengthen the border and facilitate the flow of legitimate peopleand things can seem overwhelmingly complex and difficult to approach in a systematic way. Thisreport addresses the myriad programs and policies that make up the nation's current approach toattaining higher levels of BTS. Before doing so, however, it is useful to review the development ofcongressional concern and policy approaches. Congressional concern with terrorism and border security was manifested early, followinga series of terrorist attacks beginning in the 1990s. The shock of the first World Trade Center attackin 1993 was followed by two attacks in Saudi Arabia (Riyadh in 1995 and Khobar Towers nearDhahran in 1996), the simultaneous Embassy bombings in 1998 (Kenya and Tanzania), the attackon the USS Cole in 2000, and culminating in the catastrophic attack on the World Trade Center andthe Pentagon on September 11, 2001. The congressional response began with inquiries related tothe nature of the terrorist threat, and was followed by specific, targeted measures to protect the nationfollowing the events of 9/11. There are indications that congressional interest continues in broader,more comprehensive approaches including recent efforts to respond to the report of the 9/11Commission contained in the National Intelligence Reform Act of 2004 ( P.L. 108-458 ). Congressional policy evolution is charted briefly below: Broad efforts to understand the terrorist threat -- Starting in 1998, Congresscreated three commissions to better understand the nature of the terrorist threat facing the nation. These included the Gilmore Commission (to investigate domestic preparedness to cope withweapons of mass destruction), the Bremer Commission (to explore the terrorist threat and what couldbe done to prepare for it), and the Hart-Rudman Commission (to investigate national securitychallenges in the 21st Century). (2) Structural changes to provide a proper framework for action -- Following the9/11 attacks, Congress enacted legislation to create the Department of Homeland Security to providea structural framework for subsequent action, and the USA PATRIOT ACT to provide the toolsneeded for the new challenge to national security. (3) Starting even earlier, but continuing through this period, Congressattempted to remedy perceived flaws in the immigration system with a series of legislativemeasures. (4) Highly specific actions to protect against immediate threats -- Understandably, following the 9/11 attacks that were committed by foreign national extremists, early legislativeaction called for the immediate implementation of the entry and exit control system, the use ofbiometric identifiers in travel documents, and intelligence sharing among federal law enforcementand immigration agencies through the passage of the PATRIOT Act. Airline security measures weretaken with the creation of the Transportation Security Administration, among other things in theAviation and Transportation Security Act. That was soon followed by the Enhanced Border Securityand Visa Entry Reform Act to tighten immigration practices and tools, and legislation to protectagainst the serious threats posed in the maritime domain with enactment of the MaritimeTransportation Security Act. (5) Interest in broader, more comprehensive approaches -- As evidenced in recentoversight hearings, Congress has been frustrated by the failure to more aggressively address otherborder and transportation security threats (including the need to create integrated terroristwatch-lists, and measures to address other modes of transportation -- rail and mass transit, air cargo,trucking, and buses). These concerns were given a strong impetus by the Final Report of the 9/11Commission, which highlighted the need for more strategic approaches to the terrorist threat, andare expressed in legislative form in the Intelligence Reform and Terrorism Prevention Act of 2004( P.L. 108-458 ). (6) The next section of the report traces the development of selected programs and policiesdesigned to achieve higher levels of border and transportation security, and presents them in aframework that facilitates a better understanding of current approaches and some possible newdirections. Since the September 11, 2001 terrorist attacks, the nation has made securing the homelandits primary objective. Border security has emerged as a critical stage in achieving this goal. Priorto the terrorist attacks, federal agencies involved in securing the homeland were fragmented andoften plagued by internal performance problems. As discussed below, many federal agencies taskedwith securing the nation's borders did not communicate with one another. Moreover, technology wasinadequate for communications within many of these agencies as well as between agencies. Forexample, immigration systems and databases, which are critical when trying to determine theadmissibility of a foreign national and keep bad people out of the country were not (and to someextent still are not) integrated. In an effort to address some of these issues, Congress passed theHomeland Security Act of 2002 ( P.L. 107-296 ). (7) The Homeland Security Act of 2002 consolidated many of the federal agencies responsiblefor border and transportation security into a single department. Within the Department of HomelandSecurity (DHS) is a Directorate of BTS, which is charged with securing: the borders; territorialwaters; terminals; waterways; and air, land and sea transportation systems of the United States. BTShouses the Bureau of Customs and Border Protection (CBP), the Transportation Security Agency(TSA) and Immigration and Customs Enforcement (ICE). Within CBP are the inspections serviceof the former Immigration and Naturalization Services (INS), the U.S. Border Patrol, the inspectionsservice of the U.S. Customs Service, and the border-related inspection programs of the Animal andPlant Health Inspection Service (APHIS). In addition to the border security-related functions of theformer INS and U.S. Customs Service being transferred to CBP, the following agencies were alsotransferred to DHS: (1) U.S. Coast Guard; (2) TSA; and (3) immigration investigations, intelligence,interior enforcement and detention and removal functions of the former INS and U.S. Customsinvestigations and interior enforcement. The Coast Guard was transferred to DHS as a stand-aloneagency and TSA was maintained in DHS' BTS as a distinct entity. (8) This section focuses on current border security activities of CBP, (9) the Coast Guard and the airlinesecurity component of the TSA. The activities discussed in this section are divided into categoriesof how they provide BTS and further divided into people and goods security-related programs. The DHS is the primary federal agency responsible for securing the border. CBP's functionis to secure U.S. borders while facilitating the legitimate flow of people and goods across the border. CBP personnel carry out these duties by inspecting people and goods prior to entry into the UnitedStates and by dispatching border patrol agents to patrol the border between ports of entry to preventpeople from illegally entering the country. In addition to the various components in DHS, the CoastGuard aids in securing U.S. ports and waterways. In securing the ports and waterways, the CoastGuard performs the following functions: (1) defense readiness; (2) drug interdiction; (3) migrantinterdiction; and (4) law enforcement-related functions. (10) Another component of border security is securing the nation'sair system, which is primarily done by TSA. Current policies at the border can be separated into twomajor categories: people-related border security and goods-related border security. Since the terrorist attacks, considerable focus has been placed on the fact that the 19 terroristswere aliens who apparently entered the United States legally despite provisions in immigration lawthat could have barred their admission. (11) Fears that lax enforcement of immigration laws regulating theadmission of foreign nationals into the United States may continue to make the United Statesvulnerable to terrorist attacks have led many to call for tighter measures at the border (as well asduring the screening process for visas). These concerns, which are constantly weighed with effortsto facilitate the legitimate travel of people across the border, have been expressed frequently in alegislative form. (12) The U.S. maritime system consists of more than 300 sea and river ports with more than 3,700cargo and passenger terminals, with most ships calling at U.S. ports being foreign-owned. Containerships have been the focus of much of the attention on seaport security due to the potential ofterrorists infiltrating them. More than 6 million marine containers enter U.S. ports each year andwhile all cargo information is analyzed by CBP officers for possible targeting for closer inspection,only a fraction is actually physically inspected. (13) CBP works in tandem with the U.S. Coast Guard at sea portsof entry. Efforts such as the Coast Guard's requirement that ships provide a 96-hour Notice ofArrival and CBP's Container Security Initiative (CSI) program aid in preventing more harmful thingsfrom getting to the United States. In addition to maritime security, much attention has been focused on the nation's air, truckand rail system. Similar to the massive volume of containers entering the nation's seaports, airportsalso experience large volumes of cargo. The U.S. government has employed a number of strategies and programs to make the nation'sborders more secure. The following actions are set in a framework that suggests types of possiblepolicy actions: Pushing the border outwards to intercept unwanted people or goods before theyreach the United States; Hardening the border through the use of technology and the presence of moreagents at the border; Making the border more accessible for legitimate trade andtravel; Strengthening the border through more effective use of intelligence;and Multiplying effectiveness through the engagement of other actors in theenforcement effort (including engaging Canada, Mexico, state and local law enforcement resources,and the private sector). Many contend that the best way to secure the border is by addressing issues before they reachthe border. While this concept is not new, greater emphasis has been placed on "pushing the borderout" since the terrorist attacks. (The following discussion is organized to highlight activities thattarget people and goods for inspection). In 2004, there were more than 427 million travelers who were inspected at a U.S. port ofentry. (15) Of the 427million travelers who sought entry into the United States in 2003, approximately 62% were foreignnationals. While the majority of travelers seeking entry into the United States are admitted duringprimary inspections, (16) a small percentage of travelers (less than one percent) are referred to secondary inspections. (17) In theory, by pushing outthe border, the number of travelers needing closer scrutiny at the border (i.e., referrals to secondaryinspection) would diminish, which would create a higher level of security. Following are a fewexamples of either congressional mandates and/or administrative initiatives that are aimed at pushingout the border. Pre-Inspections. Pre-inspections are immigrationinspections conducted at foreign ports of embarkation by United States authorities for passengersseeking entry into the U.S. Congress first authorized immigration pre-inspections in 1996. (18) However, efforts topreinspect travelers had previously been underway for several years. As of spring 2005, 15 foreignairports participated in the pre-inspection program, (19) and Congress has mandated that preinspections be extended to"at least 25 foreign airports." (20) Under the pre-inspection program, the Secretary of Homeland Security details immigrationofficers to foreign airports. While immigration officers that are located at pre-inspection sites canperform general inspection functions, other law enforcement functions performed by immigrationofficers within the United States may be limited in the countries where pre-inspection sites arelocated. (21) Although the original intention of pre-inspections was to decrease the number of inadmissiblealiens entering the United States, some officials now view it as a useful means to better secure ourborders while facilitating the flow of travel. Setting up pre-inspection sites at foreign airports,however, is not without controversy. In order to have a pre-inspection site at a foreign airport, theUnited States must enter into diplomatic negotiations with the host country. These negotiationsinclude addressing issues such as sovereignty and the extent to which immigration officers canenforce United States' immigration laws in the foreign country. Another issue in setting uppre-inspection sites at foreign airports is the amount of resources it takes to staff them. Immigrationofficials are assigned to pre-inspection sites based on the volume of travelers seeking entry to theUnited States. Thus, countries that may not have the volume of travelers to justify a pre-inspectionsite may still justify having such a site based on the number of "high risk" travelers. Advanced Passenger Manifest. Air carriers enroute to the United States from a foreign country are required to submit passenger manifests inadvance of their arrival at a U.S. port of entry. While inspections are done on U.S. soil, suchadvance notification alerts the CBP inspectors to which travelers will need closer scrutiny. Themanifest is transmitted electronically via the Advanced Passenger Information System (APIS), whichis integrated with the Interagency Border Inspection System (IBIS), a component of the US-VISITprogram. TSA and ICE Border Security-Related Activities. TSA and ICE have several programs that have implications for securing the nation's borders but areusually not considered to be directly applicable to border security. These programs are either gearedtowards pre-screening individuals before they embark on a flight originating in the United States orproviding intervention during a flight should an act of terrorism occur. Computer Aided Passenger Pre-Screening System. Since 1996, the Computer Aided Passenger Pre-screening (CAPPS) System has analyzed ticketpurchasing behavior to identify air travelers who may pose a threat. While the TSA maintains thatthe methods of identifying suspicious passengers under the existing CAPPS program has largelybeen compromised by information publicly discussed following the terrorist attacks, efforts to createa next-generation passenger risk assessment and pre-screening system (CAPPS II) have beenscrapped due to mounting privacy concerns and operational problems. On August 26, 2004,however, TSA announced its plans to test a new passenger pre-screening program, SecureFlight. (22) Under SecureFlight, TSA will be responsible for checking domestic airline passengers' names against terroristwatch lists (see discussion below, "Strengthening the Border Through More Effective Use ofIntelligence"). (23) The "No-Fly" and "Selectees" Lists. (24) TSA is mandated by lawto maintain a watchlist of names of individuals suspected of posing "a risk of air piracy or terrorismor a threat to airline or passenger safety." The watchlist was created in 1990 and was initiallyadministered by the Federal Bureau of Investigations, then the Federal Aviation Administrationbefore TSA finally took over the administrative responsibility. Individuals whose names are on theselists are subjected to additional security measures, with a "no-fly" match requiring the individual tobe detained and questioned by federal law enforcement and a "selectees" match requiring additionalscreening. P.L. 108-458 sets forth procedures for appealing erroneous information or determinationsmade by TSA with respect to the aforementioned records. (25) Federal Air Marshal Service. The Federal AirMarshall Service (FAMS) was created as a direct result of the events of the terrorist attacks. It wasoriginally a part of TSA but was moved to ICE by DHS in December 2003. FAMS places plainclothes federal law enforcement agents on board "high-risk" flights either destined to the UnitedStates or originating in the United States. In the two-year period following the terrorist attacks, airmarshals responded to over 2,000 aviation security incidents, used non-lethal force 16 times,discharged their weapons on three occasions and were involved in 28 arrests or detainments ofindividuals. (26) In addition to FAMS, other measures to secure passenger airlines include the hardening ofcockpit doors, training and arming pilots who volunteer to be Federal Flight Deck Officers, and thetraining of flight attendants to handle security threats in the aircraft cabin. As discussed above, the massive volume of containers that arrive at U.S. ports each yearmakes it impractical for CBP to inspect every container. In order to focus its limited inspectionresources, CBP has launched several initiatives designed to enhance the targeting of high-riskshipments and securing the entire supply chain from point of origin to final destination. While theseinitiatives assist CBP inspectors with targeting high-risk containers, thus requiring a physicalinspection at the border, they also permit the identification of such containers in advance of theirarrival at the border. Advance Electronic Cargo Manifest Requirement. Cargo inspections are dependent on receiving accurate information in a timely manner in order toexecute risk assessment and targeting procedures before shipments reach the border. To giveinspectors adequate information and time to perform a risk assessment on arriving cargo shipments,the legacy Customs agency published a rule (known as the 24-hour rule) (27) requiring the submissionof certain manifest information to Customs 24-hours in advance of the vessel cargo being laden atthe foreign port. Current law required CBP to develop rules concerning the mandatory electronicsubmission of cargo manifest data. (28) CBP published regulations establishing these rules accordingto the following time-frames: Vessel -- 24 hours prior to lading in the foreign port; Air -- 'wheels up' or four hours prior to departure for the United States(depending upon where the flight originated); Rail -- two hours prior to arrival in the United States; Truck -- one hour prior to arrival for shipments entered through the Pre-ArrivalProcessing System (PAPS) or the Automated Broker Interface (ABI) and 30 minutes prior to arrivalfor shipments entered through FAST. (29) Container Security Initiative. The ContainerSecurity Initiative (CSI) program, one of a series of initiatives aimed at securing the supply chain,was initiated by the U.S. Customs Service (now CBP) in January of 2002 to prevent terrorists fromexploiting containers entering into the United States. CSI is based on four core elements: (1)developing criteria to identify high-risk containers; (2) pre-screening high-risk containers at theearliest possible point in the supply chain; (3) using technology to pre-screen high risk containersquickly; and (4) developing and using smart and secure containers. Under the CSI program, CBPofficers are sent to participating ports where they collaborate with host country customs officers toidentify and pre-screen high-risk containers using non-intrusive inspection technology before thecontainers are laden on U.S.-bound ships. Similar to CBP inspectors who conduct pre-inspectionsat foreign airports, (as discussed above), CBP officers stationed at CSI ports are neither armed, norhave arrest powers. CBP continues to expand CSI to additional foreign ports. As of spring 2005,CSI was at 32 foreign ports. Customs-Trade Partnership Against Terrorism. The Customs-Trade Partnership Against Terrorism (C-TPAT) was initiated in April 2002 and offersimporters expedited processing of cargo if they comply with CBP requirements for securing theirentire supply chain. C-TPAT participants benefit from fewer cargo inspections, as membership inC-TPAT reduces a company's overall risk score in the Automated Targeting System (ATS). (30) In order to participate inthe C-TPAT businesses must sign an agreement that commits them to the following actions: conduct a comprehensive self-assessment of supply chain security using theC-TPAT security guidelines jointly developed by CBP and the tradecommunity; submit a completed supply-chain security profile questionnaire toCBP; develop and implement a program to enhance security throughout the supplychain in accordance with C-TPAT guidelines; and communicate C-TPAT guidelines to other companies in the supply chain andwork toward building the guidelines into relationships with these companies. Once the applicant company has conducted the security self-assessment and submitted thesecurity profile, C-TPAT officials review the security profile to develop an understanding of thecompany's security practices. C-TPAT officials also gather information regarding the company'strade compliance history and any past criminal investigations. Based upon the results of the review,CBP will work with the company to address any security concerns discovered during the review, orwill further reduce the company's risk score. Additional efforts to push the border out include the following (see Appendix A for adescription of each program): Carrier Consultant Program (people); Immigration Security Initiative (people); Known Shipper Programs (goods); and North American Perimeter Security (people). The U.S. northern and southwest borders extend over 6,000 miles, with vast areas of bothborders lacking direct surveillance by border patrol personnel. While the northern border,historically, has posed less of a problem than its southwestern counterpart, the terrorist attacks havebrought attention to the vulnerabilities that both borders pose. The southwest border, on the otherhand, has a longstanding history of illegal migrants attempting to gain entry into the United Statesas well as individuals attempting to smuggle human beings and drugs into the country. The borderpatrol has increased its manpower along portions of the border and various types of technology arealso being used such as video cameras, ground sensors, radiation detectors, geographic informationsystems, and physical barriers to provide surveillance at the border. (31) While critics of the current technological infrastructure contend that its weaknesses pose asecurity risk, efforts are underway to enhance border technology. Issues such as integrating datasystems, sharing intelligence among agencies and departments, having technology that can track thecomings and goings of foreign nationals and having technology that can read biometric identifiersare all important to border management. Additionally, agencies continue to invest in technology that will aid in detecting things thatmay cause harm, including technology that would detect explosives. (32) For example, inspectorsare increasingly using portal scanning devices on commercial vehicles to detect radiation. Theborder patrol has begun using Unmanned Aerial Vehicles (UAV) in its Tucson Border Patrol Sectoras part of its Arizona Border Control (ABC) initiative in an attempt to control the flow of illegalmigration between ports of entry. (33) The border patrol also uses other technology such as groundsensors and video cameras. In addition, CBP has deployed an array of non-intrusive inspection (NII) technologies at portsof entry to assist inspectors with the examination of cargos and the identification of contraband. Large scale NII technologies include a number of x-ray and gamma ray systems. The Vehicle andCargo Inspection System (VACIS) uses gamma rays to produce an image of the contents of acontainer for review by the CBP inspector. The VACIS can be deployed in a stationary or mobileconfiguration depending on the needs of the port. CBP has also deployed several rail VACISsystems to screen railcars entering the country. Other large scale NII systems include truck x-raysystems, which like the VACIS can be deployed in a either a stationary or mobile configuration; theMobile Sea Container Examination System, and the Pallet Gamma Ray system. CBP also continuesto deploy nuclear and radiological detection equipment in the form of personal radiation detectors,radiation portal monitors, and radiation isotope detectors at ports of entry. Following are selectedexamples of either congressional mandates and/or administrative initiatives that are aimed athardening the border. In 1996, Congress first mandated that the former INS implement an automated entry and exitdata system (now referred to as the U.S.-VISIT program) that would track the arrival and departureof every alien. (35) Theobjective for an automated entry and exit data system was, in part, to develop a mechanism thatwould be able to track nonimmigrants (36) who overstayed their visas as part of a broader emphasis onimmigration control. Following the September 11, 2001 terrorist attacks, however, there was amarked shift in priority for implementing an automated entry and exit data system. While thetracking of nonimmigrants who overstayed their visas remained an important goal of the system,border security has become the paramount concern. Tracking the entry and exit of most foreign nationals at U.S. ports of entry is not a smallundertaking. The massive volume of travelers seeking entry into the United States at one of the 300land, air and sea ports of entry coupled with the demands such a system would place on portinfrastructure makes implementing the system challenging. Nonetheless, implementation of theU.S.-VISIT program began at selected air and sea ports on January 5, 2004, and selected land portsof entry on December 31, 2004. Although initially required by Congress in 1996 to curtail the use of fraudulent MexicanBorder Crossing Cards (now referred to as Laser Visas), (37) biometric identifiers have received a great deal of attention post9/11 as the need to positively identify people seeking entry into the United States became paramount. The U.S.-VISIT program, as discussed above, brought national attention to such technology asdiscussion centered around which type of biometrics (i.e., iris scan, fingerprint, facial photograph,etc.) would be best for the program. Under current law, travel documents must have a biometric identifier that is unique to thecardholder. In May 2003, the International Civil Aviation Organization (ICAO) finalized standardsfor biometric identifiers, which asserted that facial recognition is the globally interoperable biometricfor machine readable documents with respect to identifying a person. (38) In an earlier reportpublished by the National Institute of Standards and Technology (NIST), it was determined that twofingerprints, as opposed to ten-fingerprints, and a facial photograph "... are the only biometricsavailable with large enough operational databases for testing at this time." (39) Although NIST set thetwo-fingerprint standard for identifying one's identity, concern has been raised about the possiblelimitation two-fingerprints pose for obtaining additional information on a person, such as arrestwarrants and criminal history. In an effort to secure the supply chain across international boundaries, CBP and selectvolunteer importers participating in C-TPAT have begun testing a new "smart container." Althoughincreasingly sophisticated tools exist, such as bomb sniffers and high-tech locks, many view smartcontainers that are capable of sensing changes in the surrounding environment as a critical meansto prevent crime and terrorism. In theory, "a smart container would include the means of detectingwhether someone has broken into a sealed container and would have the ability to communicate thatinformation to a shipper or receiver, via satellite or radio." (40) Under this initiative, CBP provides selected importers with sensors to be secured inside acontainer. The sensors can detect whether or not a container has been entered during transit and willsubmit the information to CBP. The first phase of 'smart box' testing involves volunteer importerswith containers originating in Europe and Asia, moving through U.S. ports in New York-New Jersey,Los Angeles-Long Beach, Seattle and Charleston. (41) Additional efforts to harden the border through the use of technology include the following(see Appendix A for a description of each program): Integration of Data Systems; Integrated Surveillance Intelligence System (ISIS); Operation Safe Commerce; and Unmanned Aerial Vehicles (UAV). The facilitation of legitimate cross-border travel and commerce, while still providing foradequate border security, has long been a challenge for policy makers. CBP inherited severalinitiatives aimed at using technology to help speed up the inspection processes for low-risk travelersand goods, which allows CBP inspectors to focus their attention on high-risk situations, as discussedbelow. NEXUS and the Secure Electronic Network for Travelers' Rapid Inspection (SENTRI) areprograms used at land ports of entry to facilitate the speedy passage of low-risk, frequent travelers. NEXUS is located at selected northern ports of entry while SENTRI is located at selected southwestports of entry. Ports of entry are selected based on the following criteria: (1) they have anidentifiable group of low-risk frequent border crossers; (2) the program will not significantly inhibitnormal traffic flow; and (3) there are sufficient CBP staff to perform primary and secondaryinspections. Travelers can participate in the program if: (1) they are citizens or legally permanentresidents of the United States, citizens of Mexico or Canada, or legally permanent residents ofCanada; (2) they have submitted certain documentation and passed a background check; (3) they paya user fee; and (4) they agree to abide by the program rules. (42) Both programs use an electronic identifier (e.g., a proximity card for NEXUS participantsor a radio transponder for SENTRI participants) that triggers an automated system to review theInteragency Border Inspection System (a background check system) and other records related to thevehicle and its designated passengers once the vehicle enters the NEXUS or SENTRI lane. WhileNEXUS and SENTRI lanes are not at all land border crossings, efforts are underway to implementthem at additional land border crossings. The Free and Secure Trade (FAST) program is a joint U.S.- Canada and U.S. - Mexicoinitiative that is aimed at expediting commerce across both the Southwest and the Northern border. FAST offers pre-approved importers, carriers, and registered drivers an expedited processing throughland ports of entry. FAST is available to "low-risk" participants who have a demonstrated historyof compliance with relevant legislation and regulations. Importers and carriers must be C-TPAT-certified in order to participate; carriers must also be approved as FAST Highway carriers; anddrivers must possess a FAST Commercial Driver Card. In order for a shipment to be processedacross the border as a FAST shipment, each of the parties involved must be FAST-certified, andless-than-truckload FAST shipments cannot be consolidated with non-FAST shipments and beprocessed through the FAST lanes at the border. While FAST lanes are not at all land bordercrossings, efforts are underway to implement them at additional land border crossings. FAST is alsoan harmonized clearance process, in that it operates in both directions across the Northern border(shipments exported from the United States into Canada can also be processed through the Canadianversion of FAST: Partners in Protection). Additional efforts to make the border more accessible for legitimate travel and trade includethe following (see Appendix A for a description of each program): INS Passenger Accelerated Service System (INSPASS)and I-68 Canadian Border Boat Landing Program / Outlying Area Reporting Station(OARS) In addition to technology used to facilitate legitimate travel and goods across the border byway of a vehicle, DHS also inherited programs designed to facilitate legitimate travel of certaingroups of people. An example of such a program is the Visa Waiver Program, as discussed below,and the Laser Visa (Mexican Border Crossing Card). (See Appendix A for a discussion of the LaserVisa). The VWP allows nationals from certain countries to enter the United States as temporaryvisitors for business or pleasure without first obtaining a visa from a U.S. consulate abroad. (44) By eliminating the visarequirement, this program facilitates international travel and commerce and eases consular officeworkloads abroad, but it also bypasses the first step by which foreign visitors are screened foradmissibility to enter the United States. Travelers under the VWP do not need a visa, and thus nobackground checks are done prior to their arrival at U.S. ports of entry, which allows only oneopportunity -- immigration inspection at the port of entry -- to identify inadmissable aliens. Whilethis program facilitates travel, questions have been raised about the VWP being a potential loopholefor terrorists. Of concern to some is the delay in issuing nationals from the participating countriespassports that contain biometric identifiers, although this concern may have abated since theAdministration is now requiring foreign nationals entering the United States through the VWP to beenrolled in the U.S.-VISIT program. (45) Intelligence plays an essential role in the protection of U.S. national security, one elementof which is to contribute to the protection of U.S. borders. As with traditional foreignintelligence, (47) theprimary role intelligence plays in the context of border security is to provide indications andwarnings to government personnel responsible for border protection -- primarily DHS personnel. Regardless of where the intelligence is collected -- domestically or internationally -- intelligencecontributes to the protection of U.S. borders by seeking to prevent certain goods and individualsfrom crossing U.S. borders. However, as the tragic events of September 11, 2001, demonstrated,even when intelligence systems and mechanisms are in place to prevent individuals with inimicalintent from crossing U.S. borders, it only takes one failure of the intelligence process and/orindividuals involved in it, to contribute to a potential catastrophe. (48) Traditional foreignintelligence as well as criminal intelligence contribute to enhancing border security. At the most basic level, intelligence is designed to find where the danger lies. With respectto protection of the U.S. borders, the primary goal is to collect, analyze and rapidly disseminateintelligence that can deny entry into the United States of terrorists or dangerous material that couldbe used as a weapon by terrorists. With respect to terrorists, one of the most useful tools in thegovernment's counterterrorism arsenal for border protection is the Terrorist Screening Database(TSDB) first compiled by the Terrorist Threat Integration Center. (49) As a testament to therobust role that traditional foreign intelligence entities are playing in the protection of bordersecurity, of the more than 20,000 records in the Terrorist Screening Database in 2004, the CentralIntelligence Agency provided just over 42% of the entries, the State Department provided almost42%, the National Security Agency provided 10%, the Federal Bureau of Investigation almost 4%,and the Defense Intelligence Agency just under 3%. (50) At the sensitive but unclassified (SBU) security level, the TSDBis then shared broadly across the U.S. government, to include agencies such as the DHS, the FederalBureau of Investigation (and the FBI-led Terrorist Screening Center), the Department of Justice-ledForeign Terrorist Tracking Task Force (51) ), the Department of Defense, as well as the Department of State,among others. A "hit" on the TSDB will trigger certain protective actions by the law enforcement,intelligence or security personnel having interaction with the individual. With respect to protection against illicit cargo coming into the United States and the potentialfor shipping to be used as a conveyance of weapons of mass destruction, one of the unique toolsbeing used by DHS's CBP is its Automated Targeting System. With shipments into the UnitedStates in the thousands of containers per day, it is not practically or financially feasible to inspecteach container. Building on years of experience in interdicting drugs being shipped into the UnitedStates through cargo containers, DHS's CBP established the interagency-supported NationalTargeting Center (NTC) as a tool to triage and effectively target cargo containers for inspection. Working with the intelligence community and law enforcement community personnel, the NTC'sAutomated Targeting System develops dynamic rules and algorithms which allow it to examine abroad scope of passenger and cargo factors to assign appropriate risk scores. Certain risk scores flaga shipment or container for human inspection. In short, intelligence serves as a force multiplier in contributing to the protection of U.S.borders. It serves the direct purpose of providing advance warnings to alert officials on the frontlines of U.S. borders. However, its indirect use may be equally valuable. That is why domesticintelligence officials, including those at the state and local levels, collect intelligence within theircommunities to put international terrorist activities into a local context. It is also why experts believethere needs to be a wide access to information that may not seem to be relevant in a national context,yet may prove what's happening in Sanaa, Yemen, may be directly or indirectly relevant and valuableto state and local law enforcement and intelligence personnel on the ground. While border security policies may not have received heightened attention until after theterrorists attacks, efforts to improve border management date back to 1995. For example, the UnitedStates and Canadian governments entered into a joint accord on February 24, 1995 called OurShared Border . The 1995 accord brought together five agencies (the former United States INS, theformer U.S. Customs Service, Revenue Canada, Citizenship and Immigration Canada, and the RoyalCanadian Mounted Police) to focus on joint border issues such as enhancing security through moreeffective inspection efforts that target specific problem areas (e.g., drugs, and smugglers), and thecontinued commitment to pool inspection and enforcement resources. And in 1999, the twocountries entered into a partnership, Canada-U.S. Partnership Forum (CUSP). CUSP provided amechanism for the two governments, border communities and stakeholders to discuss issues ofborder management. The guiding principles for U.S.-Canada cooperation resulting from thesedialogues are as follows: Streamline, harmonize and collaborate on border policies andmanagement; Expand cooperation to increase efficiencies in customs, immigration, lawenforcement, and environmental protection at and beyond the border; and Collaborate on common threats from outside the United States andCanada. Current bilateral efforts include a declaration signed on December 12, 2001, by the UnitedStates and Canadian governments establishing a "smart-border." The declaration included a 32-pointplan to secure the border and facilitate the flow of low-risk travelers and goods through thefollowing: Coordinated law enforcement operations (i.e., IBETS, see AppendixA ); Intelligence sharing; Infrastructure improvements; The improvement of compatible immigration databases; Visa policy coordination; Common biometric identifiers in certain documentation; Prescreening of air passengers; Joint passenger analysis units; and Improved processing of refugee and asylum claims, among otherthings. On December 3, 2001, the two countries signed a joint statement of cooperation on bordersecurity and migration that focused on detection and prosecution of security threats, the disruptionof illegal migration, and the efficient management of legitimate travel. In March 2002, the United States and Mexico announced a partnership to create a new,technologically advanced "smart border" to assure tighter security while facilitating legitimate travel. The U.S.-Mexico Border Partnership Action Plan has 22 points that include greater cooperationbetween the two governments in order to better secure border infrastructure and facilitate the flowof people and goods between the countries. The plan also calls for the development of integratedcomputer databases between the two countries and express lanes at high volume ports of entry forfrequent, pre-cleared low-risk travelers. (53) In addition to the bilateral agreements between the U.S./Canada and the U.S./Mexico, theUnited States has begun working with the European Union (EU) to facilitate cooperation on the CSI,as discussed above. On November 18, 2003, the United States and EU signed an agreement thatwould facilitate such cooperation by establishing an EU-wide container security policy. (54) Figure 1 maps some of the current policy approaches discussed in this report. For example,illustrations of "pushing the border outward" in order to intercept unwanted people and goods beforethey reach the United States include CBP's and FDA's advance manifest rules; the Coast Guard's96-hour rule; the CSI; and passenger pre-inspection at foreign airports. Examples of "making theborder more accessible for legitimate travel and trade" include the C-TPAT; FAST; and theNEXUS/SENTRI trusted traveler/frequent crosser programs. Examples of "multiplyingeffectiveness through the engagement of other actors" include C-TPAT; CSI; FAST; NEXUS; andpassenger pre-inspection. Figure 1. Movement of Goods and People Source: CRS and CRS analysis of OECD figures in Security in Maritime Transport . Note : FPOE = foreign port of exit, and DPOE = domestic port of entry. Balancing security with trade and travel may require a "layered approach" to attain bothgoals. The next report in this series, Border and Transportation Security: Possible New Directionsand Policy Options , examines the concept of layering and how it may fit into BTS. The currentprograms and policies in place, however, do reflect some layering. For example, the framework setforth in this report highlights the purposeful overlapping of programs and policies in order to attainBTS. Efforts to push the border outwards are aimed at preempting potential attacks and preventingindividuals who are trying to surreptitiously enter the United States. The various preinspections andadvance passenger/cargo notice programs were developed with this in mind. If someone, however,is able to penetrate the first layer of security then efforts to harden the border are put to the test. Theuse of biometric identifiers in travel documents and smart containers for the shipment of goods areboth examples of how technology is being used to harden the border. In addition to efforts to hardenthe border , the use of intelligence and engaging other actors such as state and local law enforcementand our foreign neighbors are other cumulative measures that have been taken to attain better BTS. While the programs and policies highlighted in this report may reflect an attempt at layering,some contend that there are still gaps in the system. (55) The current programs and policies were either put into place asa result of the 9/11 terrorist attacks or predated the attacks. Those programs and policies that wereput into place as a result of the attacks were done so with a sense of urgency -- to prevent anotherattack . Programs and policies already in existence prior to the attacks, however, were created witha different focus and not necessarily with the goal of keeping terrorists out of the country. As willbe examined in the next report, current efforts to provide a layered approach to BTS would meanapplying some measures of security effort to almost every point of vulnerability or opportunity. As noted earlier, this report is one of a series of three CRS reports that address the issue ofBTS. The first report in the series, CRS Report RL32839 , Border and Transportation Security: TheComplexity of the Challenge , analyzes the reasons why BTS is so difficult to attain. This report isthe second in the series. The final report is CRS Report RL32841 , Border and TransportationSecurity: Possible New Directions and Policy Options . Carrier Consultant Program (CCP). Sometimesreferred to as prescreening, the CCP was originally developed in the former INS. Working withofficials from the Department of State, CBP deploys officers to work with air carriers to preemptattempts to use those carriers to gain illegal entry into the United States using fraudulent documents. In doing so, CCP officials work towards eliminating the arrival of improperly documented aliens ata U.S. port of entry prior to their departure from the foreign port. At domestic airports, CCP officialswork with airlines in identifying any illegal or suspect activity involving the carrier, primarily relatedto the use of fraudulent documents. While the goal of CCP is to reduce illegal migration, theprogram has received heightened attention in this post 9/11 era. I-68 Canadian Border Boat Landing Program/Outlying AreaReporting Station (OARS). The I-68 Canadian Border Boat Landing Programpermits enrolled participants admission to the United States by small pleasure boats without aninspection. The program requires applicants (56) to appear in person for an inspection and interview. During theinspection/interview process, applicants names are checked against the IBIS and biometrics arecollected. Upon approval, participants are issued a boating permit for the season that allows themto enter the United States from Canada without submitting to an inspection. OARS allows travelers of small boats who are not in possession of a valid I-68 form to enterthe United States via Canada without presenting themselves for inspections. Travelers can use oneof the 33 OARS videophone stations upon entry into the United States. (57) The stations are locatedat public marinas along the Canadian border and provide automated inspections through a two-wayvisual and audio communication between the person and the remote inspector. Immigration Security Initiative (ISI). Like CCP,ISI was originally developed in the former INS. CBP is now piloting ISI at several foreign airports. ISI relies on CBP inspectors positioned at foreign airports to intercept people who have beenidentified as national security threats from traveling to the United States ISI has been compared toCBP's CSI, discussed above, which targets high risk containers for inspections. Integrated Border Enforcement Teams (IBETS). IBETs are bi-national, multi-agency law enforcement teams that target cross-border criminal activity. Although IBETS were originally created in 1996 along the British Columbia and Washington stateborder to target cross-border crimes that usually involved illicit drug violations, the terrorist attackshave prompted officials in both countries to expand IBETs role to include counterterrorismmeasures. INS Passenger Accelerated Service System(INSPASS). INSPASS is used at selected international airports. (58) It is a form ofpre-inspections for low-risk, frequent travelers. (59) INSPASS records a biometric geometry (of the hand) for eachenrollee that is verified when the traveler inserts his card. Upon arrival at an airport that hasINSPASS, enrollees proceed to an INSPASS kiosk where they access an automated hand geometryreader. Upon approval by the kiosk, the traveler receives a receipt of his inspection. INSPASSapplicants must enter the United States on certain nonimmigrant visas (60) or under the Visa WaiverProgram. (61) Integration of Data Systems. CBP officials useseveral data systems and databases that assist them with identifying aliens who are potentiallyinadmissible under the Immigration and Nationality Act or otherwise may pose a threat to thecountry. CBP officials also utilize several data systems and databases with respect to identifyinghigh-risk commercial goods that warrant further inspection or review. Of concern are the numerousdata systems and databases that are not integrated or not readily accessible. Critical to the successof border security is the ability to process information in real time. The legacy Customs Service and now CBP have been engaged in a long-term effort todevelop a new automated system to process and track the entry of all goods into the country. TheAutomated Commercial Environment (ACE) will utilize web-based electronic accounts to provideinformation regarding cargo inspections, status of clearance and other information to CBP andaccount users. Integrated Surveillance Intelligence System(ISIS). Along the northern and southwest borders, the border patrol uses ISIS asa surveillance tool. ISIS is comprised of remote video surveillance cameras that are mounted on topof towers, which are remotely monitored. According to CBP, "one camera uses natural light andtakes traditional video images; the other uses 'infrared' imaging for night vision." (62) ISIS also consists ofsensors and an Integrated Computer Assisted Detection (ICAD) database. Known Shipper Programs. The TransportationSecurity Administration uses a program that differentiates trusted shippers that are known to a freightforwarder or air carrier through prior business dealings, from unknown shippers. Under such aprogram, shipments from unknown sources are identified and placed under closer scrutiny. (63) Laser Visa (Mexican Border Crossing Card). Mexican nationals applying for admission to the United States as visitors are required to obtain avisa or hold a Mexican Border Crossing Card, now referred to as the "laser visa." The laser visa isused by citizens of Mexico to gain short-term entry (up to six months) for business or tourism intothe United States. It may be used for multiple entries and is good for ten years. Under currentpractices, Mexican nationals in possession of a laser visa will be exempt from the requirements ofthe U.S.-VISIT program, thus allowing for a speedy passage into the United States. North American Security Perimeter. As theUnited States moves forward with implementing much of the security requirements in the PATRIOTAct and the Border Security Act, many fear that the tighter security requirements will impede theflow of people across the border. Some critics are advocating for a more open border. The ideal ofa North American Perimeter Security concept has been around for several years and the basicpremise of a North American Perimeter Security would move inspections and enforcement activitiesaway from the border. Such a concept would essentially eliminate barriers to the movement ofpeople (and goods) across the shared border. P.L. 107-173 called for a study to examine thefeasibility of establishing a North American Perimeter Security program that would provide forincreased cooperation with foreign governments on questions related to border security. The NorthAmerican Perimeter Security, however, would require the harmonization of United States andCanadian immigration and refugee policies, among other things. While such a harmonization ofpolicies may be problematic following the events of 9/11, both countries have begun to harmonizeother policies at incremental levels that could be viewed as "pushing the border out" (i.e.,preinspections and reverse inspections). Operation Safe Commerce (OSC). OSC is a pilotprogram that brings together private businesses, the maritime industry and the government to analyzesecurity procedures and practices for cargo entering the country and develop improved methods forsecuring the supply chain. OSC's goal is to protect the global supply chain while facilitating the flowof commerce by identifying potential supply chain security weaknesses. Unmanned Aerial Vehicles (UAV). In 2004 DHSlaunched an initiative, dubbed the Arizona Border Control (ABC) Initiative that uses technologysuch as the UAV to increase border surveillance along the Arizona/Mexico border. Currently, theborder patrol is piloting two UAVs along the Arizona and Mexico border.

Border and Transportation Security (BTS) is a pivotal function in protecting the Americanpeople from terrorists and their instruments of destruction. This report addresses selected programsand policies now in place that seek to attain higher levels of BTS. It is the second in a three-partseries of CRS reports that make use of analytical frameworks to better understand complexphenomena and cast them in terms that facilitate consideration of alternative policies and practices. (The first report in the series, CRS Report RL32839 , Border and Transportation Security: TheComplexity of the Challenge , analyzes the reasons why BTS is so difficult to attain. This report isthe second in the series. The final report is CRS Report RL32841 , Border and TransportationSecurity: Possible New Directions and Policy Options .) Congressional concern with terrorism and border security was manifested as early as 1993,with the first World Trade Center attack and subsequent terrorist attacks against U.S. targets abroad. The congressional response to these events began with attempts to understand the nature of theterrorist threat through the creation of several commissions. The response to the 9/11 attacks wasfollowed by specific, targeted measures to protect the nation such as the creation of theTransportation Security Administration and the passage of laws that were aimed at strengtheningsecurity at the border, including immigration policies with respect to the admission of foreignnationals; and strengthening security in the maritime domain. Congressional interest continues inmore comprehensive approaches including recent efforts to respond to the report of the 9/11Commission. There are several broad strategies that could be pursued to enhance border security. Currentprograms and policies can be grouped under the following generic categories, which include pushingthe border outwards to intercept unwanted people or goods before they reach the United States (asin the passenger pre-screening program); hardening the border through the use of technology (asshown by biometric identifiers); making the border more accessible for legitimate trade and travel(as in "trusted traveler" programs); strengthening the border inspection process through moreeffective use of intelligence (with the integration of terrorist watch lists); and multiplying theeffectiveness of interdiction programs through the engagement of other actors in the enforcementeffort (as displayed by bi-national accords with Canada and Mexico). It is also possible to use thestrategies as a checklist for what new efforts might be explored. Many current programs and policies to enhance border and transportation security were putinto place as a result of the 9/11 terrorist attacks with a sense of urgency -- to prevent another attack . Programs and policies in existence prior to the attacks, however, were often created with a differentfocus and not necessarily with the terrorist threat in mind. The challenge for Congress is to reviewthese programs and policies comprehensively to help them form a more coherent and effectiveoverall strategy. This report will be updated periodically as events warrant.

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Cabo Verde is a small island nation that has historical ties to the United States. Contemporary U.S.-Cabo Verdean relations are predicated upon Cabo Verde's status as "one of Africa's success stories and an important U.S. partner in West Africa," and as an African "model of democratic governance" with high per capita income levels, a high literacy rate, and positive social indicators. Cabo Verde is of strategic significance because its geographic location has made the country a transshipment point for Latin American cocaine bound for Europe for more than two decades. Its location has also made it a key refueling stopover for trans-Atlantic air traffic between Africa and the United States. U.S.-Cabo Verdean cooperation focuses on counternarcotics efforts and related military professionalization under the State Department's International Military Education and Training (IMET) program, and development projects supported by the Millennium Challenge Corporation (MCC). There is also an Open Skies commercial aviation and flight safety and security agreement, and Cabo Verde is eligible for tariff preferences under the African Growth and Opportunity Act (AGOA), although its use of these benefits is very minimal, as is the total value of its trade with the United States. Congressional activity centering on Cabo Verde generally centers on high-level meetings with Cabo Verdean officials during periodic congressional delegations to the country. Cabo Verde, a small volcanic island archipelago located off the coast of Senegal in West Africa, is slightly larger than Rhode Island. Most of the islands are wind-eroded, mountainous, and arid, and 10% of land is arable. A lack of rain causes recurrent water shortages, which pose a challenge for food production. Cabo Verde has few natural resources, apart from a large maritime zone and its beaches, which are a tourism destination. Cabo Verde was uninhabited when it was discovered in the 15 th century by Portugal, which then colonized the island and later made it a slave trading center. It remained a Portuguese colony until 1975. Most Cabo Verdeans are of mixed Portuguese and African descent and speak a Portuguese-African Creole. Cabo Verde's location in an 18 th - and 19 th - century whaling zone made it a key ship resupply and sailor recruiting center for U.S. vessels and gave rise to a long-standing tradition of emigration to the United States and friendly U.S. ties, which both endure. There is a large Cabo Verdean population in New England. Cabo Verde's political system takes into account its large expatriate population, whose remittances are a key source of private investment and hard currency. Expatriates may vote in national elections, although in presidential elections their collective vote may constitute no more than a fifth of all votes cast within the national territory. Foreign nationals resident in Cabo Verde are eligible to vote in local elections. Formerly a one-party state ruled by the former independence movement, the socialist-oriented African Party for the Independence of Cabo Verde (PAICV), Cabo Verde became a democracy in 1991. This followed increasing demands for a multi-party political system by civil society activists and the Movement for Democracy (MPD), which had recently been created. In response to this pressure, in 1991, the PAICV government organized multi-party elections, in which the MPD won a large parliamentary majority, the presidency, and multiple municipal elections. Seven political parties have run in legislative polls since 1993, but the PAICV and the MPD strongly dominate politics. Expatriate voters in Africa, the Americas, and Europe elect six parliamentarians (two from each region) of the 72-member legislature. Cabo Verde's transition to democracy is widely seen as successful and enduring, and as having engendered a generally consensus-based polity. While in power in the 1990s, the MPD pursued an economic reform-focused agenda, seeking to privatize state-owned firms, reform public spending, alleviate poverty, boost social services, and promote exports. It also sought to promote political pluralism and increase and diversify Cabo Verde's trade and development relations with other countries. This policy agenda continues to define the MPD and is broadly shared with the PAICV, although the political and policy rhetoric of the latter tends to emphasize a more social democratic agenda. In the most recent parliamentary elections, in March 2016, the MPD won 40 seats, the PAICV 29, and the small Independent and Democratic Cabo Verdean Union three. The MPD victory ended 15 consecutive years of PAICV parliamentary majorities. In April, the parliament selected MPD leader Ulisses Correia e Silva to serve as Prime Minister. The new government has prioritized economic expansion and job growth; poverty reduction; infrastructure and business environment enhancements; expanded foreign direct investment (FDI); crime reduction measures; and national security, in part by countering drug trafficking. In October 2016, Cabo Verde held a presidential election in which incumbent President Jorge Carlos Fonseca, of the MPD, won reelection. Fonseca, a former foreign minister and an attorney, garnered 74% of the vote, besting two independents; no PAICV-affiliated candidate ran. Voter turnout was low, at 35% (compared to 65% in the 2016 parliamentary elections and 59% in the 2011 presidential first round vote), perhaps because Fonseca faced no major opponent. Presidential elections are significant in Cabo Verde because while the prime minister leads the government, the president wields appointment and legislative veto powers, commands the armed forces, convenes or leads various consultative bodies, and represents the Republic domestically and abroad as chief of state . Presidential elections are usually as closely contested as legislative ones. Fonseca first won the presidency in 2011 in a run-off following a four-candidate first-round vote, in which then-incumbent president Pedro Pires was ineligible to participate due to term limits. While Cabo Verde faces some rule of law and human rights challenges, such as abuse of prisoners, trial delays, violence against women, and child labor, its record is far better than that of most other African countries. Civil rights are widely respected, and Transparency International rated it as the second least corrupt sub-Saharan Africa country in its global Corruption Perceptions Index 201 5 . Cabo Verde is classified as a lower-middle-income economy (one with a Gross National Income (GNI) of between $1,026 and $4,035), based on its per capita GNI of $3,280 (2015). The country ranks within the medium tier of human development under the annual United Nations (U.N.) Human Development Index (HDI), at 122 out of 188 countries assessed in 2015, higher than is common in much of sub-Saharan Africa. The Heritage Foundation ranked Cabo Verde as the third freest African economy (after Mauritius and Botswana, and the 57 th freest globally in its 2016 Index of Economic Freedom . In 2012, the Cabo Verdean government reported that it had met all of the U.N. Millennium Development Goals. It recorded particular success in its implementation of health, primary education, gender equality, and poverty eradication efforts. Cabo Verde has a high literacy rate (87% in 2015) and generally high social services and health indicators, although they are lower in rural areas, and access to economic opportunities is unequal, with women and youth often excluded. Weak economic growth in Europe—a major trading partner and source of investment, aid, and tourist arrivals—contributed to a sluggish economy in recent years, but despite this, in 2016 Cabo Verdean growth recovered substantially on the back of resurgent tourism and foreign investment. Gross Domestic Product (GDP) growth averaged 0.93% in 2012 and 2013, grew to an average of 1.66% in 2014 and 2015, and jumped to 3.63% in 2016, according to the International Monetary Fund (IMF), which projects growth of 4.02% in 2017. Unemployment has dropped to an estimated 9%, from a high of 16.8% in 2012, but remains significantly higher among youth. Economic discontent is viewed as having contributed to the PAICV's March 2016 election defeat, and remains a key challenge for the current MPD government. Cabo Verde is continuing efforts to diversify its aid and trade partnerships to lessen its dependence on Europe, and has sought to strengthen relationships with countries such as China, Brazil, and Angola. Cabo Verde imports about 80% of its grain supply, and has been recovering from a drought-stricken harvest in 2014-2015 that saw domestic maize production fall by roughly 82% from the previous year, resulting in the poorest harvest on record. The new government is prioritizing agricultural growth. Poverty has decreased since the 1990s, but remains a challenge. The share of Cabo Verdeans living in poverty declined from 37% in 2002 to 27% in 2010 (more recent data is lacking), and extreme poverty rates have dropped as well. Poverty is concentrated in rural areas and some high density urban areas. Tourism has grown rapidly, from 150,000 arrivals in 2003 to a record 569,000 in 2015. Despite fears of a slowdown in 2016 linked, in part, to reported cases of the Zika virus in the country and an ensuing travel alert issued by the Centers for Disease Control and Prevention, tourism remained during the year, powering the country's growth spurt. Analysts warn that tourism may fall in the short term, however, amid ongoing sluggishness in Europe and a projected slowdown in the United Kingdom, the largest source of tourists to Cabo Verde. In 2007, the European Union (EU) established a "Special Partnership" with Cabo Verde. It provides for close bilateral policy development and coordination, with a focus on trade, investment, and shared efforts to stem illicit migration, drug-trafficking, and organized crime. Cabo Verde is also pursuing deeper bilateral and investment ties with the United States, individual European states, and Portuguese-speaking countries—notably Angola, which in early 2014 agreed to provide Cabo Verde with $13 million in aid focused on infrastructure enhancements. Cabo Verde's main transnational security challenges relate to the threat of illicit narcotics transshipment through its territory. A related need is to protect its large maritime territory and strengthen its criminal justice system capacities. Cabo Verde has a small national military of about 1,000 personnel, including a small coast guard. Cabo Verde is an active member of the Economic Community of West African States (ECOWAS). Former President Pires—who won the 2011 Mo Ibrahim Foundation Prize for "transforming Cabo Verde into a model of democracy, stability and increased prosperity" —was a member of an ECOWAS mediation team that sought to resolve the 2010-2011 political crisis in Côte d'Ivoire. Cabo Verde periodically hosts ECOWAS fora, such as a 2008 high-level ECOWAS conference on drug trafficking in West Africa and a 2014 ECOWAS conference on small arms and light weapons. U.S.-Cabo Verdean relations have traditionally been friendly, in part due to the relationship between Cabo Verde and the extensive Cabo Verdean-American and diaspora community in the United States. President Fonseca was a participant in the 2014 U.S.-Africa Leaders Summit in Washington, D.C., and in 2013, former President Barack Obama met with former Prime Minister José Maria Neves and three other African leaders at the White House to discuss good governance, transparency, and economic growth and development issues. Former First Lady Michelle Obama also met with her counterpart, Ligia Fonseca, during a stop-over in Cabo Verde while returning from a 2016 trip to several African countries. There is also youth education cooperation: Cabo Verde is a participant in the Young African Leaders Initiative (YALI). Whether the Administration of President Donald Trump or the 115 th Congress will pursue any changes in bilateral relations remains to be seen. Congressional activity relating to Cabo Verde is generally limited to periodic congressional delegations to Cabo Verde involving meetings between Members and high-level Cabo Verdean officials. According to the Congress.gov database, Congress has never considered or enacted legislation centering on Cabo Verde, although the country has periodically been referenced in broader foreign operations authorization or appropriation bills or acts. Cabo Verde receives Millennium Challenge Corporation (MCC)-administered development assistance, as well as limited U.S. security aid, and engages in bilateral security cooperation with the United States and European partners centering on counternarcotics and related maritime security efforts. The U.S. Fish and Wildlife Service (FWS) has also funded small projects supporting marine turtle conservation valued at a total of $226,000 in FY2015 and $208,000 in FY2014. Due largely to its relatively positive socio-economic record, however, Cabo Verde—which once regularly received U.S. food aid and periodic other support—has not received additional bilateral assistance from the U.S. Agency for International Development (USAID) or the State Department in recent years. In FY2013, the Peace Corps closed its Cabo Verde country program, which had operated since 1988; it was one of eight county programs closed that year based on an agency global portfolio review. While traditional sources of bilateral aid have fallen in recent years, Cabo Verde has received substantial U.S. development assistance administered under two MCC Compacts, a form of assistance awarded to selected countries that meet a range of governance, economic, and rights performance criteria. In 2010 Cabo Verde completed a $110 million five-year MCC Compact (Compact I), and in 2012 it signed a second Compact with the MCC, becoming the first country to sign a second Compact. Cabo Verde's second Compact is slated to be completed in late 2017. The bulk of the $66.2 million agreement supports a $41 million set of water utility-focused development projects. They are designed to support financially sustainable, effective public water and sanitation delivery services. An additional $17.3 million component supports the reform and strengthening of the legal, procedural, and technical aspects of Cabo Verde's land registration system. The goal is to reduce the costs and time necessary to register or transfer property rights, and generally to make property ownership more secure. The project prioritizes such efforts on selected islands seen as having a high tourism-sector investment potential. The balance of the Compact supports program costs and monitoring and evaluation. Cabo Verde's first MCC Compact (2005-2010) sought to help Cabo Verde transition from being aid-dependent to pursuing a sustainable, private sector-led growth agenda. It focused on improving the investment climate; financial sector reforms; port, road, and bridge upgrades; watershed management; agribusiness development; and fiscal improvements. Government Accountability Office (GAO) assessments have found that while MCC Compact I projects "met some key original targets and many final targets," the MCC "altered the scope" of key projects during Compact execution—for instance, when it divided a major port activity into two phases due to inaccurate initial planning assumptions and cost estimates. In addition, the planned $5 million establishment of a credit bureau was dramatically scaled back, to $400,000, due to discord among the MCC, the World Bank, and the government regarding what sectors should receive investment. The GAO also found that the government of Cabo Verde "may have difficulty maintaining the infrastructure projects in the long term due to lack of funding, among other challenges," including a plan to privatize port operations and road maintenance. The United States and Cabo Verde have a bilateral Open Skies aviation services agreement, which provides for a market-based system of direct flights between the two countries while seeking to guarantee flight safety and security. Some airlines also use Cabo Verde as a refueling stop during flights between the United States and Africa. Cabo Verde is eligible for African Growth and Opportunity Act (AGOA) tariff preferences, but is a very minor U.S. trade partner. Its exports under AGOA have generally been paltry (e.g., no more than a few hundred thousand dollars annually) and made up a small portion of total exports to the United States, but jumped to more than half a million dollars in 2015, when AGOA exports grew to nearly 24% of all such exports. Recent rises in AGOA benefits have largely been attributable to exports of tuna and other types of fish. While positive, the impact of this development is limited, given the low value of both AGOA and overall exports to the United States. Total Cabo Verdean exports to the United States from 2011 through 2015 averaged $2.3 million a year, compared to $191 million in exports to all countries. From 2011 through 2015, U.S. exports to Cabo Verde—which are dominated by meat products—were far higher, averaging $8.6 million a year, but still minor in global comparison. Narcotics trafficking poses an increasing threat in Cabo Verde and was were reportedly a factor in several shootings in 2014, including the September killing of the mother of a top police investigator and a non-fatal attack on Prime Minister Neves's son late in the year. The killings were linked to a multi-year drug investigation and reportedly represented an attempt by drug traffickers to intimidate state authorities. According to the State Department's FY2017 Congressional Budget Justification (CBJ) for Foreign Operations, Cabo Verde's "strategic location" has placed the country "increasingly at the crossroads of the transatlantic narcotics trade," principally focused on cocaine destined for Europe from South America. The CBJ states that "maritime security, domain awareness, and border control are among the highest priorities for the United States" in Cabo Verde. Programs that support these ends, in particular countering the use of Cabo Verde as a drug transshipment point, include an International Military Education and Training (IMET) professionalization program and occasional Department of Defense (DOD)-funded support. In past years, the State Department provided bilateral law enforcement and prosecutorial aid to help Cabo Verdean authorities to better investigate and prosecute drug cases and undertake counternarcotics-related antimoney laundering efforts. IMET was funded at an estimated $144,000 in FY2015, with $150,000 estimated for FY2016 and requested for FY2017, respectively. Cabo Verde has received limited assistance under the West Africa Regional Security Initiative (WARSI), a State Department regional program that seeks to help countries promote adherence to the rule of law, improve criminal justice systems, combat transnational organized crime—including drug trafficking—and promote stability, among other related goals. Cabo Verde receives several hundreds of thousands of dollars in DOD non-lethal, interdiction-related counternarcotics equipment assistance. Cabo Verde also engages in other cooperation efforts with DOD's Africa Command (AFRICOM). It has hosted multinational military exercises, such as Saharan Express , which focuses on challenges such as maritime security, drug interdiction, and anti-arms proliferation training and is supported by AFRICOM's U.S. Navy Africa Partnership Station (APS) West. The most recent Saharan Express took place off Cabo Verdean and Senegalese waters in April 2015. APS is a regional U.S. Navy-led, ship-based, multi-disciplinary, inter-agency effort focused on training, capacity-building, humanitarian, and cultural activities. Cabo Verde routinely receives additional APS and U.S. Coast Guard training visits. In 2010, the Counternarcotics and Maritime Security Interagency Operations Center (COSMAR) was established in Cabo Verde with assistance from DOD and other donors. COSMAR is designed to serve as a multilateral, cross-agency intelligence and operations fusion center. It seeks to leverage joint Cabo Verdean military, police, and intelligence capacities to counter drug trafficking and protect maritime waters and fisheries in cooperation with U.S. military and law enforcement agency efforts. The African Maritime Law Enforcement Partnership (AMLEP)—a U.S. Coast Guard and U.S. Navy APS activity aimed at demonstrating international cooperative interdiction operations and building COSMAR's applied capacities—has also undertaken cooperation activities in Cabo Verde, and the United States has helped upgrade Cabo Verde's small patrol boat fleet.

Cabo Verde, a small island nation of just over half a million people located off the west coast of Africa, is of strategic significance to the United States because its geographic location has made the country a transshipment point for Latin American cocaine bound for Europe and a key refueling stopover for trans-Atlantic air traffic between Africa and the United States. The country is also a long-standing U.S. ally in Africa that the State Department has cited as a model of democratic governance in the region since its transition from single party rule to a multi-party political system in 1991. U.S. bilateral aid to Cabo Verde is limited, and centers on military professionalization, counternarcotics efforts, and development projects supported by the Millennium Challenge Corporation (MCC).

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The return of security cooperation between the United States and New Zealand to a high level has forged a new security partnership between the two countries. The two nations, which fought together in many of America's wars and established the Australia-New Zealand-United States (ANZUS) alliance in 1951, are once again close security partners in the Asia Pacific and beyond. New Zealand's nuclear policies in the mid-1980s that prohibited nuclear-armed or nuclear-powered ships from entering New Zealand ports led the United States to restrict bilateral defense cooperation with New Zealand. For many years this difference largely defined the relationship between the two nations. Recent developments, while not restoring the formal alliance relationship, have greatly bolstered practical aspects of the two nation's bilateral defense and security cooperation as well as reaffirmed an overall close United States bilateral relationship with New Zealand. The extent to which the nuclear issue had been put into the past was demonstrated when President Obama invited Prime Minister John Key to attend the Nuclear Summit in April 2010 and stated that New Zealand had "well and truly earned a place at the table. " New Zealand was the only non-nuclear state invited to the conference. Several organizations and groups, some involving Members of Congress, help promote bilateral ties between the United States and New Zealand, including the United States-New Zealand Council in Washington, DC, and its counterpart, the New Zealand-United States Council in Wellington; the Friends of New Zealand Congressional Caucus and its New Zealand parliamentary counterpart; and the more recent Pacific Partnership Forum. The U.S.-N.Z. Council was established in 1986 to promote cooperation between the two countries and works with government agencies and business groups to this end. The bipartisan Friends of New Zealand Congressional Caucus was launched by former Representatives Jim Kolbe, Ellen Tauscher, and 52 other Members in February 2005. The caucus has included over 60 Members of Congress. Representative Kevin Brady has since replaced Kolbe as the Republican co-chair of the caucus. The Democrat co-chair, Representative Rick Larsen, replaced Ellen Tauscher when she left the House. The first Partnership Forum was held in April 2006. The next Partnership Forum meeting is scheduled for May 2013. The Wellington Declaration of 2010 was a key turning point in United States-New Zealand relations. It built on ongoing improvements in the relationship to enable a reorientation of the bilateral relationship that has put aside past differences to focus on the present and future. The degree to which the Wellington Declaration was able to move the relationship forward is attested to by the 2012 Washington Declaration on Defense Cooperation, which consolidated the developing relationship and opened the way for further enhanced strategic dialogue and defense cooperation. This positive momentum in the relationship has been maintained by subsequent developments such as then U.S. Secretary of Defense Leon Panetta's September 2012 visit to New Zealand where he lifted a ban on New Zealand naval ship visits. New Zealand, like many countries in its region, has both benefited economically by the rise of China while at the same time found itself in a period of geopolitical uncertainty that has resulted from China's rise. Continuing to develop bilateral security ties with New Zealand within this geopolitical context will likely require continued attention by the United States. New Zealand's military commitment to Afghanistan did much to change U.S. perceptions of New Zealand. New Zealand's commitment of regular troops and other assistance in support of the Provincial Reconstruction Team in Bamiyan Province, Afghanistan, as well as the commitment of Special Forces, demonstrated New Zealand's value not only in political or diplomatic terms but also as a military partner in the field. These deployments were instrumental in positively affecting perceptions in Washington and underlining the value of partnering with New Zealand in the future. President Obama described New Zealand as "an outstanding partner" during Prime Minister Key's visit to Washington in July 2011. This warming of relations added ballast to the relationship and moved forward a process for contemplating how the two nations could enhance their cooperation in a Pacific and broader context. The Wellington Declaration of November 2010 established in a public way a new strategic partnership between the United States and New Zealand. It stated that "our shared democratic values and common interests" will guide the two nations' collective action. The Declaration is viewed as putting to rest past differences, which had been fading for some time, to focus on areas of ongoing and future cooperation between the two nations. The agreement reaffirmed their close ties and established a framework of "strategic partnership to shape future practical cooperation and political dialogue." The agreement also noted that the United States and New Zealand are Pacific nations in addition to emphasizing shared interests and values: Our governments and peoples share a deep and abiding interest in maintaining peace, prosperity and stability in the region, expanding the benefits of freer and more open trade, and promoting and protecting freedom, democracy and human rights. The agreement pointed to the need to address regional and global challenges including enhanced dialogue on regional security in the Pacific. New Zealand and the United States actively support Pacific island countries (PICs) by helping them patrol their Exclusive Economic Zones. Pacific island states have few naval or air assets of their own to patrol these vast maritime zones. New Zealand's upgraded P-3K2 Orion aircraft and Offshore Patrol Vessels provide it with enhanced capabilities to conduct aerial surveillance and enforcement in the Pacific. New Zealand supports the work of the Forum Fisheries Agency, which is an agency of the main regional grouping of Pacific island states, the Pacific Islands Forum, and the Te Vaka Toa Arrangement which provides for enhanced collaboration between New Zealand and PICs in the areas of fisheries protection. The region-wide Niue Treaty also seeks to strengthen regional fisheries protection. New Zealand works with the United States, as well as with Australia and France, in providing maritime surveillance of the region, particularly in fisheries. This group is known as the Quadrilateral Defense Coordination Group, or Quad. A World Bank study has projected that strengthening fisheries management could yield PICs an additional U.S. $60 million in revenue annually. The U.S. Coast Guard Ship Rider Program works with Forum Fisheries Agency Member states to help them enforce control of their fisheries. The Ship Rider Program seeks to "build capacity and strengthen interoperability among Pacific Island countries" to deal with illegal fishing. The Program puts law enforcement officers from various Pacific Island nations on U.S. Coast Guard ships, which can then serve as platforms for boarding commercial vessels found in Pacific Island nations' exclusive economic zones. The United States and New Zealand also participated in Operation Kurukuru , . the single largest monitoring control and surveillance operation conducted in the region to date. New Zealand has also joined the United States in the annual U.S.-led Pacific Partnership exercise. The annual humanitarian assistance and disaster relief exercise is aimed at increasing interoperability in the Pacific among U.S., Australian, New Zealand, and French forces. Bilateral relations were further enhanced in May and June 2012 by the New Zealand government's hosting a number of events to mark the remembrance of U.S. forces that were based in New Zealand during World War II. Exercises Alam Halfa and Bold Alligator are further evidence of the removal of barriers to bilateral defense exercises between the United States and New Zealand. U.S. troops travelled to New Zealand in June 2012 to work with their New Zealand counterparts in exercise Alam Halfa , which provided soldiers from both countries an opportunity to exchange knowledge on tactics and procedures and set a precedent for future training opportunities. Bold Alligator 2012 was held in January and February 2012 off the coast of Virginia, North Carolina and Florida and included participants from nine countries including New Zealand. The significant development of bilateral defense cooperation that followed the Wellington Declaration of 2010, as discussed above, was consolidated and substantially extended by the Washington Declaration of June 2012. The Washington Declaration does much to provide a framework for the new strategic partnership for which the Wellington Declaration called. The Washington Declaration, signed by Secretary of Defense Panetta and the Key government's Minister of Defence Coleman, reaffirmed the increasingly close bilateral relationship by setting principles of cooperation while also discussing purposes, scope, and implementation of expanded defense and security cooperation. The agreement marks a return to close security cooperation. Minister Coleman described the Declaration as foreshadowing greater cooperation in maritime security, counterterrorism, humanitarian assistance, and disaster relief in the region while also promoting peace support initiatives. Coleman stated, "This high level arrangement recognizes the significant security cooperation that exists between New Zealand and the United States within the context of our independent foreign policy, and seeks to build upon that cooperation in the years ahead." The agreement does much to codify many of the ongoing bilateral arrangements that have been re-established since the Wellington Declaration while also providing a framework for moving defense cooperation forward. New Zealand's return to increasingly close defense cooperation with the United States is not limited to disaster relief and humanitarian assistance. For the first time in 28 years New Zealand defense forces joined with 21 other nations' militaries in the biennial Rim of the Pacific (RIMPAC) military exercise hosted by the U.S. Pacific Fleet and held off Hawaii. The June to August 2012 exercise involved 42 ships, 6 submarines, over 200 aircraft, and 25,000 defense personnel. New Zealand sent HMNZS Te Kaha and HMNZS Endeavour , a rifle platoon, an Orion P-3K aircraft, and headquarters staff to participate in RIMPAC. Commander Joint Forces New Zealand Major General Dave Gawn stated, "Participation in exercises like RIMPAC also enables the Defence Force to prepare for a variety of contingencies to ensure that New Zealand can play its part effectively in working with other nations to reduce conflict and improve stability in the Pacific and around the world." During his September 2012 visit to New Zealand then-U.S. Defense Secretary Panetta lifted a ban on New Zealand naval ship visits to U.S. ports. This ban had been in place since 1985 and had necessitated obtaining a waiver in order for New Zealand ships to visit U.S. ports. This irritant in the bilateral relationship was demonstrated when New Zealand's naval vessels participating in RIMPAC 2012 off Hawaii had to berth at a civilian rather than naval port facility in Honolulu. Secretary Panetta stated that the policy shift signals a new era in bilateral ties. He also signaled that the U.S. Marine Corps may become involved in assisting New Zealand develop its amphibious capabilities as part of the renewed and expanding partnership. Further high-level exchanges and joint military exercises, particularly in the areas of humanitarian and disaster relief in a Pacific context, appear to be forthcoming. New Zealand's foreign policy orientation has shifted over time as has its national identity. New Zealand's credentials as a loyal supporter of the British Empire were once at the core of the country's military commitments, external orientation, and identity. This was demonstrated by the sacrifices that New Zealand made in support of the British Empire. This commitment existed at a time when the ethnic composition of New Zealand was largely drawn from the United Kingdom. Further, the national narrative was predominantly written by British settlers and their descendants with limited input from the indigenous Māori or inhabitants of New Zealand's Pacific colonies. In recent decades, the demographics of New Zealand's growing Māori, Pacific Islander, and Asian populations have changed the country's national identity and will likely continue to influence New Zealand's foreign policy towards the Asia Pacific region in future decades. Through a series of policy documents in recent years New Zealand has been examining its relationships with the South Pacific, Asia, and China. New Zealand's national security and defense interests were defined in the 2010 Defence White Paper as follows: A safe and secure New Zealand, including its border and approaches; A rules-based international order which respects national sovereignty; A network of strong international linkages; and A sound global economy underpinned by open trade routes. The White Paper highlights how "a rules-based international order based on values sympathetic to New Zealand's own," such as the primacy of the rule of law and constraints on the unilateral exercise of force, is in New Zealand's national security interest. While its national interests are arguably the more salient rationale for existing and past involvement with the South Pacific, New Zealand's evolving national identity stemming from its shifting demographic composition will likely add impetus to its involvement in the region. The government of New Zealand has identified seven key objectives that underpin its comprehensive concept of national security. The list demonstrates the interrelated nature of interests and values in a New Zealand context: Preserving sovereignty and territorial integrity; Protecting lines of communication; Strengthening international order to promote security; Sustaining economic prosperity; Maintaining democratic institutions and national values; Ensuring public safety; and Protecting the natural environment. Also articulated in New Zealand's National Security System document of May 2011 are concerns with structural shifts in global economic power. The document pays particular attention to the implications these shifts could have for the distribution of global military power, as states with growing economies allocate more resources to military spending. The document also points out how New Zealand derives significant benefit from a stable and prosperous Asia, and that "it is in our national interest to uphold and contribute to that favourable environment by supporting regional peace and security." New Zealand has set itself a goal of strengthening its leadership role in the South Pacific, which it has identified as an area of fragility. In the 2010 Defence White Paper, New Zealand identified the Pacific as a top security priorities for the nation. In articulating New Zealand's interests in the South Pacific, the White Paper states: It is in New Zealand's interest to play a leadership role in the South Pacific for the foreseeable future, acting in concert with our South Pacific neighbours. A weak or unstable South Pacific region poses demographic, economic, criminal, and reputational risks to New Zealand.... It will remain in our interests for Pacific Island states to view New Zealand as a trusted member and friend of the Pacific community. New Zealand has a special relationship with the South Pacific and can play a key role as a partner to promote security, stability and prosperity in the region and beyond. The New Zealand Ministry of Defence has plans for a new Joint Amphibious Task Force (JATF) that will provide "a long term plan for an NZDF which is combat capable, maritime in outlook and expeditionary in nature ... it's about being able to do this across the great expanse of the Pacific." Based on New Zealand's experience with peace operations in places such as Bougainville, Timor-Leste, and the Solomon Islands, it appears that the JATF structure will facilitate potential future deployments in the Pacific. New Zealand's strategic geography views Polynesia, Melanesia, and Micronesia as its "near abroad." It should be noted that "near" is a relative term and that the maritime environment encompassed by the South Pacific is immense. New Zealand's focus on its place in the South Pacific increased in the mid-1980s. This has in part been influenced, as noted above, by New Zealand's increasing Pacifika population as well as by New Zealand's national interests in the region. New Zealand has traditionally partnered with Australia, which is its most important strategic partner, in promoting shared security interests in the South Pacific and beyond. The Australian and New Zealand Army Corps (ANZAC) spirit remains a core identity for many New Zealanders and gives New Zealand a special bond with Australia. This bond has found expression in a regional context in joint security operations in Timor-Leste and the Regional Assistance Mission to the Solomon Islands (RAMSI). New Zealand's strong security relationship with Australia, which was forged at the battle of Gallipoli in World War I, was formalized in the Canberra Pact of 1944 and strengthened through the trilateral Australia-New Zealand-United States (ANZUS) Treaty in 1951. The security relationship was further defined in the bilateral Closer Defense Relations (CDR) agreement in 1991 which was updated in 2008. The 2011 review of New Zealand's defense relationship with Australia noted Australia and New Zealand's "mutual commitment to each other's security and overlapping interest in the security, stability, and cohesion of our neighborhood and the broader Asia Pacific." An understanding of the role of Pacific identities in the New Zealand polity, as well as New Zealand's regional interests, informs an understanding of New Zealand's external gaze and its sense of region. Because of this increasing sense that New Zealand is a Pacific nation, which also stems from its historical role in the Cook Islands, Niue, Samoa, Tuvalu, and Tokelau, there is an expectation within the country that it should play a constructive role in regional Pacific affairs. This will likely inform future decisions on New Zealand's engagement in the region. It has been noted that New Zealand "took a long time to make up its mind that it was a Pacific country, not a European outpost." It was not until after Britain entered the European Common Market in the 1970s and the ANZUS spilt in 1984 that New Zealand fully embraced its role as a Pacific state in the post-colonial world. While New Zealand's place within the British Empire has done much to shape its history and sense of identity, New Zealand's role as a colonizing power itself, as in Samoa, is less well understood. In its early history, New Zealand sought to exert a sphere of influence in the area of the Pacific closest to itself by urging the British to "adopt a more forward policy of annexations" while claiming that New Zealand was well suited to rule in Polynesia. In 1849, Sir George Grey sought to thwart the French in New Caledonia. In 1897, Prime Minister Seddon, who viewed New Zealand as a natural leader of island peoples, advocated for the annexation of Pacific islands as far away as Hawaii. The failure of Britain to develop a Monroe Doctrine for the South Pacific apparently "caused chagrin" in New Zealand as American, German, and French influence extended into the region. A legacy of these desires for a South Pacific sphere of influence can be seen in New Zealand's constitutional relationships with Tokelau, Niue, and the Cook Islands and through its Treaty of Friendship with Samoa. These relationships have some similarities with the United States relationships with Pacific island states and territories. R.J. Seddon also opposed the British withdrawal from Samoa in 1899. The Cook Islands and Niue, which were British protectorates, became part of New Zealand in 1901 and in 1914 New Zealand seized Western Samoa from Germany. New Zealand's poor handling of the global influenza epidemic in Samoa in 1918, in which an estimated 20% of the population died, led to widespread resentment of New Zealand's rule and the Samoan Mau uprising. Tokelau was included in New Zealand's administration in 1948. At the close of World War II, Australia and New Zealand sought to secure their part of the Pacific. Samoa became the first independent state in Polynesia in 1962 and signed a Treaty of Friendship with New Zealand in the same year. By 1989, 15 Pacific Island states received 70% of New Zealand's overseas aid. The 2010 "Inquiry into New Zealand's Relationships with South Pacific Countries," by the Foreign Affairs, Defence, and Trade Committee of Parliament acknowledged the increasing Pacific composition of New Zealand and found that "New Zealand is increasingly part of the regional fabric." It also noted that "Key partners expect New Zealand to strongly support the maintenance of peace and stability in this region." The report further stated that "Any instability in the neighbourhood has consequences for all its neighbours." Recent New Zealand governments have concluded that the country must invest more time and energy into strengthening its ties with Asia and that it needs to look to new ways to build a shared future in the Asia Pacific region and increase trade and investment linkages. Beyond the first circle of interest and engagement, which includes Australia and the South Pacific, is New Zealand's relationship with the broader Asia Pacific. The relative importance of this extended region has increased in recent years as alternative patterns of trade since the 1970s have shifted New Zealand's economic focus away from Britain and Europe towards Asia and to a lesser extent the United States. New Zealand's focus on Asia has to a large extent been an extension of New Zealand's drive to diversify its export markets and thereby promote its economic security. New Zealand's multilateral approach and trade agenda has led it to increase its linkages with Asia through such organizations as the East Asia Summit (EAS) and the proposed Trans Pacific Partnership (TPP) agreement. New Zealanders generally appreciate the importance of Asia. A recent Asia-New Zealand Foundation poll found that 77% of New Zealanders see the Asian region as important to New Zealand's future. This compares to ratings of importance for Europe with 66%, North America 56%, and the South Pacific 43%. Only Australia, at 86%, was deemed more important to New Zealand's future than Asia. Eight out of ten New Zealanders also believe that conflict, threats, or instability in Asia could have some impact on New Zealand. While New Zealand's indigenous Polynesian Māori, and to a lesser but increasing extent Pacific Island populations, have largely been brought into the national identity, it is still unclear how far Asian identities will be brought into it in New Zealand. This sociological process is largely driven by demographics rather than explicit government policy. Current immigration trends indicate that Asian identities will likely be far more prominent in the near future. In 1994 only 3% of New Zealanders were of Asian ancestry. By 2026, this is projected to grow to 16%. This growth represents a rapid demographic shift that may have implications for the social fabric of New Zealand society. The New Zealand government further articulated its strategy for engaging China in the China strategy document "Opening Doors to China: New Zealand's 2015 Vision." The document identifies a whole-of-government approach to growing exports and new markets in China and highlights that New Zealand's trade relationship with China is "crucial in delivering the Government's Economic Growth Agenda." China is New Zealand's second largest export destination and New Zealand exports to China have increased dramatically in recent years. China and New Zealand also significantly reached a Free Trade Agreement in 2008. China also sent approximately 150,000 tourists and 21,000 students to New Zealand in 2010. Prime Minister Key has stated that "New Zealand welcomes a closer dialogue with China on development cooperation in the Pacific." In April 2012, Foreign Minister McCully reiterated the Key government's desire to work more closely with China in the Pacific by stating "we can maximise our efforts if we work together more closely." McCully has observed that China has more diplomats in the Pacific than Australia and New Zealand combined despite only having diplomatic representation in 8 of the 14 countries in the Pacific Islands Forum. McCully has also stated that I do not regard greater Chinese activity in the Pacific as a great mystery. Nor do I attribute unwholesome motives. China is simply ... undertaking a level of engagement designed to secure access to resources on a scale that will meet its future needs, and establishing a presence through which it can make its other interests clear. New Zealand's economy has become increasingly linked to China. The New Zealand government promotes trade with China and is sensitive to anything that might disturb the nation's lucrative and growing trade relationship due to the increasing importance of that relationship to New Zealand's overall economic wellbeing. New Zealand's Free Trade Agreement with China has done much to facilitate New Zealand's trade. There are a range of views in New Zealand on the rise of China, its implications for New Zealand, and the way New Zealand should position itself within the shifting geopolitical and trade dynamics of the region. These views are overwhelmingly informed by New Zealand perceptions of the increasingly important role that China plays in buying New Zealand exports, although geopolitical considerations and the role of values are also important. Foreign Minister McCully has stated that there is a "natural tendency for the rising powers to define and pursue their interests in a more forthright way." As a result, McCully has argued that countries large and small should "help mediate that relationship" through diplomacy and regional institutions. McCully also stated that China is looking for resources and seeking to protect its interests as a global player and that the challenge is to increase cooperation and transparency with China and to work together. He added that New Zealand "needs to meet China half way" and develop a more cooperative effort in the Pacific. Signs exist of increasing sensitivity within some segments of New Zealand society to China's growing economic influence over the country. This can be seen in the 2012 debate over the Crafar Farms sale of New Zealand agricultural land to a Chinese corporation. This dynamic may in some ways parallel past changes in attitudes towards China in Australia. In Australia, the 2010 trial of Rio Tinto mining executives on charges of spying, and China's urging of suppression of publicity surrounding Uighur leader Rebiya Kadeer and the Dalai Lama led to a perception by many Australians that the high degree of Australia's economic closeness to China was leading to Chinese pressure on Australia to make policy decisions that ran counter to many Australians' values. There are a range of academic views in New Zealand (and Australia) on China's role in the region. Some view China as filling a vacuum created by the West while "incorporating the Pacific islands into its broader quest to become a major-Asia-Pacific power" with the long term goal to "ultimately replace the United States as the pre-eminent power in the Pacific Ocean." Some have also emphasized that China's "Look South" strategy has led Pacific Island countries to increasingly "Look North" to China rather than to traditional Western partners. Others take a less concerned view, seeing opportunities for PICs to gain foreign assistance while pointing to China's limited naval reach. While China has adopted a more assertive stance and hardened its position in the South China Sea and the East China Sea, its approach to the Pacific has thus far been less overtly assertive according to some analysts. Chinese strategic perceptions of the Pacific, as well as the manner in which it pursues its interest in the region, will influence U.S. and New Zealand perceptions of its role. There is also the potential that a deterioration of the strategic situation in the Western Pacific could influence the dynamic between China and Western powers in the South Pacific. China's aid to the Pacific, with its relative lack of transparency and focus on buildings and soft loans, differs in its approach from Western development assistance. The region had been an arena for Chinese and Taiwanese diplomatic rivalry, which manifested itself in terms of dollar diplomacy. This rivalry was suspended following the election in 2008 of President Ma Ying-jeou of the Nationalist Party of Taiwan who sought improved relations with China. Ma was returned to office in 2012. Kiribati, the Marshal Islands, Nauru, Palau, the Solomon Islands, and Tuvalu are among the 23 governments globally that recognize Taiwan. In recent years, it appears that China has increased its aid to and engagement with the Pacific to pursue other interests as well. In addition to seeking diplomatic leverage, China is thought to seek to gain access to resources, including minerals, timber, and fish, and to extend its influence in the region. China's aid program to the Pacific is difficult to quantify but appears to be significant and growing. China is thought to be the third largest aid donor to the Pacific, after Australia and the United States. New Zealand has expressed interest in working with China in aid projects in the Pacific. This could help draw China into a collaborative posture in the region. If China resists such efforts to cooperate on development projects with Western nations it would then appear that China views its assistance as in competition with Western assistance. China's strategy in the Pacific, when combined with the projected further expansion of Chinese naval capabilities, such as the launch of its first aircraft carrier for sea trials in 2011, appears to be drawing China militarily closer to the Pacific region. China's increasing military capability will likely give it the ability to be more directly involved in the Pacific region in the future, though the operational integration of naval capabilities, such as aircraft carriers, may take considerable time to develop. China's relations with Fiji offer an example of the impact of China's foreign relations in a South Pacific context. Expanding foreign assistance from and other ties to China have helped Fiji work around the political ostracism that Australia, New Zealand, and others sought to impose on the regime of Commodore Bainimarama for leading a coup that undermined democratic government in Fiji. Commodore Bainimarama has stated that it makes sense for Fiji to more closely align itself with China which does not care about the nature of the regime. Commodore Bainimarama stated in January 2013 that the draft constitution would be scrapped and that he would have his legal office draw up a new constitution. New Zealand Foreign Minister McCully reportedly stated that this brings into question whether elections anticipated in 2014 would be free and fair. An examination of the interrelationship of identity, interests, and values yields insight into the nature of bilateral relations between the United States and New Zealand. Focusing on identity fosters understanding of why some in New Zealand have been somewhat skeptical of becoming overly reliant on a single great and powerful friend. Looking at interests helps explain the extent to which New Zealand seeks to maximize its economic opportunities in a globalized economy as well as its perceptions of China. New Zealand's desire for independence in its external relations can also be viewed as a consequence of its historical experience. In terms of values, while the U.S.-New Zealand bilateral relationship has changed over time from close allies to estranged ones and now back to increasingly close partners, the relationship between the two states has been close on a cultural or people-to-people basis. Inquiry based on interests alone does not do justice to the strong ties of culture, history, and values that the two nations share. It is these common values, as well as shared interests, that explain why these two democratic nations are once again on track to becoming even closer security partners. Subtle differences in values can explain past differences, and a more layered and nuanced understanding of these areas of commonality, and difference, can inform future policy decisions and further develop an enduring Pacific partnership between the two nations. While shared values are at the core of the relationship, past history tells us that the relationship must also be tended in order to reach its full potential. When New Zealand and U.S. leaders meet there is often an opening reference to the theme of shared values, partnership, and friendship between the two nations. This makes the relationship qualitatively deeper than those based only, or predominantly, on common interests. "We are very pleased that the relationship between New Zealand and the United States is growing stronger by the day. Part of that has to do with the great affection that our peoples have towards each other. Part of it has to do with a great deal of common interests and a common set of values." –President Barack Obama "New Zealand sees itself as a small but important partner for the US and with our shared values we believe New Zealand can work with the US on efforts to enhance global peace and security." –Prime Minister John Key If the United States and New Zealand have largely common values, then why did these two nations, in the period after 1984, have such distance in their relationship? Insights into this answer can be found in subtle differences in the two nation's values. The United States and New Zealand share many values drawn from their common roots as largely British settler societies. The two nations' values, and from these their national identities, have, however, evolved differently over time. David Hackett Fischer attributes key differences in values between the United States and New Zealand to the timing of their founding. The United States was founded during the First British Empire when concepts of freedom were paramount. New Zealand was founded later, during the Second British Empire, when concepts of fairness were more prominent. While values are a deep force that can draw the two nations together, they can also be at the core of differences of opinion. The importance of independence of action must be highlighted as a key value for New Zealand foreign policy. This is evident in New Zealand's support for the U.N. as well as close relations with the United States, its FTA with China, its leadership on climate change and the environment, and its anti-nuclear policy. Other value differences—including differences in the political spectrum of the two nations, views on the role of religion and the state, and views on the role of government in public welfare, for example—indirectly influence the bilateral relationship. Attention to these differences can also lead to better understanding of both nations. After decades of being friends but not allies, the New Zealand government under Prime Minister John Key has effectively consolidated a return to close security and defense relations with the United States. The government's desire to return to closer ties with the United States coincided with, and was facilitated by, the Obama's Administration's move to rebalance U.S. involvement in the Indo-Pacific region. It should be noted that the Key government built on improvements in the bilateral relationship begun under Key's predecessor, Helen Clark of the Labour Party, including in the area of security and defense. That said, there is a debate within defense and foreign policy circles in New Zealand where a significant minority would challenge the government's decision to bring New Zealand closer to the United States. In one poll 47.6% of New Zealanders approved of "the U.S. resuming military exercises in New Zealand" while 44% disapproved. Strategic debate in New Zealand appears to be coalescing around three loosely defined positions. The first position in the debate, represented by the New Zealand government, is comfortable with American power in Asia and the Pacific and seeks to actively establish closer political, security, and trade ties with the United States while maintaining close trade relations with China. This dominant view emphasizes the shared values that have underpinned past cooperation with the United States. This position is closer to that of Australia's strategic posture than the other two positions. This is important because of the central position that Australia plays in New Zealand's strategic plans. The second perspective places relatively more emphasis on New Zealand's economic closeness to China, is more worried that New Zealand may have to choose between the United States and China, and fears that this could have negative, largely economic, consequences for New Zealand. This second group, if pushed by an adverse strategic environment, would likely side with the United States. Like all New Zealanders, this group does not want to have to choose between economic and security interests. The third group views the United States and China as two great powers, places less emphasis on the role of traditional values, and prefers a more even-handed approach to relations with the United States and China. It also emphasizes New Zealand's economic interests with China as key to New Zealand's economic security. This group generally does not oppose enhanced cooperation with the United States as long as it does not compromise New Zealand's relationship with China. As such, it would likely place limits on developing the bilateral relationship with the United States. Some in this group also emphasize the economic—and by implication the eventual military—decline of the United States relative to China's rise. China has gained much geopolitical influence from its expanding trade relationship with New Zealand. This could lessen somewhat if a potential trade agreement, such as the TPP, were to lessen New Zealand's reliance on China trade. A more nuanced understanding of New Zealand's international posture depends on continuing to better understand New Zealand's search for independence and economic security and its conceptualization of its strategic space in the South Pacific and more broadly in Asia, as well as its values as they pertain to international and strategic affairs. The relative impact of history and geography in shaping these conceptions has changed over time. As a result, New Zealand is more Pacific-focused and increasingly Asia-focused. Understanding this change will continue to facilitate the United States' and New Zealand's partnership in the Pacific and beyond. While the United States' strategic and economic geography is global, New Zealand's geography is more regionally focused on the South Pacific and Asia. New Zealand's current strategic guidance, as well as its historical relationship with the South Pacific, its changing demographic composition, and regional security concerns will continue to call for it to be an active player in its near region. As a result, New Zealand will likely focus its efforts in the South Pacific as its primary area of strategic interest. New Zealand's economic geography, and its continuing efforts to diversify its trade relations, will likely continue its increasingly broad focus on Asia and regional economic architectures such as the TPP. China's increasing presence in the South Pacific will also continue to be of interest to New Zealand. Mainstream thinking in New Zealand sees the country's strategic interests in the South Pacific and its larger Asia Pacific political and economic interests running largely in tandem with America's rebalancing towards Asia. America's rebalancing to the Asia Pacific contains within it a renewed focus on the Pacific which directly brings U.S. and New Zealand conceptions of their strategic geography into the same space. By agreeing to let past differences over nuclear policy no longer define the relationship, the United States shifted its approach to New Zealand in a way that demonstrates respect for New Zealand's nuclear policy and its independence in foreign affairs and opened the way for a resumption of closer security cooperation. Continued sensitivity to New Zealand's nuclear stance and its desires for independence in international affairs will likely facilitate further deepening of the rapidly expanding linkages between these two great open societies. Expansion of economic and trade relations between these two, and other, nations through the Trans Pacific Partnership agreement could also further enhance political and strategic ties between the United States and New Zealand. The above discussion of developing security cooperation between the United States and New Zealand raises a number of questions that may be of interest to Members of Congress interested in oversight of the Administration's rebalancing to Asia strategy. Among these questions are: How does the developing security relationship with New Zealand fit in with the future course of the United States' rebalancing to Asia strategy? What is the correct balance that should be struck between security and economic aspects of the bilateral relationship? Is there need for enhanced collaboration between the United States, New Zealand, Australia, and others in coordinating humanitarian assistance, disaster relief, maritime awareness, and regional posture in the South Pacific? In what areas and in what ways can the United States and New Zealand best cooperate to advance shared interests in the Asia Pacific region in the future? Does the history of bilateral relations with New Zealand contain any lessons that can be learned for improving other bilateral security relationships in the Asia Pacific context?

As part of its strategy to rebalance toward Asia the Obama Administration has greatly expanded cooperation and reestablished close ties with New Zealand. Changes in the security realm have been particularly notable as the two sides have restored close defense cooperation, which was suspended in the mid-1980s due to differences over nuclear policy. The two nations are now working together increasingly closely in the area of defense and security cooperation while also seeking to coordinate efforts in the South Pacific. The United States and New Zealand are also working together to help shape emerging architectures in the Asia-Pacific such as the 11-nation Trans Pacific Partnership (TPP) free trade agreement negotiation in which New Zealand has played a key role. Members of Congress interested in oversight of the Obama Administration's rebalancing to Asia strategy and the United States' presence in the South Pacific as well as Members associated with the Friends of New Zealand Congressional Caucus may be interested in these new developments in the bilateral relationship. Congressional interest has also been demonstrated through Members' participation in the Pacific Partnership Forum with New Zealand. In discussing how the United States is updating alliances to address new demands and "building new partnerships," then-Secretary of State Hillary Rodham Clinton cited in November 2011 the outreach effort to New Zealand, among other countries, as "part of a broader effort to ensure a more comprehensive approach to American strategy and engagement in the region." She added that "We are asking these emerging partners to join us in shaping and participating in a rules-based regional and global order." It is of interest to note that New Zealand, a nation that like Australia has fought alongside the United States in most of its wars, is now being reconceived as a "new" partner. While the current right-of-center government of Prime Minister John Key has moved forward in restoring bilateral ties with the United States, some analysts in New Zealand are concerned that if this trend is taken too far it may threaten New Zealand's trade interests with China. Others in New Zealand are also concerned that moving too far too fast with the United States may jeopardize New Zealand's independence in foreign policy. The Obama Administration's move away from old restrictions on bilateral ties, as demonstrated by the opening of U.S. naval ports to New Zealand ships, will likely continue to move bilateral ties forward. This desire on both sides to continue to strengthen relations was demonstrated by the 2010 Wellington Declaration and the 2012 Washington Declaration. In the view of many, the improvement in bilateral relations marked by these two agreements will better enable both nations to navigate the shifting geopolitical dynamics of both the South Pacific and the larger the Asia Pacific region, including the rise of China. New Zealand's national identity, values, and economic interests will all likely influence its external engagement in the years ahead. Values, as well as interests, have played a role in explaining past differences between the United States and New Zealand and why the two nations are once again close Pacific partners.

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The U.S. Constitution establishes two methods by which Presidents may appoint officers of the United States: either with the advice and consent of the Senate, or unilaterally "during the Recess of the Senate." These two constitutional provisions have long served as sources of political tension between Presidents and Congresses, and the same has held true since President Obama took office. This tension is illuminated by President Obama's difficulty in obtaining Senate confirmation of nominations for the Directorship of the newly-established Bureau of Consumer Financial Protection (CFPB or Bureau) and Members of the National Labor Relations Board (NLRB or Board). President Obama formally nominated Richard Cordray to be the first Director of the CFPB on July 18, 2011. In May 2011, 44 Senators signed a letter to the President stating that they would oppose the confirmation of any nominee to serve as CFPB Director until substantive changes to the structure of the Bureau were enacted into law. On October 6, 2011, the Senate Committee on Banking, Housing, and Urban Affairs (Senate Banking Committee) approved Cordray's nomination for a full vote of the Senate. However, on December 8, 2011, the Senate fell seven votes shy of the 60-vote threshold necessary to reach cloture and move to a vote on the nomination. The NLRB, an agency with certain powers to investigate and adjudicate unfair labor practices, consists of up to five officials who are to be appointed by the President with the advice and consent of the Senate. However, there have been periods during the presidencies of both George W. Bush and Obama in which the board has had vacancies, including a period of more than two years in which the NLRB operated with only two members. In a 2010 decision, New Process Steel, L.P. v. National Labor Relations Board , the U.S. Supreme Court ruled that the National Labor Relations Act prevents the NLRB from exercising rulemaking powers without having three or more acting members. In 2010, the NLRB had operated with a quorum of three or more members; however, by August 2011, there were only three members remaining, the minimum number of members required to establish a quorum. The NLRB was slated to lose one member by the end of the first session of the 112 th Congress. Therefore, in an effort to prevent board membership from dropping below the minimum quorum required for the NLRB to fully conduct business, President Obama nominated Terrence F. Flynn, Sharon Block, and Richard F. Griffin Jr. to be Board members. However, the Senate did not confirm any of the nominees before the third member's term expired. Following Senate inaction, the President reportedly considered making recess appointments should the Senate go into recess. However, the Senate, at various times during the 112 th Congress, has held "pro forma" sessions, which are intended, at least in part, to prevent the existence of a Senate recess sufficient to permit the President to exercise his constitutional authority to unilaterally appoint officers. These pro forma sessions typically are governed by unanimous consent agreements of the Senate that prohibit the chamber from conducting any formal business. The pro forma sessions generally have been held every three or four days, and typically consist of a single Senator gaveling in the session and, shortly thereafter, gaveling the session out. On December 17, 2011, the Senate adopted a unanimous consent agreement that scheduled a series of pro forma sessions to occur from December 20, 2011, until January 23, 2012, with brief recesses in between. The unanimous consent agreement established that "no business" would be conducted during the pro forma sessions and that the second session would begin at 12:00 p.m., January 3, 2012. On January 4, 2012, despite the periodic pro forma sessions of the Senate, the President, asserting his authority under the Recess Appointments Clause, announced his intent to appoint Cordray to serve as the first CFPB Director and Block, Griffin Jr., and Terrence F. Flynn, to be members of the NLRB. The appointments occurred in the time between pro forma sessions on January 3 and January 6, 2012. The President's actions have proven to be contentious. In addition to their impact on relations between the executive and legislative branches, these appointments also raise a number of significant legal questions regarding the scope of the President's authority under the Recess Appointments Clause and the statutory authorities these individuals may exercise—questions that may spark litigation. This report analyzes the legal issues associated with the President's exercise of his Recess Appointments Clause power on January 4, 2012. To set the framework of our discussion, the report begins with a general legal overview of the Recess Appointments Clause. This is followed by an analysis of two legal principles, standing and the political question doctrine, which may impede a reviewing court from reaching the merits of a potential legal challenge to the appointments. The examination of these justiciability issues is followed by an analysis of the constitutional validity of the appointments; potential statutory restrictions on a recess appointee's authority to exercise the powers of the CFPB; and how actions taken by the recess appointees may be impacted by a court ruling that the appointments are unlawful. The U.S. Constitution explicitly provides the President with two methods of appointing officers of the United States. First, the Appointments Clause establishes that the President "shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for and which shall be established by Law." Second, the Recess Appointments Clause authorizes the President to "fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session." During the meetings of the Constitutional Convention, there was no debate on the Recess Appointments Clause. However, in light of the constitutional text and historical pronouncements, it is generally accepted that the Recess Appointments Clause was designed to foster administrative continuity by enabling the President to ensure unfettered operation of the government during periods when the Senate was not in session and, therefore, unable to perform its advice and consent function. The inherent ambiguities of the Recess Appointments Clause, such as the interpretation of the phrases "Vacancies that may happen" and "Recess of the Senate," have primarily received formal consideration from the executive branch in the form of Attorneys General opinions, with only periodic attention from the courts and Congress. Some interpretive questions surrounding the Clause are generally regarded as settled. For example, through interpretation and practice, a "Recess" for purposes of the Recess Appointments Clause encompasses both the inter- and intrasession recesses of the Congress. While there have been varying opinions about the duration of an intrasession recess sufficient for the President to make a recess appointment, the shortest duration in the modern era for an intrasession recess appointment has been 10 days. In addition, it is generally understood that the commission of a recess appointee expires at the sine die adjournment of the Senate's "next Session." In practice, an individual receiving an intersession appointment would serve until the end of the following session. However, an individual receiving an intrasession appointment—for example, during the traditional August recess of a first session of Congress—would serve until the end of the following session, that is, the end of the second session. As an intrasession recess appointment during the second session of the 112 th Congress, President Obama's January 4 appointments could serve until the end of the first session of the 113 th Congress. Furthermore, as a constitutional matter, a recess appointee possesses the same legal authority as a confirmed appointee. In upholding the President's authority to make a recess appointment of an Article III judge, the U.S. Court of Appeals for the Eleventh Circuit (11 th Circuit) stated: The Constitution, on its face, neither distinguishes nor limits the powers that a recess appointee may exercise while in office. That is, during the limited term in which a recess appointee serves, the appointee is afforded the full extent of authority commensurate with that office. Similarly, a federal district court explained: There is nothing to suggest that the Recess Appointments Clause was designed as some sort of extraordinary and lesser method of appointment.… In the absence of persuasive evidence to the contrary, it is therefore not appropriate to assume that this Clause has a species of subordinate standing in the constitutional scheme…. There is no justification for implying additional restrictions not supported by the constitutional language. Congress has, however, attempted to dissuade the President from making recess appointments through legislation. For example, Congress has passed legislation that restricts certain recess appointees from receiving salaries. Given the historical interpretation of the Recess Appointments Clause and the historical use of its authority, the President's appointments of Cordray, Flynn, Block, and Griffin Jr. during a three-day recess between pro forma sessions raises a number of significant legal questions that may lead to judicial challenge. However, prior to assessing the merits of any challenge, a reviewing court would first consider a number of preliminary questions of justiciability—including whether the plaintiffs who have brought the claim have standing and whether the asserted claims present matters appropriately resolved by a court. An extended preliminary discussion of these justiciability questions is necessary because they may have relevance to many of the underlying legal questions posed by the Recess Appointments Clause, the President's recent actions thereunder, and the operation of the statutory authorities exercised by the recess appointees in this case. Although the Supreme Court has established a number of "justiciability" doctrines to ensure that a claim is properly before a court, concerns relating to standing and the political question doctrine appear to present the most likely hurdles to judicial resolution of any challenge to the President's appointments. The standing doctrine asks whether the particular plaintiff has a legal right to a judicial determination on the merits before the court, while the political question doctrine asks whether the claim presented is inappropriate for judicial review. If a court determines that a plaintiff lacks standing or that the nature of the questions presented precludes review, the court will dismiss the claim, leaving the status quo undisturbed. The law with respect to standing is a mix of both constitutional requirements and prudential considerations. To satisfy Article III constitutional standing, a plaintiff must satisfy three requirements. First, a plaintiff must allege to have suffered an injury in fact, which is personal, concrete, and particularized, not vague or abstract. Second, the plaintiff's injury must be "fairly traceable to the defendant's allegedly unlawful conduct." Third, the plaintiff's injury must be an injury that is likely to be redressed by the relief requested from the court. In addition to the constitutional questions posed by the doctrine of standing, federal courts also follow a well-developed set of prudential principles that are relevant to a standing inquiry. Like their constitutional counterparts, these judicially created limits are "founded in concern about the proper—and properly limited—role of the courts in a democratic society." However, unlike the constitutional requirements, prudential standing requirements "can be modified or abrogated by Congress." These prudential principles require that (1) a plaintiff assert his own legal rights and interests, not those of a third party; (2) a plaintiff's complaint be encompassed by the "zone of interests" protected or regulated by the constitutional or statutory guarantee at issue; and (3) the court not adjudicate "abstract questions of wide public significance which amount to generalized grievances pervasively shared and most appropriately addressed in the representative branches." A challenge to President Obama's recess appointments will likely come from one of three classes of plaintiffs. A private individual who has suffered an injury as a result of some discrete action by either the CFPB or the NLRB would be the most likely plaintiff to obtain standing. However, given the separation of powers issues associated with the President's recess appointments, either individual Members of Congress, or the Senate as a whole may also seek to challenge the appointments. Congressional plaintiffs, however, would need to survive an "especially rigorous" standing inquiry. Private plaintiffs must comply with the three constitutional standing requirements and the judicially imposed prudential principles. Private plaintiffs who are impacted by rules issued or enforcement actions implemented against them by the CFPB or NLRB after President Obama's recess appointments may likely have standing to challenge the validity of the appointments. These private plaintiffs may include individuals, businesses, or an association suing on behalf of its members, if it meets the independent requirements of associational standing. These claims would assert either that the Director lacked the authority to take action due to his improper appointment, or that the NLRB lacked a quorum given that three of the five board members were improperly appointed. Private plaintiffs would also need to ensure that their claims are ripe and that their alleged injury is sufficiently concrete and particularized. The recent case New Process Steel, L.P. v. NLRB , provides an example of how a private plaintiff may obtain standing based on an injury arising from an agency action. In New Process Steel , L.P. , the court found that the plaintiff suffered a concrete and particularized injury in fact when the NLRB issued a decision finding it had engaged in unfair labor practices. The Court found that the injury was personal, not vague or abstract, since the Board issued the decision specifically against New Process Steel and imposed mandatory conditions on the business to remedy its violation, including compensating its employees for any losses caused by the business's action. Additionally, the Court found that the injury was fairly traceable to the actions of the NLRB, and it was the type of injury that is typically redressed via judicial action. A private plaintiff alleging an injury caused by actions taken by the CFPB or NLRB after the recess appointments were made that is similar to the injury alleged in New Process Steel, L.P. may be likely to have standing to challenge the validity of the appointments. The Supreme Court last delved into the issue of individual Member standing in its 1997 decision in Raines v. Byrd . The Court held that six Members of Congress did not have standing to challenge the Line Item Veto Act of 1996 because their complaint did not establish that they had suffered a personal, particularized, and concrete injury. In light of this decision, there appear to be two ways that a Member of Congress may satisfy the standing injury requirement discussed above. First, a Member plaintiff who alleges a personal injury, such as the loss of a Member's seat, may likely fulfill the injury requirement of standing. Second, a Member plaintiff who alleges an institutional injury may likely also obtain standing, but only if the injury amounts to "vote nullification." Additionally, when a case invokes "core separation of powers questions at the heart of the relationship among the three branches of our government" an "especially rigorous" standing inquiry may be administered by the court. The U.S. Court of Appeals for the District of Columbia (D.C. Circuit) has held that "vote nullification" only occurs if Congress has no other legislative remedies available to rectify its alleged injury. For example, the Member plaintiffs in Campbell v. Clinton did not have standing to challenge the President's decision to assert military force in the Federal Republic of Yugoslavia without congressional authorization because Congress had available legislative remedies, namely to "[pass] a law forbidding the use of U.S. forces in the Yugoslav campaign." Therefore, the Member plaintiffs' institutional injury did not rise to the level of vote nullification and could not satisfy the standing requirements. A Member challenging President Obama's recess appointments may argue that the President's actions circumvented the Senate's "Advice and Consent" appointments function under Article II of the Constitution, causing the Member to suffer an institutional injury akin to the loss of legislative authority. Whether or not this institutional injury amounts to vote nullification depends on how broadly the requirement that Congress lack a legislative remedy is interpreted. On the one hand, if the legislative remedy question is narrowly framed, a reviewing court could find that Congress has no legislative remedy available because Congress likely cannot directly remove a recess appointee from his position. On the other hand, if the injury is framed more broadly, Congress has the authority to pass legislation that substantively impacts the NLRB and CFPB recess appointees. For instance, Congress could pass legislation that cuts off funding for the CFPB and NLRB or that dilutes the authority of the CFPB Director by converting the Bureau's leadership structure to a board or commission. Indeed, Congress also has the authority to repeal the legislation creating the agencies or the statutory authorization for the specific offices. Given the analysis in Raines and Campbell , substantial arguments could likely be made that legislative remedies are available to a Member plaintiff seeking to challenge the President's recess appointments, which may call into question the Member's ability to satisfy the injury prong of the standing doctrine. On several occasions, courts have held that congressional institutions, such as the full House or Senate or authorized Committees, have standing to sue based on an institutional injury. However, in order to sue as an institutional plaintiff, it appears that an authorization from a House of Congress to bring suit may be required. Authorization "is the key factor that moves [the suit] from the impermissible category of an individual plaintiff asserting an institutional injury ... to the permissible category of an institutional plaintiff asserting an institutional injury...." An institutional plaintiff's institutional injury must be a concrete and particularized injury in fact in order to satisfy the standing requirement. For example, the courts have determined that "being denied access to information that is the subject of a subpoena" is a "concrete and personalized" injury in fact. Outside the subpoena context, a full House has been permitted to intervene in a case where the alleged injury "directly (particularly) implicated the authority of Congress within our scheme of government, and the scope and reach of its ability to allocate power among the three branches." Following Raines , it is unclear if an institutional plaintiff's injury would be considered "concrete and personalized" if the plaintiff has legislative remedies available to redress its injury. A congressional institution challenging President Obama's recess appointments would likely be subject to an "especially rigorous" standing inquiry, since the case would raise significant separation of powers questions. The institutional plaintiff would likely argue that the President's actions thwarted the Senate's constitutional obligation to provide "Advice and Consent" on nominations—thereby establishing a concrete and particularized injury in fact. The plaintiff would likely need Senate authorization to bring a suit, showing that the institutional plaintiff is permitted to represent the alleged institutional harm. However, it remains unclear if the Raines and Campbell standard, denying standing to a plaintiff alleging an institutional injury if a legislative remedy is available to rectify the injury, is applied to institutional plaintiffs as it is to Member plaintiffs. If authorized institutional plaintiffs can establish standing notwithstanding any available legislative remedies, then arguably, the Senate's alleged institutional injury satisfies the injury requirement, since it probably directly impacts the Senate's authority within the governmental scheme. To the contrary, if institutional plaintiffs are treated similarly to Member plaintiffs, the Senate would likely be denied standing because it arguably has an alternate legislative remedy to redress its injury. Even if a reviewing court determines that a plaintiff has standing, the court may still dismiss aspects of a challenge to the President's recess appointments—prior to reaching the merits of the case—as a nonjusticiable political question. The political question doctrine is generally characterized as an "amorphous," self-imposed bar to adjudicating certain disputes that are considered "inappropriate" for judicial review. Thus, courts may abstain from resolving matters that, due to their political nature, may more appropriately be resolved by the other branches. By encouraging judicial self-restraint, especially in the face of inter-branch conflicts, the doctrine seeks to preserve the limited role of the judicial branch vis-à-vis the other branches of government. The doctrine finds its roots in Marbury v. Madison , in which Chief Justice John Marshall noted that "questions in their nature political," or that are committed to presidential discretion either by the Constitution or by statute, "can not be [resolved] by this court." However, the modern doctrine, which "hing[es] on conceptions of separation of powers," has expanded to apply beyond challenges to executive action and is often invoked to bar judicial review of cases involving disputes between the executive and legislative branch. Although the Supreme Court articulated criteria for use in applying the political question doctrine in the 1962 decision of Baker v. Carr , most commentators consider the standards supplied to be an insufficient basis for determining what does or does not constitute a political question. In Baker , the Court explained that political questions typically involve: a textually demonstrable constitutional commitment of the issue to a coordinate political department; or a lack of judicially discoverable and manageable standards for resolving it; or the impossibility of deciding without an initial policy determination of a kind clearly for nonjudicial discretion; or the impossibility of a court's undertaking independent resolution without expressing lack of the respect due coordinate branches of government; or an unusual need for unquestioning adherence to a political decision already made; or the potentiality of embarrassment from multifarious pronouncements by various departments on one question. Although the Baker standards may be of limited usefulness, the Court has identified a number of constitutional provisions that, by their very subject matter, tend to trigger the political question doctrine—therefore precluding judicial review in most circumstances. For example, the Supreme Court has repeatedly held that legal challenges founded on the Republican Form of Government Clause are nonjusticiable. Additionally, the political question doctrine has previously been invoked as a justification for abstaining from reviewing Congress's own internal processes, procedural aspects of the impeachment process, and the manner in which Constitutional amendments are ratified. Given the ambiguities of the Baker criteria, it can be difficult to predict how, and even whether a reviewing court would invoke the political question doctrine. Notwithstanding this ambiguity, no court has held that the Recess Appointments Clause, by its very subject matter, precludes judicial review. Indeed, a number of lower federal courts have considered challenges to presidential appointments made pursuant to the Clause. In hearing these cases, courts have used constitutional text, history, practice, and precedent to resolve significant interpretive controversies such as when a vacancy arises for the purpose of the Clause; whether the Clause applies to both intersession and intrasession recesses; and whether the President can rely on the Clause to appoint an Article III Judge. All these questions were found to be appropriate for judicial consideration—providing evidence of the courts' willingness to look closely at the constitutional text and interpret the contours of the President's recess appointment power. However, there are important aspects of any potential challenge to a presidential recess appointment that a court may view as "political questions" inappropriate for consideration. For example, the U.S. Court of Appeals for the Eleventh Circuit has previously held that any claim that the President's recess appointment "circumvented and showed an improper lack of deference to the Senate's advice-and-consent role" raises a nonjusticiable political question. In dismissing the argument, the circuit court was uncomfortable departing from the text of the constitutional provision in order to determine "how much presidential deference is due to the Senate when the President is exercising the discretionary authority that the Constitution gives fully to him." The unique nature of the circumstances surrounding President Obama's recess appointments may raise additional questions that a reviewing court may hesitate to consider on the merits. For example, an eventual plaintiff could argue that, due to the Senate's pro forma sessions, the Senate was not in a recess of sufficient duration to trigger the President's recess appointment power. Such an argument could present two potential political questions. First, out of respect for the independence of the Senate, a reviewing court may decline to consider the question of whether pro forma sessions are constitutionally meaningful or constitute a session of Congress adequate to prevent the President's use of his recess appointment power, as evaluating such a question may force a court to review the internal proceedings of the Senate. The Constitution provides an express textual commitment to the Senate to establish its own rules and procedures. Courts have historically "grappled with whether challenges to this type of internal rule present nonjusticiable political questions for the reason that there is an explicit textual commitment to each house to set its own rules." Accordingly, if a reviewing court finds the question of whether the Senate is in session or in recess to be one more appropriately answered by the Senate—as the source of its own rules and proceedings—the political question doctrine may prevent review. However, the Supreme Court has previously reviewed the validity and application of Senate rules that may violate the Constitution or affect interests outside of the legislative branch. Second, unless a court draws from the Adjournment Clause, there is a substantial possibility that a reviewing court would be unwilling to establish an alternative minimum duration of a recess (i.e. number of days) necessary to trigger the President's recess apportionment authority. Such a question may lack a "judicially discoverable and manageable standard" upon which the court can rely. As will be discussed infra , the Recess Appointments Clause is silent as to how long the Senate must be in recess before the President may validly assert his recess appointment powers. Although the executive branch appears to have historically implied that a recess of at least three days is likely necessary, that result does not appear to be constitutionally required. Given the constitutional ambiguity—and without additional criteria or other "judicially discoverable standards"—a reviewing court may determine that the precise length of time for which the Senate must be in recess before a recess appointment is permissible is a question best resolved by the political branches. The scope of the Clause in this respect would thus be defined by the President and Congress, rather than the courts, with each branch utilizing the tools provided to it under the Constitution to influence the actions of the other branch. A court may, of course, extract its own standard by drawing from the Adjournment Clause, for example, or from history and precedent. Furthermore, even if a reviewing court considers the questions relating to pro forma sessions and the minimum recess duration to be nonjusticiable, the court would not necessarily be forced to dismiss the case as a whole. Indeed, the court could avoid these determinations and still reach the merits of the appointments on other grounds. If a reviewing court determines that a plaintiff challenging the appointments of Cordray, Flynn, Block, or Griffin Jr. has met all elements of justiciability, the court may proceed to assess the merits of the suit. The primary issue before a court would be whether the appointments were made in compliance with the strictures of the Recess Appointments Clause, which provides the President with the "Power to fill up all Vacancies that may happen during the Recess of the Senate." Prior to proceeding to a consideration of this question, a brief recitation of the unique factual circumstances underlying the President's January 4 recess appointments may be helpful. The Senate, on December 17, 2011, adopted a unanimous consent agreement that scheduled a series of pro forma sessions to occur every few days from December 20, 2011, until January 23, 2012. The unanimous consent agreement expressly established that "no business" would be conducted during the pro forma sessions. The agreement also provided that the second session of the 112 th Congress would commence with a pro forma session at 12:00 p.m. on January 3, 2012, and that a subsequent pro forma session would be held on January 6, 2012. On January 4, 2012, between these two pro forma sessions, the President, asserting his Recess Appointments Clause powers, announced his intent to appoint Cordray to serve as the first CFPB Director and Block, Griffin Jr., and Flynn, to be members of the NLRB. While it appears well established that the Senate was in an intrasession recess following the conclusion of the January 3 rd pro forma session that convened the second session of the 112 th Congress, it is not clear how to measure that intrasession recess and whether it was sufficient to trigger the President's power under the Recess Appointments Clause. The Senate was either in one of a series of short recesses created by the pro forma sessions, or in a single intrasession recess of 20 days—spanning from January 3 rd to January 23 rd . The length of the recess may be of great importance, as it appears that no President, at least in the modern era, has made an intrasession recess appointment during a recess of less than 10 days. The President has asserted that pro forma sessions are not meaningful sessions of Congress for purposes of the Recess Appointments Clause and, therefore, cannot interrupt a longer recess. Under this reasoning, the President's January 4 recess appointments were consistent with established historical precedent as they were made during a 20-day recess. Critics, however, assert that the pro forma sessions are meaningful sessions of Congress and, therefore terminate a recess. Under this reasoning, the President's recess appointments broke from established historical precedent, as they were made during a recess of only three days. These unique facts raise at least two significant, and mostly unresolved constitutional questions. First, may Congress utilize pro forma sessions to interrupt the duration of an otherwise continual intrasession recess so as to prevent a recess appointment? Second, is there a minimum number of days for which the Senate must be out of session before a President may constitutionally exercise his recess appointment power? The following section now examines each of these questions in turn. Beginning in 2007, the Senate began using "pro forma" sessions to avoid a sustained break of more than three days, with the apparent intent of preventing the President from exercising his recess appointment powers. A pro forma session is generally understood to be a short meeting of the chamber in which little or no business is typically conducted, and in recent Senate practice it is often routinely agreed upon by unanimous consent that no business will be conducted. Pro forma sessions of the Senate typically involve a Senator convening the session, assuming the chair, and adjourning. For example, during the first session of the 112 th Congress, there were eight occasions when the Senate suspended its business for an overall period of longer than three days but held pro forma sessions at least every three days pursuant to a unanimous consent agreement. During each of these periods, the Senate held pro forma sessions at least every three days pursuant to a unanimous consent agreement. The President did not make any recess appointments during these periods. To evaluate the lawfulness of the January 4 appointments, a reviewing court would likely first need to determine the length of the recess within which President Obama made his recess appointments. Assuming such a consideration is not barred by the political question doctrine, a court would likely need to determine whether a pro forma session is a session of Congress sufficient to interrupt an otherwise continual intrasession recess (such a session will hereinafter be called a "standard session"), and therefore meaningful for purposes of the Recess Appointment Clause. If the Senate's pro forma sessions do act as standard sessions, then the recess within which the President made his appointments would have been one of three days. There appear to be at least three potential approaches a reviewing court could take to evaluate whether pro forma sessions constitute standard sessions. First, it is possible that a court could determine that any session of Congress, including any pro forma session, constitutes a standard session. Second, a court could determine that a pro forma session is a standard session only if business is actually conducted during the pro forma session. Lastly, a court could determine that a pro forma session is a standard session so long as the Senate has the capacity to conduct business during the session. Each approach will be evaluated below. First, a reviewing court could find that any pro forma session, regardless of its length, purpose, attendance, or other characteristic, is not distinguishable from any other standard session of Congress where Members vote on legislation or engage in debate. This approach could be affected by a court's inclination to show deference to the Senate in determining its own schedule. Viewed in this light, all pro forma sessions held by the Senate would break up a long intrasession recess by creating shorter recesses. If a court were to reach this conclusion, the January 4 appointments would have occurred during a three-day recess of the Senate (i.e., January 4 to January 6). Under this approach, whether the appointments were lawfully made would depend on whether a three-day recess constitutes a "Recess" sufficient to trigger the Presidents authority for purposes of the Recess Appointments Clause. A reviewing court may, however, choose to look at what specifically occurs during pro forma sessions to determine whether they constitute standard sessions, and are therefore meaningful for purposes of the Recess Appointments Clause. Under this approach, only if "business" were actually conducted during a pro forma session would it be considered a standard session. As explicitly provided for by the unanimous consent agreements, "business" has generally not been conducted at recent pro forma sessions. With respect to the specific sessions at issue here, the December 17, 2011, unanimous consent agreement provided that "no business" was to be conducted during any of the pro forma sessions. During the January 3, 2012, pro forma session, the Senate convened at 12:01 p.m. and adjourned at 12:02 p.m. until January 6, 2012, when it convened at 11:00:03 a.m. and adjourned at 11:00:32 a.m. Nor does it appear that "business" has been conducted at any subsequent pro forma session. Under an approach that considers the content of the specific session, it seems unlikely that any of the January pro forma sessions would be considered standard sessions. Under this approach, the January 4 appointments could be considered to have occurred during an intrasession recess of 20 days, in which case a court would likely consider them to be consistent with established historical precedent. Finally, a reviewing court may determine that a pro forma session is a standard session so long as the Senate has the capacity to conduct business. Although the Senate agreed by unanimous consent that no business would be conducted during the pro forma sessions, that decision can be reversed by the same means. For example, there were two occasions during the 112 th Congress when the Senate conducted business by unanimous consent after it had previously adopted a unanimous consent agreement to adjourn and hold a series of pro forma sessions in which no business was to be conducted. Under these subsequent agreements, the Senate approved legislation, H.R. 2553 , the Airport and Airway Extension Act of 2011 Part IV, on August 5, 2011, and H.R. 3765 , Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011. Additionally, it should be noted that with respect to appointments, the Senate has previously confirmed nominees by unanimous consent. Therefore, as the Senate may be considered to have the capacity to consider nominations and conduct other business pursuant to separate unanimous consent agreements, a court may then determine that pro forma sessions are standard sessions, and therefore meaningful for purposes of the Recess Appointments Clause. If a court were to reach this conclusion, then all the January 2012 pro forma sessions could be considered standard sessions, such that they break up a long intrasession recess into brief recesses. Under this approach, the President would have made the January 4 appointments over a three-day recess. Whether the appointments were lawfully made in this situation, again, depends upon whether a "Recess" for purposes of the Recess Appointments Clause must be a minimum number of days for the President to exercise his authority. Based on the preceding analytical framework, it is possible a hypothetical reviewing court could determine that the President made the January 4 appointments during a three-day recess. Given the brevity of this recess, a reviewing court may then consider whether the Recess Appointments Clause requires that a recess of the Senate be in progress for a minimum number of days before the President is authorized to exercise his recess appointment power. This conclusion could likely depend upon whether a court finds a link between the Recess Appointments Clause and the Adjournment Clause. As stated previously, it appears to be generally settled that a "Recess" under the Recess Appointments Clause encompasses both inter- and intrasession recesses of the Senate. Historical practice seems to indicate that an intrasession "Recess" should be one of sufficient length for the President to make a recess appointment. However, the Constitution does not explicitly define "Recess" for purposes of the Recess Appointments Clause, nor does there appear to be a constitutionally required length of time that must be satisfied before the President exercises his authority under the Clause. Because of the ambiguous nature of the Recess Appointments Clause, the Adjournment Clause has historically been drawn upon to impart meaning to the term "Recess." The Adjournment Clause provides that "Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting." Based on this linkage, it could be argued that a "Recess" must be longer than three days for the President to exercise his recess appointment power. Prior to 1857, Presidents had virtually no occasion to make intrasession recess appointments, because Congress did not take such breaks. However, since the late 19 th century, Congress has frequently scheduled more intrasession recesses, during which periods Presidents have exercised their recess appointment authority. In 1921, Attorney General Daugherty declared that the President had the authority to make a recess appointment during an intrasession recess of 29 days. However, he also arguably limited the scope of his opinion when, referencing the Adjournment Clause, he stated the opinion was not meant to imply that "the power exists if the adjournment is for only 2 instead of 28 days ... Nor do I think an adjournment for 5 or even 10 days can be said to constitute the recess intended by the Constitution." In fact, in 1979 the Office of Legal Counsel (OLC) informally advised against making a recess appointment over a six-day intrasession recess based on "the warning in Attorney General Daugherty's opinion." Furthermore, the Department of Justice (DOJ), during litigation, appears to have supported a link between the Adjournment Clause and Recess Appointments Clause. In 1993, the DOJ submitted a brief in the case Mackie v. Clinton , where it responded to the plaintiff's assertion that the 13-day recess in question was of insufficient duration to trigger the recess appointment power. The brief noted that no Attorney General or court has found that the President lacks the authority to make recess appointments during a 13-day recess. Nevertheless, the brief stated: If the [intrasession] recess here at issue were of three days or less, a closer question would be presented. The Constitution restricts the Senate's ability to adjourn its session for more than three days without obtaining the consent of the House of Representatives. It might be argued that the Framers did not consider one, two and three day recesses to be constitutionally significant. The DOJ has reiterated this view in subsequent briefs, and more recently during oral argument before the Supreme Court in New Process Steel v. National Labor Relations Board . Specifically, the Deputy Solicitor General, Neil Katyal, stated that "[T]he recess appointment power can work—in a recess. I think our office has opined the recess has to be longer than 3 days." A reviewing court may consider accepting that the Adjournment Clause informs the meaning of "Recess" for purposes of the Recess Appointments Clause. When considering historical practice, courts have stated: "The ... Supreme Court has made clear that considerable weight is to be given to an unbroken practice, which has prevailed since the inception of our nation and was acquiesced in by the Framers of the Constitution ...." (internal citations omitted). While intrasession recess appointments cannot be traced to the founding period, the executive branch appears to have acknowledged some link between the two clauses since the President first began making such appointments. In light of the historical views and acceptance of the executive branch, discussed above, a court may therefore conclude that recess appointments may only be made during intrasession recesses of more three days. As discussed above, it is possible that a court may find that pro forma sessions constitute standard sessions of the Senate such that they could break up a continual intrasession recess into shorter recesses. However, if a court were to determine that a "Recess" for purposes of the Recess Appointments Clause must be more than three days , then the President would not be able to exercise his recess appointment powers where the interpretations of pro forma session resulted in the President making the January 4 appointments during a recess of only three days. However, arguments could also be made that there is no determinative constitutional basis for linking the Adjournment Clause to the Recess Appointments Clause. First, the Adjournment Clause does not use the term "recess," and the Recess Appointment Clause, likewise, does not use the term "adjourn." Second, from a structural perspective, the Adjournment Clause is located in Article I, Section 5 of the Constitution, which sets forth the internal rulemaking authorities of the houses. The Recess Appointments Clause, on the other hand, is located in Article II, Section 2 of the Constitution, which establishes the express authorities of the President. As the two sections do not speak to similar functions or duties of the respective branches, a court may find no basis for referencing a constitutionally required rule of legislative procedure as relevant to the interpretation of a term related to the President's recess appointment powers. Accordingly, a court could define "Recess" for purposes of the Clause in a manner wholly unrelated to the Adjournment Clause. If a "Recess" for purposes of the Clause is not tied to the three-day requirement from the Adjournment Clause, a court may be hesitant to establish a bright-line minimum length of time without a constitutional provision upon which it can rely. As noted previously, the political question doctrine may act as a deterrent to making such a determination. However, the Senate's ability to exercise its advice and consent prerogative may be greatly undermined absent a time requirement because the President arguably would have the authority to make a recess appointment whenever there is any break of the Senate at all, for instance over a weekend. Given this potential, it is possible a court may depend upon descriptive criteria to define a "Recess" for purposes of the Clause, as did a 1905 report of the Senate Committee on the Judiciary. The Senate report, which was issued in response to President Theodore Roosevelt's intersession recess appointments during the 58 th Congress, first stated: "The word 'recess' is one of ordinary, not technical signification, and it is evidently used in the constitutional provision in its common and popular sense." It further states that it was the intention of the Framers that "[a recess] should mean something real, not something imaginary; something actual, not something fictitious." Perhaps most instructive, the report asserts: [Recess] means, in our judgment, in this connection the period of time when the Senate is not sitting in regular or extraordinary session as a branch of the Congress ... ; when its members owe no duty of attendance; when its Chamber is empty; when, because of its absence, it can not [ sic ] receive communications from the President or participate as a body in making appointments. Attorneys General opinions have made statements similar to that of the Senate report. An Attorneys General opinion from 1960 stated: does the word "recess" relate only to a formal termination of the session of the Senate, or does it refer as well to a temporary adjournment of the Senate, protracted enough to prevent that body from performing its functions of advising and consenting to executive nominations? It is my opinion, which finds its support in executive as well as in the legislative and judicial authority, that the latter interpretation is the correct one. Without an explicit standard for a required minimum length of time, for purposes of the Clause, a court might turn to what it means for the Senate to be "absent" in such a way that permits the President to use his recess appointment power. Alternatively, as it would to evaluate pro forma sessions, a court could look at what it means for the Senate to conduct "business" in such a way that prevents the President from using his recess appointment power. However, it may prove difficult for a court to provide meaningful definitions for these terms. The January 2012 OLC opinion makes a similar argument. Without reaching a conclusion on a minimum length of time, the OLC emphasized the practical purpose of the recess appointment power and opined that a "Recess" exists when, "as a practical matter, the Senate is not available to give its advice and consent to executive nominations." If a court were to establish a descriptive meaning of "Recess" for purposes of the Clause, that standard would determine whether the President could rely upon his recess appointment power to make the January 4 appointments. In such case, the length of the recess in which the President made his recess appointments may not be a dispositive factor. As described above, a reviewing court could evaluate the effect pro forma sessions have, or may not have, on a recess from several different perspectives. Given this framework, it may be possible that a court could find the Senate to be "absent," despite its use of pro forma sessions, if it determined that the Senate could not "receive communications from the President or participate as a body in making appointments," in the words of the 1905 Senate report. If a court were to reach this conclusion, then it seems that the President could have the ability to rely upon his recess appointment power to make the January 4 appointments. Alternatively, if a reviewing court were to find that the Senate was indeed able to conduct "business" such that it could take up its "advising and consenting functions [to] executive nominations" by unanimous consent. Under this viewpoint, it seems unlikely that the President could have relied upon his recess appointment power to make the January 4 appointments. A reviewing court may also take into account general separation of powers concerns that may arise from the prolonged use of pro forma sessions. For example, were a court to conclude that pro forma sessions are standard sessions such that they prevent a "Recess" from occurring under the Clause, the Senate may be able to utilize such sessions to repeatedly and consistently block the President from making recess appointments. Such a scenario could result in a complete abrogation of the President's recess appointment power during lengthy intrasession recesses. This scenario may raise constitutional concerns under the separation of powers doctrine. The separation of powers doctrine stands for the proposition that certain political functions must be allocated amongst various governmental branches, so as to avoid domination by any one entity. The doctrine primarily acts to prevent the aggrandizement of a particular branch through the Constitution's structure of checks and balances. However, not all encroachments by one branch upon another violate the separation of powers doctrine—especially in areas where the Constitution envisions shared power between the branches. The Appointments Clause clearly contemplates roles for both the President and the Senate in appointing officers of the United States, whereas the Recess Appointments Clause provides the President with the ability to unilaterally make temporary appointments, but only during the Senate's absence. If the Congress took formal steps to prevent the President from exercising his powers under the Appointments Clause, such action likely would violate the separation of powers doctrine. Likewise, if the Senate took measures, such as the prolonged use of pro forma sessions, to effectively prevent the President's exercise of his authority under the Recess Appointments Clause, such actions could raise similar separation of powers concerns. While there is no uniform jurisprudential approach to evaluating separation of powers cases, the Supreme Court appears to have developed two main analytical frameworks by which it scrutinizes the Constitution's allocation of power. These analytical approaches are referred to as formalism—which emphasizes precise definitional boundaries—and functionalism—which deemphasizes the efficacy of adhering to such precise boundaries, relying instead on the effect of the exercise of power. Although these frameworks share a common concern regarding branch self-aggrandizement, they differ greatly in their views regarding the scope of the separation of powers and the degree to which governmental functions may be intermingled. Under what could be considered a formalist approach, a reviewing court may view the plain text of the Recess Appointments Clause as a purely conditional power. The Constitution has delineated clear boundaries to the President's use of his traditional appointment power as compared to his recess appointment power. Whereas the President may submit a nomination to the Senate for its advice and consent at any time, the "auxiliary" recess appointment power is triggered only upon a specific event—a "Recess of the Senate." Therefore, if pro forma sessions are found to be meaningful for purposes of the Clause, the Senate's procedural mechanism could be viewed as ensuring that the contingency the Founders deemed necessary to trigger the President's recess appointment power simply does not occur. Without the occurrence of a recess, the President's recess appointment power is not activated and therefore cannot be infringed. Under this view, the repeated, consistent, and prolonged use of pro forma sessions to prevent a "Recess" may not be distinguishable from a scenario in which a Senate chooses never to adjourn. The DOJ has acknowledged that "Congress can prevent the President from making any recess appointments by remaining continuously in session and available to receive and act on nominations." Thus, under this analytical framework, the mere fact that the President is consistently barred from using his recess appointment power may not give rise to separation of powers concerns. Under a functionalist approach, a court is more likely to consider whether the consistent and repetitive use of pro forma sessions interferes with the President's ability under the Recess Appointments Clause to maintain the continuity of administrative government. For example, in the context of "Vacancies" for purposes of the Clause, the judicial and executive branches have consistently rejected a narrow and literal interpretation of when a vacancy may exist because of the practical considerations behind the Clause. It was the opinion of the Attorney General in 1832 that the Constitution "was formed for practical purposes, and a construction that defeats the very object of the grant of power cannot be the true one. It was the intention of the [C]onstitution that the offices created by law, and necessary to carry on the operations of the government, should always be full, or at all events, that the vacancy should not be a protracted one." In addition, a court could find that the use of a tactic, which would essentially prohibit the President from effectively using his recess appointment power to "take Care that the Laws be faithfully executed," would be an unconstitutional enhancement of legislative power in relation to the executive branch. Hence, from a functionalist approach, overriding separation of powers concerns may indicate that the Senate's use of pro forma sessions, even if deemed meaningful, could nonetheless "impermissibly undermine" the powers of the President or prevent the President "from accomplishing [his] constitutionally assigned functions." Overall, whether President Obama could rely upon his recess appointment power to make the January 4 appointments is dependent on whether there was a "Recess of the Senate" for purposes of the Recess Appointments Clause. The unique facts of the situation—appointments made between two pro forma sessions—raise significant and unresolved constitutional issues. A reviewing court may turn to the Adjournment Clause to provide a definition of "Recess" for purposes of the Clause, in which case a "Recess" must be longer than three days for the President to exercise his authority. Yet, a reviewing court may also find no basis for linking these Clauses and, alternatively, unless barred by the political question doctrine, could establish a definition of "Recess" by relying upon descriptive criteria. In such case, a "Recess" for purposes of the Clause might hinge on what it means for the Senate to be "absent" or "conducting business" in such a way that either permits or prevents the President from exercising his recess appointment power. Whether a "Recess" within the meaning of the Clause is specifically defined as one that is more than three days or is based on descriptive criteria, it is unclear whether Congress may utilize pro forma sessions to disrupt the duration of an otherwise continual intrasession recess. If pro forma sessions are found not to be meaningful for purposes of the Clause, then the President's recess appointments would likely be considered to have been validly made during a single intrasession recess of at least 20 days. Alternatively, if a reviewing court were to find the Senate's pro forma sessions to be meaningful for purposes of the Clause, then the sessions may be sufficient to prevent a President from making a recess appointment. However, even if these sessions are deemed meaningful such that they would prevent a "Recess" from occurring, prolonged use of pro forma sessions by the legislative branch may raise separation of powers concerns that could compel a court to re-evaluate the contours of each branch's role in the recess appointment context. Assuming, arguendo, that the President's appointment of Richard Cordray is constitutional, questions remain as to whether, and to what extent, the specific statutory language of the Consumer Financial Protection Act (CFP Act) restricts Cordray's powers. To address these questions, this report first provides a general description of the CFPB. It then analyzes the provisions of the CFP Act that provide the Secretary of the Treasury (Secretary) certain powers to perform the functions of the CFPB until a Director is appointed, which is followed by an analysis of the impact that the President's recess appointment may have on both Cordray's and the Secretary's CFPB authorities. The CFPB was established by Title X of the Dodd-Frank Act, the CFP Act. The CFP Act alters the consumer financial protection landscape by largely consolidating regulatory authority and, to a lesser extent, supervisory and enforcement authority in one regulator—the CFPB. It also provides the CFPB the authority to prescribe regulations to implement 18 federal "enumerated consumer laws" that largely were in place prior to Dodd-Frank's enactment, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Section 1011 of the CFP Act provides that the Bureau is to be headed by a single Director, who "shall be appointed by the President, by and with the advice and consent of the Senate." However, section 1066 of the CFP Act provides the Secretary the authority to perform some, but not all, of the Bureau's authorities until a CFPB Director is appointed. CFP Act section 1066 serves as the primary source of the Secretary's interim authority over the Bureau. It states, in relevant part: (a) In General.—The Secretary is authorized to perform the functions of the Bureau under this subtitle [F] until the Director of the Bureau is confirmed by the Senate in accordance with section 1011. The first half of this provision establishes the scope of the Secretary's authority. The second half defines when the Secretary's authority shall terminate. Section 1066 does not authorize the Secretary to exercise the full panoply of the Bureau's powers. Rather, the scope of the Secretary's authority under section 1066 is limited to "the functions of the Bureau under this subtitle [F]...." Generally speaking, subtitle F of the CFP Act transfers certain consumer financial protection functions from seven "transferor agencies" to the Bureau. For clarity, this report refers to the authorities provided under subtitle F that the Secretary may exercise pursuant to section 1066 as "transferred powers" or "transferred authorities." The powers provided to the Bureau pursuant to provisions outside of subtitle F generally are the Bureau's "newly established" powers—that is, the enhanced consumer protection authorities that were not explicitly provided by law to federal regulators before the Dodd-Frank Act. An example of a newly established power is the authority to supervise covered non-depository financial institutions, such as payday lenders and check cashers. Given that the newly established powers are provided for by provisions other than subtitle F, they do not appear to be within the scope of the Secretary's authorities as defined by CFP Act section 1066. The Secretary's authority to exercise the Bureau's transferred powers lasts "until the Director of the Bureau is confirmed by the Senate in accordance with section 1011." Section 1011 sets forth that the Director of the CFPB is to be "appointed by the President, by and with the advice and consent of the Senate." This language in section 1011 is virtually identical to the statutory language used to establish many other advice and consent positions. This standard advice and consent language does not explicitly reference the President's recess appointment powers. However, this language has never been construed by a court to prevent the President from exercising his recess appointment powers, and there are numerous examples in which such positions have been filled by recess appointees without judicial challenge. Had Richard Cordray been nominated by the President and confirmed by the Senate to be the first CFPB Director, it would seem clear that the Secretary's power to exercise the transferred authorities would have terminated, and Cordray would have assumed the full powers of the Director position. The fact that Cordray was recess appointed without being "confirmed by the Senate" may call into question whether, through section 1066, Congress intended to place restrictions on the powers of a recess appointed CFPB Director. There appear to be at least two different ways that a reviewing court could interpret section 1066 with respect to both Cordray's and the Secretary's authorities. Under one interpretation, a reviewing court could find that Cordray holds all of the powers provided to the CFPB—both the transferred authorities previously exercised by the Secretary and the newly established powers. Under a second interpretation, a court could conceivably determine that Cordray assumes only the CFPB's newly established powers, while the Secretary retains the power to exercise the transferred authorities until a Director is actually confirmed by the Senate. Each interpretation is discussed below. Under the first interpretation, a reviewing court may stress that the phrase "until a Director is confirmed by the Senate" must be read in conjunction with the clause that follows: "in accordance with section 1011." As previously mentioned, section 1011 uses the standard statutory language to establish advice and consent positions, and it is generally understood that these positions can be filled pursuant to both of the procedures expressly provided for under the constitution. As a result, a court could interpret the relevant language of section 1066, with its reference to section 1011, as merely an alternative, or equivalent way, of expressing the standard process of appointing advice and consent positions. Had Congress truly intended to only allow a Senate-confirmed Director to exercise the full powers of the position, then a court may find it would not have referenced section 1011. Additionally, construing section 1066 as restricting a recess appointee's authority would run contrary to the generally established principle that, as a constitutional matter, recess appointees possess the same legal authority as Senate-confirmed appointees. A canon of statutory interpretation commonly employed by courts is to presume that Congress is aware of established law and intends for new statutes to be consistent with established interpretations of law absent a clear indication to the contrary. A court may reason that had Congress intended to take the unusual step of restricting the authority of a recess appointed CFPB Director, it would have expressed that intention more clearly. This could have been accomplished through an explicit delineation of the powers to be held by an initial recess appointee, on the one hand, and by a Senate-confirmed appointee on the other. In sum, a court could interpret section 1066 as a legislative delegation to the Secretary to exercise certain CFPB functions until a Director can be appointed pursuant to either of the standard methods that are expressly provided by the Constitution: by the advice and consent of the Senate or by a recess appointment. Under this interpretation, a Senate-confirmed Director or a recess appointed Director, such as Cordray, would assume the full authorities established by the CFP Act—both the newly established and transferred powers—and the Secretary's interim authority to exercise the Bureau's transferred powers would terminate. Under the second interpretation, it could be argued that the statutory language may be construed as stipulating that the Secretary's transferred authorities terminate, and the Director's full authorities are assumed, only upon the appointment of a Senate-confirmed Director. This construction would turn on a strict interpretation of the language "until the Director of the Bureau is confirmed by the Senate." To reach this conclusion, proponents likely would rely on two common canons of statutory interpretation. The first is the rule of surplusage: which provides that courts should "give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed." Under this reading, it could be argued that Congress intended the language "until confirmed by the Senate" to have a different meaning than, and to be read distinctly from, that of section 1011. To further buttress this position, a one could apply a second canon that "where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." It could be argued that if Congress intended to merely reiterate the standard advice and consent language of section 1011, then it could have used the very same section 1011 phrasing in drafting section 1066. In other words, instead of using the phrase "until confirmed by the Senate," in section 1066, the drafters could have used the phrase "shall be appointed," that is used in section 1011 (and in many other places within the U.S. Code). Relying on this premise, the clearest understanding of section 1066 would be that the Secretary retains his authority to exercise the transferred powers until the Senate takes steps to confirm a CFPB Director. By extension, a recess appointed Director, such as Cordray, could only directly exercise the Bureau's newly established powers. Interpretation two may raise a number of potential interpretive problems. First, it would seem to render meaningless the clause "in accordance with section 1011," given the generally established understanding of the statutory language of section 1011. Additionally, under the second interpretation, section 1066 would impose statutory restrictions on the authorities that may be exercised by a recess appointee that would not apply to a Senate-confirmed appointee. This disparate treatment of recess appointees and Senate-confirmed appointees could be viewed as interfering with the President's constitutionally provided recess appointment power. Such an interpretation would likely raise separation of powers issues that a court may want to avoid. If interpretation two raises constitutional concerns that could be avoided, it is unlikely that a reviewing court will adopt that interpretation. The Supreme Court has stated that "where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress." Therefore, "if a case can be decided upon two grounds, one involving a constitutional question, the other a question of statutory construction or general law, the Court will decide only the latter." Under this doctrine of "constitutional avoidance" a reviewing court would likely resolve the ambiguities of section 1066 so as to avoid a construction that raises constitutional questions. Therefore, when presented with both possible interpretations of section 1066, a reviewing court may take into consideration that a statutory restriction on the authorities of a recess appointee, as would be imposed under interpretation two, would likely raise constitutional concerns. An interpretation of section 1066 that limits a recess appointee's ability to exercise the full authorities delegated to his office could be viewed as interfering with the President's express constitutional authority to "fill up all Vacancies that may happen during the Recess of the Senate…" However, not all legislative encroachments on presidential authority constitute a violation of separation of powers. Our constitutional structure "by no means contemplates a total separation of each of [the] three essential branches of government." Indeed, the Founding Fathers recognized that a "hermetic sealing off" of the various branches would "preclude establishment of a nation capable of governing itself effectively." The constitutionality of congressional restrictions on the authority exercised by a recess appointee—like those that would be imposed by interpretation two of section 1066—would be a question of first impression by the courts. However, if one were to interpret section 1066 as preventing Cordray from exercising the full powers of his office, then it would have to be determined whether the provision actually limits the President's constitutional authority to make recess appointments, and if so, whether that limitation is sufficient to constitute an unconstitutional legislative infringement on executive power. It is not clear whether an interpretation of section 1066 that would prevent a recess appointee from exercising the full powers of his office would actually restrict the President's authority to make recess appointments. The provision would not directly limit whom the President may appoint or how and when the President may make such an appointment. Instead, the provision purports to limit the authorities the Director may exercise, in the absence of Senate confirmation, after a recess appointment is made. Thus, the provision would arguably act to restrict the Director, rather than the President. Viewing the provision in this manner, one could characterize section 1066 as simply defining the contours and powers of the Office of the Director of the CFPB. Congress has broad authority to create, structure, and organize executive branch offices, agencies, and departments. Additionally, it is Congress, upon creating an office, that delegates to the officer the authority to act. Congress is free to limit, restrict, or condition how that delegated authority may be exercised, and an officer may not act in contravention to, or in excess of, the statutory authority provided to him by Congress. Therefore, it could be argued that, in enacting section 1066, Congress structured the office and limited the delegation of authority such that the Director could only exercise the transferred powers once "confirmed by the Senate." If one accepts the view that section 1066 represents a restricted delegation of authority to the Director, rather than a limitation on the President's ability to make recess appointments, then it seems unlikely that interpretation two would be determined to raise concerns under the separation of powers doctrine. Alternatively, interpretation two could be viewed as an indirect interference with the President's recess appointment power in that it restricts the authorities that may be exercised by a recess appointee—thereby designating him as having lesser constitutional standing as compared to that of a Senate-confirmed officer. Lower federal courts, however, have made clear that recess appointees possess the same constitutional authority as a Senate-confirmed appointee. History does not "suggest that the Recess Appointments Clause was designed as some sort of extraordinary and lesser method of appointment." The Court of Appeals for the Eleventh Circuit, for instance, has stated that "during the limited term in which a recess appointee serves, the appointee is afforded the full extent of authority commensurate with that office." The executive branch also has taken the position that Congress may not intrude on the President's power by "granting less power to a recess appointee than a Senate-confirmed occupant of the office would exercise." Thus, if section 1066 is interpreted to permit a Senate-confirmed appointee to exercise the full authority of the office, while forbidding a recess appointee from exercising those same powers, it may act to limit the effectiveness of presidential recess appointments by preventing the President from meaningfully filling an existing vacancy in the manner envisioned by the Recess Appointments Clause. Even accepting that interpretation two would amount to an indirect limitation on the President's recess appointment power, the provision cannot be characterized as a total prohibition on those appointments. However, the provision may nonetheless infringe on the President's constitutional authority to such a degree that it raises significant constitutional questions under the separation of powers doctrine. Any discussion of the division of authority between Congress and the President in the context of the Recess Appointments Clause should note that a series of lower federal court cases considering challenges to the President's use of his recess appointment power have repeatedly rejected attempts to restrict the President's constitutional authority to make such appointments. These cases also suggest that, in considering constitutional questions regarding recess appointments, reviewing courts should give deference to the President as he plays the "primary" role in the appointment process. In Evans v. Stephens , the appeals court noted that "when the President is acting under the color of express authority of the United States Constitution, we start with a presumption that his acts are constitutional." The Staebler court also noted this principle of deference to the President, stating that where there is an "ambiguity ... it is appropriate to consider that the President was intended by the framers of the Constitution to possess the active, initiating, and preferred role with respect to the appointment of officers of the United States." With this background in mind, a constitutional analysis would consider whether an interpretation that section 1066 restricts the powers exercised by a recess appointee would result in an infringement on the President's power sufficient to violate the separation of powers doctrine. Often the outcome of a challenge will depend on the nature of the infringement, the power that is being infringed, and the extent to which the court views that power as essential to the functioning of the branch. As noted previously, while there is no uniform jurisprudential approach to evaluating separation of powers cases, the Supreme Court appears to have developed two main analytical frameworks: formalism—which emphasizes precise definitional boundaries—and functionalism—which deemphasizes the efficacy of adhering to such precise boundaries, relying instead on the effect of the exercise of power. A formalist approach is more likely to reach a conclusion that a congressional restriction similar to interpretation two of section 1066 violates the separation of powers doctrine than a more flexible functionalist approach. Under a formalist approach, the President's recess appointment authority would likely be viewed as deriving from a clear and exclusive constitutional commitment to the President. Therefore, any congressional attempt to limit the President's exercise of his recess appointment power could be considered an unconstitutional legislative encroachment. Under this reasoning, a statutory provision that permits a Senate-confirmed appointee to exercise powers denied to a recess appointee may be characterized as intruding on the President's authority to make recess appointments, thus constituting an unconstitutional limitation on an express presidential power. A similar analysis has been applied to other expressly enumerated executive powers. For example, with respect to the President's authority to "grant Reprieves and Pardons for Offenses against the United States," the Supreme Court has stated that "[t]his power of the President is not subject to legislative control. Congress can neither limit the effect of his pardon, nor exclude from its exercise any class of offenders." Likewise, the Court has held that the authority to negotiate treaties is exclusive to the President. Although the President completes treaties with the advice and consent of the Senate, "[i]nto the field of negotiation the Senate cannot intrude; and Congress itself is powerless to invade it." The analogy to the President's authority to negotiate treaties may be especially apt given that the treaty context involves shared authority between the Senate and the President. With respect to the treaty making process, the Court has been willing to draw distinct lines delineating the roles of each branch. One could argue that the same may be true with respect to recess appointments. Although the Senate's participation was clearly envisioned under the traditional Appointments Clause, the Recess Appointments Clause arguably operates as a "separate" and independent authority of the President from which the Senate is excluded. Accordingly, significant separation of powers concerns could arise under a formalist approach to evaluating congressional restrictions on powers exercised by a recess appointee. Separation of powers concerns associated with a congressional restriction on the powers exercised by a recess appointee, however, may be less significant under a functionalist approach. The Supreme Court has recognized very few presidential powers that are entirely excluded from congressional influence or interference. The President's recess appointment power may be viewed as one in which reasonable congressional intrusions are permitted as long as Congress does not prevent the President "from accomplishing [his] constitutionally assigned functions." The analysis may be similar to that which has been applied to the President's traditional appointment and removal powers. Although the Constitution expressly provides the President power to appoint officers of the United States, the Court has upheld certain statutory constructs that impact the President's traditional appointment powers. While Congress may not vest the authority to appoint officers in itself, Congress may prescribe reasonable and relevant qualifications along with other rules of eligibility for appointees. Likewise, although the Court has held that the President enjoys the implied constitutional power to oversee executive officers through removal, that power is not free from reasonable congressional regulation. Application of a functionalist analysis would require a consideration of whether section 1066 has the effect of "impermissibly undermin[ing]" the Presidents ability to exercise a "core function." Under such an approach, a restriction on the powers available to a recess appointee, rather than a restriction on the recess appointment itself, may not excessively interfere with the President's ability to fill vacancies. Accordingly, separation of powers concerns could be regarded as less significant under a functionalist approach to congressional limitations on the President's recess appointment power. Although it is unclear whether interpreting section 1066 in a manner that restricts the authorities exercised by a recess appointee—but not a Senate-confirmed appointee—would violate the separation of powers doctrine, the foregoing analysis suggests that such an interpretation would at least raise constitutional concerns. Presented with two "reasonably susceptible interpretations"—one that is consistent with historical practice, the other that may lead to a constitutional conflict—the doctrine of "constitutional avoidance" indicates a substantial possibility that a reviewing court would adopt the construction of section 1066 that raises no constitutional difficulties. Therefore, it seems unlikely that a court would adopt interpretation two and give effect to section 1066 in a manner that prevents a recess appointed director from exercising the transferred powers. In addition, interpretation two would arguably represent a unique and novel restriction on a longstanding presidential power. Without a clear statement of legislative intent, which section 1066 lacks, a court may be disinclined to interpret an ambiguous statutory provision in a manner that may significantly alter the division of power between the branches. Accordingly, it seems unlikely that a reviewing court would interpret section 1066 in a manner that restricts the authorities that may be exercised by a recess appointee, and therefore, if Cordray's appointment was valid, he appears likely to be free to exercise the full authorities of his office. Furthermore, it should be noted that even if a court were to construe section 1066 under the second interpretation, the statutory limitations on Cordray's ability to exercise the full powers of the CFPB Director could be circumvented simply by the Secretary delegating the transferred powers to Cordray. In other words, if a court agreed with this interpretation, Cordray could exercise the newly established powers pursuant to his recess appointment and could exercise the transferred powers upon a formal delegation from the Secretary. With the legal uncertainty surrounding the President's recess appointments of Cordray, Flynn, Block, and Griffin Jr., it seems prudent to review how decisions made and actions performed by the CFPB and NLRB under the direction of these individuals would be treated if a court determined that their appointments were unconstitutional. The de facto officer doctrine "confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person's appointment or election to office is deficient." Therefore, even if a reviewing court were to invalidate the appointment of an officer, the de facto officer doctrine could be applied to limit the remedies available to the plaintiffs. The purpose of the doctrine is to maintain stability, prevent a disruption of the status quo caused by the overturning of accepted decisions, and facilitate the orderly functioning of the government despite technical defects. The Supreme Court, however, has recognized that the doctrine is applied most often in cases where an appointment is challenged based on a "merely technical" statutory defect. In cases that hinge on more than mere technicalities, such as cases involving a "challenge to the constitutional validity" of an appointment or a statutory challenge that "embodies a strong policy concerning the proper administration of judicial business," courts have declined to apply the doctrine. Additionally, several circuit courts have explicitly rejected application of the doctrine when a constitutional challenge is presented. It seems unlikely that a court would choose to apply the de facto officer doctrine in a case challenging the CFPB and NLRB recess appointments. Any challenge to the recess appointments will likely raise substantial constitutional questions based on issues of separation of powers and the interpretation of the Recess Appointments Clause. Therefore, it appears this case would fall under the Court's statement in Ryder v. United States , that a "timely challenge to the constitutional validity" of an appointment warrants a "decision on the merits of the question and whatever relief may be appropriate if a violation indeed occurred." This principle was exemplified in Buckley v. Valeo , where plaintiffs successfully argued that the appointment of four members of the Federal Election Commission by Congress, rather than the President, violated the Appointments Clause. The Court did not explicitly apply the de facto officer doctrine, since it both invalidated the appointments and granted the plaintiffs their requested declaratory and injunctive relief. However, even without relying on the de facto officer doctrine, the Court still "summarily" held that the Commission's past actions remained valid and did not provide further explanation. More recently, following a finding that the NLRB lacked authority to issue decisions with only two Board members, the Court in New Process Steel v. NLRB granted the plaintiff relief by vacating and remanding its adjudication to the NLRB. In New Process Steel , the Court did not even address the continued validity or possible precedential value of the decisions made by the two-member Board. Although the Court's statement in Ryder means a plaintiff likely may be granted relief if a court invalidated the CFPB and NLRB appointees, the future consequences of such an invalidation remain uncertain. The unique facts underlying the President's January 4, 2012, recess appointments raise a number of unresolved constitutional questions regarding the scope of the Recess Appointments Clause. However, the Clause itself contains ambiguities, and with a lack of judicial precedent that may otherwise elucidate the provision, it is difficult to predict how a reviewing court would define the contours of the President's recess appointment authority. If the President's recess appointments are challenged, it appears the most likely plaintiffs to satisfy the court's standing requirements would be a private individual or association who, following the appointments, has suffered an injury as a result of some discrete action taken by the CFPB or NLRB. Were the court to proceed to the merits of the challenge, the primary question presented would likely be whether the President made the January 4 recess appointments "during a recess of the Senate." That determination may hinge on whether the Senate's pro forma sessions were adequate to interrupt an otherwise continuous recess. Although there are several approaches a court could take in evaluating the impact of the sessions, whether the President is constitutionally authorized to make a recess appointment would also depend on how a court chooses to define a "Recess" for purposes of the Recess Appointments Clause. Aspects of both of these determinations, which appear to involve questions of separation of powers and the internal proceedings of the Senate, may potentially be deemed to involve political questions inappropriate for judicial review and better resolved by the President and Congress. Finally, even if the recess appointments are considered constitutionally valid, it appears likely that questions may be raised as to Director Cordray's authority. However, given the potential constitutional concerns that could be associated with an interpretation of the CFP Act that restricts the authorities delegated to a recess appointee as opposed to a Senate-confirmed appointee, it is likely that a reviewing court would avoid a construction that prevents Cordray from exercising the full authorities of his office.

The U.S. Constitution establishes two methods by which Presidents may appoint officers of the United States: either with the advice and consent of the Senate, or unilaterally "during the Recess of the Senate." These two constitutional provisions have long served as sources of political tension between Presidents and Congresses, and the same has held true since President Obama took office. At the end of the first session of the 112th Congress, the Senate had not acted upon the nominations of the Director to the recently established Bureau of Consumer Financial Protection (CFPB or Bureau) or of members to the National Labor Relations Board (NLRB). On December 17, 2011, the Senate adopted a unanimous consent agreement that established a series of "pro forma" sessions to occur from December 20, 2011, until January 23, 2012, with brief recesses in between. The unanimous consent agreement established that "no business" would be conducted during the pro forma sessions and that the second session would begin at 12:00 p.m., January 3, 2012. On January 4, 2012, despite the periodic pro forma sessions of the Senate, the President, asserting his Recess Appointments Clause powers, announced his intent to appoint Richard Cordray to be Director of the CFPB and Terrence F. Flynn, Sharon Block, and Richard F. Griffin Jr. to be Members of the NLRB. The unique facts underlying the President's January 4, 2012, recess appointments raise a number of unresolved constitutional questions regarding the scope of the Recess Appointments Clause. However, the Clause itself contains ambiguities, and with a lack of judicial precedent that may otherwise elucidate the provision, it is difficult to predict how a reviewing court would define the contours of the President's recess appointment authority. If the President's recess appointments are challenged, it appears the most likely plaintiffs to satisfy the court's standing requirements would be a private individual or association who, following the appointments, has suffered an injury as a result of some discrete action taken by the CFPB or NLRB. Were the court to proceed to the merits of the challenge, the primary question presented would likely be whether the President made the January 4 recess appointments "during a recess of the Senate." This issue, however, appears to involve questions of separation of powers and the internal proceedings of the Senate, and may potentially be deemed to involve political questions inappropriate for judicial review and better resolved by the President and Congress. Finally, even if the recess appointments are considered constitutionally valid, it appears likely that other questions may be raised as to Director Cordray's authority. This report analyzes the legal issues associated with the President's asserted exercise of his Recess Appointments Clause power on January 4, 2012. The report begins with a general legal overview of the Recess Appointments Clause. This is followed by an analysis of two legal principles, standing and the political question doctrine, which may impede a reviewing court from reaching the merits of a potential legal challenge to the appointments. The examination of these justiciability issues is followed by an analysis of the constitutional validity of the appointments; potential statutory restrictions on a recess appointee's authority to exercise the powers of the CFPB; and how actions taken by the recess appointees could be impacted by a court ruling that the appointments are unlawful.

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Federal immigration laws set forth procedures governing the exclusion and removal of non-U.S. nationals (aliens) who do not meet specified criteria regarding their entry or presence within the United States. Typically, aliens within the United States may not be removed without due process. Commensurate with these constitutional protections, the Immigration and Nationality Act (INA) generally affords an alien whose removal is sought with certain procedural guarantees, including the right to written notice of the charge of removability, to seek counsel, to appear at a hearing before an immigration judge (IJ), to present evidence, to appeal an adverse decision to the Board of Immigration Appeals (BIA), and to seek judicial review. Congress, however, has broad authority over the admission of aliens seeking to enter the United States. The Supreme Court has repeatedly held that the government may exclude an alien seeking to enter this country without affording him the traditional due process protections that otherwise govern formal removal proceedings; instead, an alien seeking initial entry is entitled only to those procedural protections that Congress expressly authorized. Consistent with this broad authority, Section 235(b)(1) of the INA provides for the expedited removal of arriving aliens who do not have valid entry documents or have attempted to gain their admission by fraud or misrepresentation. Under this streamlined removal procedure, which Congress established through the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA) of 1996, such aliens may be summarily removed without a hearing or further review. In limited circumstances, however, an alien subject to expedited removal may be entitled to certain procedural protections before he may be removed from the United States. For example, an alien who expresses a fear of persecution may obtain administrative review of his claim and, if the review determines that his fear is credible, the alien will be placed in "formal" removal proceedings where he can pursue asylum and related protections. Additionally, an alien may seek administrative review of a claim that he is a U.S. citizen, lawful permanent resident (LPR), admitted refugee, or asylee. Unaccompanied alien children also are not subject to expedited removal. In addition to providing for expedited removal of certain arriving aliens, INA Section 235(b)(1) also confers the Secretary of the Department of Homeland Security (DHS) with the ability to expand the use of expedited removal to aliens present in the United States without being admitted or paroled if they have been in the country less than two years and do not have valid entry documents or have attempted to gain their admission by fraud or misrepresentation. In practice, the government has employed expedited removal only to (1) arriving aliens; (2) aliens who arrived in the United States by sea within the last two years, who have not been admitted or paroled by immigration authorities; and (3) aliens found in the United States within 100 miles of the border within 14 days of entering the country, who have not been admitted or paroled by immigration authorities. Nevertheless, expedited removal is a major component of immigration enforcement, and in recent years, it has been one of the most regularly employed means by which immigration authorities remove persons from the United States. Furthermore, in January 2017, President Trump issued an executive order directing DHS to apply expedited removal within the broader limitations of the statute. To date, however, DHS has not yet implemented this policy. This report provides an overview of the statutory and regulatory framework that governs expedited removal under INA Section 235(b)(1). The report also highlights the exceptions to expedited removal, including provisions that permit an alien to seek review of an asylum claim before he may be removed. Finally, the report addresses the scope of judicial review of an expedited removal order, some of the legal challenges that have been raised to the expedited removal process, and briefly considers potential legal issues that may arise if expedited removal were expanded to cover additional categories of aliens present in the United States. A glossary of some terms used frequently throughout this report can be found in Appendix A . The Supreme Court has long recognized the federal government's authority "to expel or exclude aliens" from the United States. The Court has described this authority as a "fundamental act of sovereignty" that stems not only from Congress's legislative power, but also from "the executive power to control the foreign affairs of the nation." The Court also has repeatedly recognized that an alien's admission into the United States is a privilege, but the alien lacks a vested right to be admitted into the country. Guided by these principles, the Supreme Court has held that the government's decision to exclude an alien from entering the United States generally lies beyond the scope of judicial review. Moreover, the Court has determined, "the decisions of executive or administrative officers, acting within powers expressly conferred by [C]ongress, are due process of law" for aliens seeking to enter this country. Thus, the government's decision to deny entry is often deemed "final and conclusive," and immigration officials are fully "entrusted with the duty of specifying the procedures" for implementing that authority. Initially, the Supreme Court held that the government's broad authority covered not only the expulsion of foreign nationals seeking to enter the United States, but also aliens who were already within the territorial boundaries of this country. The Court explained that "[t]he right of a nation to expel or deport foreigners who have not been naturalized, or taken any steps towards becoming citizens of the country, rests upon the same grounds, and is as absolute and unqualified, as the right to prohibit and prevent their entrance into the country." Gradually, the Supreme Court modified its position regarding the reach of the government's authority. For example, the Court determined that lawfully admitted aliens were entitled to Fifth Amendment due process protections in formal removal proceedings. The Court explained that "'once an alien lawfully enters and resides in this country he becomes invested with the rights guaranteed by the Constitution to all people within our borders.'" In these circumstances, the alien is "entitled to notice of the nature of the charge and a hearing at least before an executive or administrative tribunal." The Supreme Court eventually went further and declared that all aliens who have entered the United States—including those who entered unlawfully—may not be removed without due process. The Court declared that aliens physically present in the United States, regardless of their legal status, are recognized as "persons" guaranteed due process of law by the Fifth and Fourteenth Amendments. Consequently, the Court reasoned, "[e]ven one whose presence in this country is unlawful, involuntary, or transitory is entitled to that constitutional protection." Although the Supreme Court has afforded due process protections to aliens physically present in the United States, the Court has consistently held that aliens seeking to enter the country may not avail themselves of those same protections. The Court has reasoned that, although "aliens who have once passed through our gates, even illegally, may be expelled only after proceedings conforming to traditional standards of fairness encompassed in due process of law," an alien "on the threshold of initial entry stands on a different footing" because, theoretically, he is outside of the geographic boundaries of the United States, and thus beyond the scope of constitutional protection. This distinction, known as the "entry fiction" doctrine, allows courts to treat an alien seeking admission as though he had never entered the country, even if he is, technically, physically within U.S. territory, such as at a border checkpoint or airport. In those circumstances, the alien is legally considered to be "standing on the threshold of entry," and outside the territorial jurisdiction of the United States. By contrast, once an alien "enters" the country, "the legal circumstance changes," and he may become subject to constitutional rights and protections. The Supreme Court has applied this principle not only with respect to aliens seeking entry into the United States, but also to aliens seeking entry who are detained within the country's borders pending determinations of their admissibility. For example, in United States ex rel. Knauff v. Shaughnessy , the German wife of a U.S. citizen challenged her exclusion without a hearing under the War Brides Act. The German national was detained at Ellis Island during her proceedings, and, therefore, technically within U.S. territory. Nevertheless, the Supreme Court held that the government had the "inherent executive power" to deny her admission, and that "[w]hatever the procedure authorized by Congress is, it is due process as far as an alien denied entry is concerned." Similarly, in Shaughnessy v. United States ex rel. Mezei , an alien detained on Ellis Island for more than 21 months argued that the government's decision to deny admission without a hearing violated due process. Citing "the power to expel or exclude aliens as a fundamental sovereign attribute exercised by the Government's political departments," the Court determined that the Executive was authorized to deny entry without a hearing, and that the decision was not subject to judicial review. Further, the Court held, although the alien had "temporary harborage" inside the United States pending his exclusion proceedings, he had not effected an "entry" for purposes of immigration law, and could be "treated as if stopped at the border." Therefore, existing Supreme Court jurisprudence recognizes that the federal government has broad plenary power over the admission and exclusion of aliens seeking to enter the United States, and may deny admission without affording due process protections such as the right to a hearing. Aliens seeking entry are thus generally entitled only to those protections that Congress explicitly authorized. Conversely, an alien who has entered the United States is generally entitled to due process protections prior to removal. Under the "entry fiction" doctrine, however, aliens who are detained within the United States pending a determination of their admissibility may be "treated, for constitutional purposes" as though they have not entered this country. The extent to which the entry fiction doctrine may apply to aliens who are already within the United States remains an unresolved question. While some courts have held that aliens apprehended near the U.S. border may be treated as though they had not effected an entry into the country, the degree to which this principle may be applied to aliens within the interior of the United States is unclear. Congress established the expedited removal process when it enacted IIRIRA in 1996. Before IIRIRA, federal immigration law distinguished between arriving aliens and aliens who had entered the United States. Based on this distinction, there were two types of proceedings to determine whether an alien should be removed: exclusion proceedings, which were "the usual means of proceeding against an alien outside the United States seeking admission," and deportation proceedings, which applied to aliens "already physically in the United States." In both types of proceedings, however, the alien had statutory rights to counsel, a hearing, and administrative and judicial review before he could be removed from the United States. Confronted with what it perceived as mounting levels of unlawful migration, Congress enacted IIRIRA in 1996 and made sweeping changes to the federal immigration laws. One major shift was to replace the exclusion/deportation framework, which turned on whether an alien had physically entered the United States, with a new framework that turned on whether an alien had been lawfully admitted into the country by immigration authorities. Under the new framework, aliens who were lawfully admitted could be removed from the United States if they fell under the grounds of deportability listed in INA Section 237(a). On the other hand, aliens who had not been admitted into the United States—whether first arriving to the United States or having entered the country without being lawfully admitted—could be denied admission and removed from the United States if they fell under the grounds of inadmissibility listed in INA Section 212(a). Secondly, IIRIRA removed the distinction between deportation and exclusion proceedings. Instead, it established a standard, "formal" removal proceeding under INA Section 240 applicable to aliens regardless of whether they are charged with being inadmissible or deportable. These formal removal proceedings generally entail the same statutory rights and protections that previously governed deportation proceedings. IIRIRA also created a new, expedited removal process generally required for certain arriving aliens. This expedited removal process, codified in INA Section 235, does not apply to all arriving aliens who are believed inadmissible, but only to those who are inadmissible because they lack valid entry documents or have attempted to procure their admission through fraud or misrepresentation. Under this new procedure, the federal government could summarily remove these aliens without a hearing or further review unless they expressed an intent to apply for asylum or a fear of persecution. In a separate provision, Congress gave the Attorney General (now the Secretary of DHS) "the sole and unreviewable discretion" to apply this procedure to "certain other aliens" inadmissible on the same grounds if (1) they were not admitted or paroled into the United States, and (2) they could not establish that they have been physically present in the United States continuously for two years at the time of their apprehension. Table 1 illustrates the differences between expedited removal proceedings, pre-IIRIRA deportation/exclusion proceedings, and post-IIRIRA formal removal proceedings. Following IIRIRA, the former Immigration and Naturalization Service (INS) initially applied the new expedited removal authority to circumstances mandated by the governing statute (i.e., to arriving aliens), and not to other circumstances where the Attorney General was authorized (but not required) to exercise such authority. In addition, because the expedited removal provisions exempted aliens from countries in the Western Hemisphere whose governments did not have full diplomatic relations with the United States, and who arrived by aircraft at a port of entry, Cuban nationals who arrived in the United States by aircraft were not subject to expedited removal. While the expedited removal statute governs the removal of certain aliens who are "arriving" in the United States, it does not define this group. When promulgating regulations implementing the new expedited removal authority, the INS defined the term "arriving alien" to include (1) aliens seeking admission into the United States at a port of entry, (2) aliens seeking transit through the United States at a port of entry, and (3) aliens who have been interdicted at sea and brought into the United States "by any means, whether or not to a designated port-of-entry, and regardless of the means of transport." Over the years, however, the INS and its successor agency DHS gradually expanded the implementation of expedited removal authority to cover (1) aliens who entered the United States by sea without being admitted or paroled by immigration authorities, and who have been in the country less than two years; (2) aliens apprehended within 100 miles of the U.S. border within 14 days of entering the country, and who have not been admitted or paroled by immigration authorities; and, (3) ultimately, Cuban nationals who met the criteria for expedited removal. But despite these expansions, the agency has never employed expedited removal to the full degree authorized by INA Section 235(b)(1), which would include both arriving aliens and, potentially, all aliens physically present in the United States without being admitted or paroled who have been in the country less than two years and who fall under the expedited removal statute's specified grounds of inadmissibility. Table 2 shows how the INS and DHS implemented their expedited removal authority since 1997. (A more comprehensive discussion about the exercise of expedited removal authority over time can be found in Appendix B .) As noted above, expedited removal authority currently is exercised with regard to the following three overarching categories of aliens: 1. Arriving aliens seeking entry into the United States at a designated port of entry. 2. Aliens who arrived in the United States by sea, who have not been admitted or paroled, and who have been in this country for less than two years. 3. Aliens who are encountered within 100 miles of the border, who have not been admitted or paroled, and who have been in the United States for less than 14 days. Aliens in these categories are subject to expedited removal only if they fall under the grounds of inadmissibility found in INA Section 212(a)(6)(C) and (a)(7). These grounds of inadmissibility generally apply to aliens who lack valid entry documents or who attempt to procure admission through fraud or misrepresentation. More specifically, the two inadmissibility grounds apply to the following: An alien who is not in possession of (1) a valid unexpired immigrant visa, reentry permit, border crossing identification card, or other valid entry document; and (2) a valid unexpired passport, or other suitable travel document, or document of identity and nationality if required under applicable regulations. This provision applies, for example, to aliens who arrive with proper documents for entry into the United States for certain purposes, but who intend to enter the United States for reasons that require different authorizing documents. An alien whose immigrant visa has been issued in violation of the provisions regarding the numerical limitations on the distribution of immigrant visas. An alien whose passport will expire within six months after his authorized period of stay in the United States. An alien who is not in possession of a valid nonimmigrant visa or border crossing identification card at the time of his application for admission. An alien who seeks to procure (or has attempted to procure or has procured) a visa, other documentation, or admission into the United States or other immigration benefit through fraud or willful misrepresentation (e.g., an alien presenting a photo-substituted passport, or providing false information on a visa application). An alien who falsely represents (or has falsely represented) himself to be a U.S. citizen. Importantly, expedited removal is available in cases where the alien is charged only with being inadmissible under these grounds. If an immigration officer determines that an alien is inadmissible on additional grounds (e.g., because he has engaged in specified criminal activity), then the alien will be placed in formal removal proceedings under INA Section 240. INA Section 235(b)(1) instructs that an immigration officer must inspect an alien and determine whether he falls within the category of inadmissible aliens subject to expedited removal. If the alien meets the criteria for expedited removal, the alien will be ordered removed without a hearing or further review, unless the alien indicates an intent to apply for asylum or a fear of persecution. The alien will also be barred from reentering the United States for five years, with lengthier or even permanent bars to admission if special factors are present. While expedited removal is a more streamlined process than formal removal proceedings, it nonetheless can involve a number of determinations by multiple agencies and agency subcomponents—particularly in cases where an alien intends to apply for asylum or expresses a more generalized fear of persecution that could potentially render the alien eligible for relief from removal. U.S. Customs and Border Protection (CBP), the DHS component with primary responsibility for immigration enforcement along the border and at designated ports of entry, typically takes the lead role in the expedited removal process, from the initial inspection or apprehension of the alien through the issuance of an order of expedited removal. U.S. Immigration and Customs Enforcement (ICE), the DHS component primarily responsible for interior enforcement and removal, also regularly plays a significant role, such as when the alien seeks asylum or expresses a fear of persecution, and ICE takes responsibility for the alien's detention and removal. Another DHS component, U.S. Citizenship and Immigration Services (USCIS), is responsible for interviewing aliens who have claimed a fear of persecution and assesses whether such claims are credible. If such claims are not deemed credible, the agency may issue an expedited removal order. Finally, IJs within the Department of Justice's Executive Office for Immigration Review may become involved in the expedited removal process when either (1) an IJ is asked to review a USCIS determination that an alien does not have a credible fear of persecution or (2) in the event that an alien is determined to have a credible fear, the alien is placed in formal removal proceedings before an IJ where the alien's claim for relief can be adjudicated. The following sections provide further explanation of the expedited removal process. An alien arriving in the United States or an alien present in the United States who has not been admitted is considered an "applicant for admission" who is subject to inspection by an immigration officer. At a designated port of entry, the initial phase of the inspection process is referred to as "primary inspection." During this stage, "the immigration officer literally has only a few seconds to examine documents, run basic lookout queries, and ask pertinent questions to determine admissibility and issue relevant entry documents." If the immigration officer finds discrepancies in the alien's documents or statements, "or if there are any other problems, questions, or suspicions that cannot be resolved within the exceedingly brief period allowed for primary inspection," the alien will be referred to "secondary inspection" for "a more thorough inquiry." During secondary inspection, the immigration officer often will not know if the alien is subject to expedited removal until the officer has sufficiently questioned the alien to assess whether the alien is inadmissible. In order to make that determination, the immigration officer may obtain statements under oath about the purpose and intention of the applicant in coming to the United States. DHS regulations provide that "[i]nterpretative assistance shall be used if necessary to communicate with the alien." At other locations (e.g., in cases where the alien is found between ports of entry), an alien who is apprehended by immigration authorities is typically taken to a U.S. Border Patrol station for inspection and processing to determine whether the alien is inadmissible and subject to expedited removal. DHS regulations provide that, if an immigration officer determines that an alien is inadmissible and subject to expedited removal, the officer must prepare a Record of Sworn Statement in Proceedings (Form I-867), which contains the facts of the case and any statements made by the alien. The regulations require the immigration officer to record the alien's statements in response to questions concerning his identity, nationality, and inadmissibility. Following questioning, the alien must be given an opportunity to read (or have read to him) the information in the Form I-867 and any statements he made during the inspection. Further, the alien must sign and initial each page of the Form I-867 as well as any corrections made. DHS regulations also require the immigration officer to prepare a Notice and Order of Expedited Removal (Form I-860) containing the charges of inadmissibility against the alien, and the alien must have an opportunity to respond to the charges. In addition, the regulations instruct that, in cases where an alien is suspected of being present in the United States without being admitted or paroled, the alien must be given an opportunity to show that he was admitted or paroled into the United States after inspection at a port of entry. As previously noted, an alien placed in expedited removal may be charged with being inadmissible only under the grounds involving a lack of entry documents or attempting to procure admission through fraud or misrepresentation. If the immigration officer determines that the alien is inadmissible on other grounds, and DHS intends to pursue additional charges, the alien will be placed in formal removal proceedings under INA Section 240, and the agency may lodge the additional charges during those proceedings. An expedited order of removal becomes final after supervisory review. At that point, agency regulations permit the immigration officer to serve the alien with Form I-860 and obtain the alien's signature acknowledging receipt. During this process, the alien is not entitled to an administrative hearing or appeal of the expedited removal order. Upon the issuance of the expedited removal order, the alien will be removed from the United States. As an alternative to expedited removal, DHS may permit an alien to voluntarily withdraw his application for admission if he intends, and is able, to depart the United States immediately. This option allows the agency "to better manage its resources by removing inadmissible aliens quickly at little or no expense to the Government, and may be considered instead of expedited or regular removal when the circumstances of the inadmissibility may not warrant a formal removal." Under DHS policy, the immigration officer typically considers a number of factors to determine whether an alien may withdraw his application for admission, including (1) the seriousness of the immigration violation; (2) any previous findings of inadmissibility against the alien; (3) the intent on the part of the alien to violate the law; (4) the alien's ability to overcome the ground of inadmissibility; (5) the alien's age and health; and (6) other humanitarian or public interest considerations. An alien does not have a right to withdraw his application for admission; instead, it is up to the discretion of the agency whether to permit the alien to withdraw his application and immediately leave the United States in lieu of undergoing removal proceedings. Furthermore, implementing regulations provide that an alien who is allowed to withdraw his application for admission will remain detained pending his departure unless DHS determines that parole is warranted. Generally, an alien subject to expedited removal will be ordered removed without further hearing to contest the immigration officer's determination. But there are exceptions. Notwithstanding these restrictions, further administrative review occurs if an alien in expedited removal indicates an intent to seek asylum or claims that he fears persecution if removed. Administrative review also occurs if a person placed in expedited removal claims that he is a U.S. citizen, an LPR, or has been granted refugee or asylee status. In these limited circumstances, DHS may not proceed with removal until the alien's claim receives consideration. When Congress created the expedited removal process in 1996, it also established special protections for those who claim they qualify for certain forms of relief from removal. Specifically, an alien otherwise subject to expedited removal who expresses an intent to apply for asylum, a fear of persecution or torture, or a fear of returning to his country is entitled to administrative review of that claim before he can be removed. In these circumstances, the statute instructs, the immigration officer must refer the alien for an interview with an asylum officer to determine whether the alien has a "credible fear" of persecution or torture. A credible fear determination is a screening process that evaluates whether an alien could potentially qualify for asylum, withholding of removal, or protection under the Convention Against Torture (CAT). The INA defines a "credible fear of persecution" as "a significant possibility, taking into account the credibility of the statements made by the alien in support of the alien's claim and such other facts as are known to the officer, that the alien could establish eligibility for asylum." A "credible fear of torture" is defined by regulation as "a significant possibility that [the alien] is eligible for [protection] under the Convention Against Torture." Under this "low screening standard," the alien has to show only a "substantial and realistic possibility of success on the merits" of an application for asylum, withholding of removal, or CAT protection. An alien does not have to show that it is more likely than not that he could establish eligibility for these protections to be found to have a credible fear. The credible fear determination is not intended to fully assess the alien's claims, but only to determine whether those claims are sufficiently viable to warrant more thorough review. USCIS may conduct the credible fear interview at a designated port of entry or another location, such as a detention center. Before the interview, the alien may consult with another person at no expense to the government; the consulted person may be present at the interview and may be permitted, at the discretion of the asylum officer, to offer a statement. The alien also has the option to present evidence at the interview. DHS regulations provide that the immigration officer who refers the alien for an interview must prepare Form M-444, Information about Credible Fear Interview in Expedited Removal Cases, that explains the credible fear interview process, the right to consultation before the interview, the right to request a review of the asylum officer's determination, and the consequences of failing to show a credible fear of persecution or torture. The regulations direct the asylum officer to confirm that the alien received Form M-444, and that he understands the credible fear interview process. The asylum officer "will conduct the interview in a nonadversarial manner, separate and apart from the general public," and the purpose of the interview "shall be to elicit all relevant and useful information bearing on whether the applicant has a credible fear of persecution or torture." If the alien cannot proceed with the interview in English, the asylum officer "shall arrange for the assistance of an interpreter in conducting the interview." By regulation, during the interview, the asylum officer will create "a summary of the material facts as stated by the applicant," and, at the end of the interview, will review that summary with the alien, who must have an opportunity to correct any errors. The asylum officer will then create a written record of his credible fear determination, which will include the factual summary, any additional facts he relied upon, and his decision as to whether the alien established a credible fear of persecution or torture. The asylum officer's determination will not become final until it is reviewed by a supervisory asylum officer. An alien who has a credible fear of persecution or torture is not automatically granted relief. Rather, he is placed in formal removal proceedings governed by INA Section 240 in lieu of expedited removal. During these formal removal proceedings, the alien may be represented by counsel; challenge the basis for his removability; and pursue applications for asylum, withholding of removal, CAT protection, and other forms of relief. The alien may also administratively appeal the IJ's decision and (as specified by statute) seek judicial review of a final order of removal. An alien's failure to establish a credible fear to the satisfaction of the asylum officer may also be subject to further review. Under INA Section 235(b)(1) and its implementing regulations, if an asylum officer determines that an alien does not have a credible fear of persecution or torture, the officer will provide the alien with written notice of that decision and inquire whether the alien would like to seek review of the decision before an IJ. The alien indicates whether he wants to seek review on Form I-869, Record of Negative Credible Fear Finding and Request for Review by an IJ. If the alien declines further review, the asylum officer will issue Form I-860, Notice and Order of Expedited Removal, following review by a supervisory asylum officer, and order the alien removed from the United States. The statute and regulations instruct, however, that if the alien requests review of the asylum officer's negative credible fear finding (or refuses to request or decline such review), the asylum officer will issue Form I-863, Notice of Referral to Immigration Judge, for a de novo review of that determination. The IJ's review "shall be concluded as expeditiously as possible, to the maximum extent practicable within 24 hours, but in no case later than 7 days" after the asylum officer's decision. The alien has the opportunity to be heard and questioned by the IJ during this review, which is limited to the issue of credible fear, and may be conducted in person or by telephonic or video conferencing. If the IJ concurs with the asylum officer's negative credible fear finding, "the case shall be returned to [DHS] for removal of the alien," and the IJ's decision "is final and may not be appealed." DHS, however, may reconsider a negative credible fear finding that has been concurred upon by an IJ after providing notice to the IJ. The alien may submit a request for reconsideration to the regional USCIS asylum office that conducted his initial interview, and if the request is granted, the alien will either have a second interview or receive a positive credible fear determination. Based on a 1997 INS memorandum, USCIS will reconsider the alien's credible fear claim if the alien "has made a reasonable claim that compelling new information concerning the case exists and should be considered." Conversely, if the IJ finds that the alien has a credible fear of persecution or torture, the IJ will vacate the asylum officer's negative credible fear determination, and the alien will be placed in formal removal proceedings under INA § 240, where he will have an opportunity to pursue asylum, withholding of removal, or CAT protection during those proceedings. In late 2002, the United States and Canada entered into an agreement that bars certain non-Canadian nationals arriving from Canada, or who are in transit during removal from Canada, from applying for asylum and related protections in the United States. Under the agreement, if such aliens express a fear of persecution or torture, they must be returned to Canada—the country of last presence—to seek protection under Canadian law rather than applying in the United States. Under DHS regulations, if an alien arriving in the United States from Canada expresses a fear of persecution or torture, the asylum officer will determine whether the alien is ineligible to apply for asylum in light of the agreement, or whether he qualifies for an exception. If the asylum officer (after supervisory consultation) determines that the alien does not qualify for an exception, the alien will be ineligible to apply for asylum in the United States, and will be removed to Canada, where he may pursue his claims. If the alien qualifies for an exception to the agreement, the asylum officer may determine whether the alien has a credible fear of persecution or torture. When Congress established the expedited removal process, it created an exception to the otherwise applicable expedited removal procedures for any alien who claims to be an LPR, an admitted refugee, a person who has been granted asylum (asylee), or a U.S. citizen. Congress directed the implementing agency to "provide by regulation for prompt review" of an expedited removal order in these circumstances, which involve persons who claim to have some legal foothold into the United States. Pursuant to the implementing regulations, an immigration officer must attempt to verify a claim of U.S. citizenship, LPR status, refugee status, or asylee status before he can issue an expedited order of removal. The verification process includes "a check of all available [DHS] data systems and any other means available to the officer." DHS regulations provide that, if the immigration officer cannot verify the alien's claim that he is an LPR, refugee, asylee, or U.S. citizen, the alien will be advised of the penalties of perjury, and placed under oath or permitted to make an unsworn declaration regarding his claim of lawful status. The immigration officer will obtain a written statement from the alien in his own language and handwriting "stating that he or she declares, certifies, verifies, or states that the claim is true and correct." Following the alien's declaration, the immigration officer will issue an expedited order of removal and refer the alien to an IJ for further review. Under the regulations, if the IJ determines that the alien has not been admitted as an LPR or refugee, granted asylum status, or is not a U.S. citizen, the IJ will affirm the expedited order of removal, and DHS typically proceeds with the alien's removal. There is no appeal of the IJ's decision. However, if the IJ determines that the individual has been admitted as an LPR or a refugee, has been granted asylum, or is a U.S. citizen, the IJ will vacate the expedited order of removal and terminate the proceedings. At this point, DHS may admit the individual or, if appropriate, commence formal removal proceedings against him under INA Section 240 "to contest his or her current retention of such status." The agency, however, may not initiate removal proceedings against a U.S. citizen. If, upon examination, an immigration officer verifies that an alien is a U.S. citizen, the alien may not be ordered removed and must be admitted. If the immigration officer verifies that an alien is an LPR, and that he continues to hold that status, the immigration officer cannot issue an expedited order of removal against the alien. Instead, the regulations require the immigration officer to determine whether the alien is considered to be applying for admission into the United States. Under the INA, an LPR will not be regarded as an applicant for admission unless he has abandoned or relinquished his LPR status; has been absent from the United States for a continuous period of more than 180 days; has engaged in illegal activity after departing the United States; has departed the United States while removal or extradition proceedings against him were pending; has committed a criminal offense described in INA Section 212(a)(2), such as a crime involving moral turpitude, a controlled substance offense, or a drug trafficking crime, unless the alien was previously granted a discretionary waiver or cancellation of removal; or is attempting to enter the United States at a time or place other than as designated by immigration officers, or has not been admitted to the United States after inspection and authorization by an immigration officer. If the immigration officer concludes that the LPR is an applicant for admission, and that he is otherwise admissible except that he lacks required documentation to enter the country, the officer may waive the documentary requirements if the alien shows good cause for failing to present documentation. Alternatively, the immigration officer may defer the alien's inspection "to an onward office for presentation of the required documents." On the other hand, if the immigration officer determines that an LPR seeking admission is inadmissible under INA Section 212(a) (e.g., because of certain criminal activity), the officer may initiate formal removal proceedings against the alien under INA Section 240. Under DHS regulations, if the immigration officer determines, through the verification process, that an alien has previously been admitted as a refugee or granted asylum in the United States, and that he continues to hold such status, the officer cannot issue an expedited order of removal against the alien. Instead, if the alien is not in possession of a valid, unexpired refugee travel document, the immigration officer may accept an application for a refugee travel document from the alien provided that he (1) did not intend to abandon his refugee or asylum status when he departed the United States; (2) did not engage in any activities outside the United States that would conflict with his refugee or asylum status (e.g., the alien engaged in persecution); and (3) has been outside the United States for less than one year. If the application is approved, the immigration officer will readmit the refugee or asylee into the United States. However, if the alien is not eligible to apply for a refugee travel document, the immigration officer may initiate regular removal proceedings against the alien under INA Section 240. Under federal statute, unaccompanied alien children are not subject to expedited removal. Instead, the governing statute provides that any unaccompanied alien child (UAC) who is determined by immigration authorities to be subject to removal must be placed in formal removal proceedings under INA Section 240, regardless of whether the alien is found in the interior of the United States or at the border. The governing statute also instructs that, during the formal removal proceedings, the UAC is eligible for voluntary departure in lieu of removal at no cost and will be provided access to pro bono counsel. In limited circumstances, DHS may permit a UAC to voluntarily return to his country in lieu of removal proceedings, but only if the UAC is "a national or habitual resident of a country that is contiguous with the United States" (i.e., Mexico and Canada), and the child (1) has not been a victim of human trafficking (or is not at risk of human trafficking upon return to his native country or country of last habitual residence); (2) does not have a credible fear of persecution in his native country or country of last habitual residence; and (3) is capable of independently withdrawing his application for admission to the United States. The INA generally authorizes (but does not require) immigration authorities to detain aliens pending their removal proceedings. Aliens placed in expedited removal, however, are generally subject to detention pending a determination as to whether they should be removed from the United States. Aliens in the expedited removal process who express a fear of persecution or an intent to apply for asylum are likewise generally subject to detention while the viability of those claims is considered. But depending on a number of circumstances, including whether such aliens are apprehended at a designated port of entry or crossing the border surreptitiously, such aliens may potentially be released from detention on bond, on their own recognizance, under an order of supervision, or via the exercise of DHS's parole authority. Moreover, the extended detention of alien minors and their parents is limited by a binding settlement agreement from a case in the U.S. District Court for the Central District of California now called  Flores v. Sessions . INA Section 235(b)(1) and its implementing regulations provide that an alien "shall be detained" pending a determination as to whether the alien should be subject to expedited removal. Historically, executive branch agencies have construed this detention authority as mandatory. The mandatory detention requirement applies not only during the initial expedited removal screening, but also during any determination as to whether the alien has a credible fear of persecution or torture and any administrative review of an alien's claim that he is a U.S. citizen, LPR, asylee, or refugee. DHS, however, has the discretion to parole an alien on a case-by-case basis "for urgent humanitarian reasons or significant public benefit" during these expedited removal proceedings. Based on this statutory authority, the agency has implemented regulations that allow parole of an alien subject to expedited removal, but only if parole "is required to meet a medical emergency or is necessary for a legitimate law enforcement objective." The agency's discretionary decision to grant parole is not subject to administrative or judicial review. INA Section 235(b)(1) provides that aliens subject to expedited removal who establish a credible fear of persecution or torture "shall be detained" pending consideration of their applications for asylum and related protections in formal removal proceedings. Under DHS regulations, the agency may parole such aliens on a case-by-case basis for "urgent humanitarian reasons" or "significant public benefit," and typically will interview the alien to determine his eligibility for parole within seven days following the credible fear finding. The regulations list the following five categories of aliens who would generally meet the criteria for parole, provided that they do not present a security or flight risk: 1. aliens who have serious medical conditions; 2. women who have been medically certified as pregnant; 3. alien juveniles (defined as aliens under the age of 18) who can be released to a relative or nonrelative sponsor; 4. aliens who will be witnesses in proceedings conducted by judicial, administrative, or legislative bodies in the United States; and 5. aliens "whose continued detention is not in the public interest." While INA Section 235(b)(1) generally requires the detention of aliens who establish a credible fear of persecution or torture pending consideration of their applications for asylum and related protections (unless DHS grants parole), the mandatory detention requirement applies only to arriving aliens . During the formal removal proceedings, such aliens are not eligible for bond hearings before an IJ under INA Section 236(a) to determine whether they should be released from custody, and may only be considered for parole by DHS. On the other hand, aliens apprehended between ports of entry (e.g., when suspected of surreptitiously crossing the border) who are initially screened for expedited removal and subsequently placed in formal removal proceedings following a positive credible fear determination are not subject to mandatory detention under INA Section 235(b)(1). Instead, these aliens are subject to INA Section 236(a)'s discretionary detention authority, and, unlike arriving aliens, do not fall within the listed classes of aliens that are excluded from an IJ's custody jurisdiction during formal removal proceedings. Thus, to the extent they are detained by DHS, this class of aliens may seek a redetermination of their custody status at bond hearings before an IJ. INA Section 235(b)(2) covers applicants for admission who are not subject to expedited removal. This provision would thus cover unadmitted aliens who are inadmissible on grounds other than those specified in INA Section 212(a)(6)(C) and (a)(7) (e.g., because of specified criminal activity); or verified LPRs who are construed to be applicants for admission (based on the narrow criteria set forth by statute) and found to be inadmissible and subject to removal. The INA provides that aliens covered by INA Section 235(b)(2) "shall be detained" pending formal removal proceedings before an IJ. As discussed above, arriving aliens placed in formal removal proceedings are subject to mandatory detention, and may be considered for parole by DHS only in certain circumstances (e.g., aliens with serious medical conditions, pregnant women, juveniles, witnesses, or in cases where detention "is not in the public interest"). But aliens apprehended within the United States following entry without inspection who are placed in formal removal proceedings are not subject to mandatory detention, and may seek review of a custody determination before an IJ. As noted above, detention is generally mandatory pending expedited removal proceedings (including during any credible fear determination), and arriving aliens placed in formal removal proceedings are also subject to detention. However, a 1997 court settlement agreement (the " Flores Settlement") generally limits the period of time in which an alien minor may be detained by DHS. Among other things, the settlement agreement requires DHS to transfer within days (subject to exception) a detained alien minor to the custody of a qualifying adult or a nonsecure facility that is licensed by the state to provide residential, group, or foster care services for dependent children. Further, in 2016, the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) ruled that the Flores Settlement applies to both accompanied and unaccompanied minors. Although the court also held that the Flores Settlement does not require DHS to release parents along with their children, the effect of the agreement has been that DHS typically will release family units pending their removal proceedings given the difficulties of separating families who may be subject to removal. As a practical matter, DHS would face difficulties locating other relatives or licensed programs to accept the children while their parents remain in detention. Additionally, a federal district court has ruled that a "government practice of family separation without a determination that the parent was unfit or presented a danger to the child" likely violates due process. Therefore, while DHS has broad detention authority over aliens seeking admission into the United States, the agency's ability to detain minors and their accompanying relatives is notably restricted. Table 3 shows the different detention and parole requirements for applicants for admission subject to expedited removal. While the INA authorizes the detention of aliens pending proceedings to determine whether they should be removed, the duration of such detention has been the subject of litigation. Previously, the Ninth Circuit upheld an injunction requiring DHS to provide aliens detained under INA Sections 235(b), 236(a), and 236(c) with individualized bond hearings after six months' detention. The Ninth Circuit had expressed concern that these statutes, if construed to permit the indefinite detention of aliens pending removal proceedings, would raise "serious constitutional concerns." The court acknowledged that the constitutional concerns raised by extended periods of detention generally involved aliens within the United States, and that reviewing courts had typically considered aliens seeking initial admission into the country as having less due process protection. Nonetheless, the court believed that these constitutional concerns were pertinent to INA Section 235(b), despite this provision primarily addressing aliens seeking initial entry to the United States, because it could in some circumstances apply to returning LPRs who are entitled to more robust protections than aliens seeking initial entry into the United States. Accordingly, the Ninth Circuit ruled that INA Sections 235(b), 236(a), and 236(c) "should be construed through the prism of constitutional avoidance" as containing implicit time limitations. In Jennings v. Rodriguez , the Supreme Court reversed the Ninth Circuit's decision, rejecting as "implausible" the lower court's construction of INA Sections 235(b), 236(a), and 236(c) as containing implicit time limitations. The Court reasoned that both INA Sections 235(b) and 236(c) were textually clear in generally requiring the detention of covered aliens during removal proceedings, and that nothing in INA Section 236(a) required bond hearings after an alien was detained under that authority. The Court remanded the case to the Ninth Circuit to address, in the first instance, the plaintiffs' constitutional claim that their indefinite detention under these provisions violated their due process rights. Therefore, while the Supreme Court has upheld DHS's statutory authority to detain aliens potentially indefinitely pending their removal proceedings, the Court has left unresolved the issue of whether such detention is constitutionally permissible. An alien who is in expedited removal proceedings generally has no right to a hearing or administrative appeal of an immigration officer's determination that he should be removed from the United States. In addition to these restrictions, the alien has no statutory right to seek judicial review of the expedited order of removal except in limited circumstances. Under Section 242 of the INA, the federal courts of appeals generally have jurisdiction to review a final order of removal, and a petition for review may be filed in the circuit court in the jurisdiction where the Immigration Court proceedings were completed. INA Section 242(a)(2)(A), however, expressly precludes judicial review of an expedited order of removal unless the alien's claim falls within one of the exceptions referenced in INA Section 242(e). The jurisdictional bar applies to claims that an immigration officer improperly placed an alien in expedited removal proceedings; challenges to an immigration officer's credible fear determination; arguments challenging the procedures and policies implemented by DHS to expedite removal; and claims contesting the expedited removal order itself. Additionally, although INA Section 242(a)(2)(D) typically grants the courts jurisdiction to review constitutional claims or questions of law raised in a petition for review that would otherwise be foreclosed on jurisdictional grounds, this provision does not apply to petitions challenging expedited removal orders. The statutory bar to review of an expedited order of removal, however, is not without any exception. There are limited circumstances where an alien may seek review of an expedited order of removal. Under INA Section 242(e)(2), an alien subject to an expedited order of removal may challenge the underlying order in a habeas corpus proceeding. The district court's jurisdiction, however, is strictly limited to the following three narrow issues: 1. whether the petitioner in the habeas action is an alien; 2. whether the petitioner was ordered removed under INA Section 235(b)(1)'s expedited removal provisions; and 3. whether the petitioner can prove by a preponderance of the evidence that he is an LPR, that he has been admitted as a refugee, or that he has been granted asylum. INA Section 242(e)(5) provides that, in reviewing whether the petitioner was ordered removed under the expedited removal provisions, the district court's inquiry "shall be limited to whether such an order in fact was issued and whether it relates to the petitioner." However, "[t]here shall be no review of whether the alien is actually inadmissible or entitled to any relief from removal." If the court determines that the petitioner is an alien who was not ordered removed under the expedited removal statute, or that he was lawfully admitted for permanent residence, admitted as a refugee, or granted asylum, "the court may order no remedy or relief other than to require that the petitioner be provided a hearing" in formal removal proceedings under Section 240 of the INA. Further, the alien may seek judicial review of any final order of removal issued in those proceedings. Under INA Section 242(e)(3), an alien subject to an expedited order of removal may challenge the validity of the expedited removal system by filing a lawsuit in the U.S. District Court for the District of Columbia. The district court's review, however, is limited to determining one of the following issues: 1. whether the expedited removal statute or its implementing regulations is constitutional; or 2. whether a regulation, written policy directive, written policy guideline, or written procedure issued by DHS to implement expedited removal is consistent with the statute or other laws. A lawsuit raising a systemic challenge to expedited removal must be brought within 60 days after implementation of the challenged statutory provision, regulation, directive, guideline, or procedure. The D.C. District Court has held that the 60-day requirement "is jurisdictional rather than a traditional limitations period," and, therefore, the period runs from the initial implementation of the challenged provision or policy, rather than from the date they were applied to a particular alien. Finally, an alien challenging the validity of the expedited removal system may file a notice of appeal within 30 days of the district court's order. The statute instructs the appellate courts to conduct review in an expedited manner. In some cases, an alien who is criminally charged with unlawful reentry after removal may collaterally challenge an expedited order of removal. Under INA Section 276, an alien who "has been denied admission, excluded, deported, or removed or has departed the United States while an order of exclusion, deportation, or removal is outstanding," and subsequently "enters, attempts to enter, or is at any time found in, the United States" shall be subject to criminal penalty. The INA provides that, in prosecutions for unlawful reentry, the courts do not have jurisdiction to consider any claim challenging the validity of an expedited order of removal, including a determination that an alien failed to show a credible fear of persecution. In United States v. Mendoza-Lopez , however, the Supreme Court held that an alien who is prosecuted for unlawful reentry may challenge the validity of an underlying removal order during his criminal proceedings if the removal proceeding "effectively eliminates the right of the alien to obtain judicial review" of that order. The Court reasoned that "where a determination made in an administrative proceeding is to play a critical role in the subsequent imposition of a criminal sanction, there must be some meaningful review of the administrative proceeding." The Court thus declared that, at a minimum, "where the defects in an administrative proceeding foreclose judicial review of that proceeding, an alternative means of obtaining judicial review must be made available before the administrative order may be used to establish conclusively an element of a criminal offense." In response to the Supreme Court's decision, Congress enacted a new clause to the unlawful reentry statute, which provides that an alien charged with unlawful reentry may challenge the validity of an underlying removal order if (1) he exhausted any administrative remedies that may have been available to seek relief against the order; (2) the prior removal proceedings in which the order was issued deprived the alien of the opportunity to seek judicial review; and (3) the entry of the order was "fundamentally unfair." Subsequently, the Ninth Circuit determined that "the principle established by Mendoza-Lopez is equally applicable in the expedited removal order context." The Ninth Circuit ruled that the Supreme Court's rationale that aliens must have "some meaningful review" of their underlying removal orders if they serve as a basis for criminal prosecution is applicable to a criminal defendant "regardless of whether the defendant was a nonadmitted alien or an alien in the United States when the removal order was issued." The Ninth Circuit thus held that a defendant charged with the crime of unlawful reentry may challenge an expedited removal order that serves as the basis for prosecution if he contends that the expedited removal order is "fundamentally unfair." According to the Ninth Circuit, an expedited removal proceeding is "fundamentally unfair" if it deprives the alien of due process and results in prejudice. The Ninth Circuit, for example, has determined that expedited removal proceedings are fundamentally unfair if the immigration officer failed to obtain interpretative assistance, provide the alien with notice of the charge and nature of the proceedings, and afford the alien an opportunity to review his sworn statement—as DHS regulations require. In sum, the INA generally limits the ability of an alien to challenge an underlying expedited removal order in a subsequent criminal prosecution for unlawful reentry in violation of the order. That order can be challenged only in limited circumstances, primarily centering on whether the entry of the order was "fundamentally unfair." Given its summary nature and comparatively limited procedural protections, the expedited removal process has been subject to legal challenges since its implementation in 1997. However, in part because of the strict limitations to judicial review of an expedited order of removal, courts have largely dismissed such challenges for lack of jurisdiction, or, in the few occasions where courts have entertained such challenges, rejected them on substantive grounds. Nevertheless, these cases raise important issues concerning the breadth and scope of the expedited removal statute and the constitutionality of its provisions. In 1997, shortly after IIRIRA's implementation, a group of immigrant assistance organizations and aliens who had been removed challenged the new expedited removal statute and regulations in the federal district court for the District of Columbia. In American Immigration Lawyers Association v. Reno , the plaintiffs argued, among other things, that the expedited removal procedures offered insufficient protections for aliens seeking entry into the United States because they did not afford an opportunity to consult with family or counsel during that process, or to contest and seek further review of an expedited removal order. The plaintiffs also claimed that the expedited removal procedures violated aliens' due process rights because those aliens could be erroneously removed from the country without additional protections provided in formal removal proceedings. The district court held that the limited protections afforded by the expedited removal statute reasonably "advance[d] Congress's twin goals of creating a fair yet expedited process," and fell well within the statute's command that an alien be summarily removed "without further hearing or review." The court also cited Congress's broad legislative authority over the admission of aliens, and the "long-standing precedent" that aliens seeking to enter the United States—including those detained just within the border—have no constitutional due process protections concerning their applications for admission, apart from what Congress provided by statute. The plaintiffs appealed the district court's order to the D.C. Circuit. In a published decision, the D.C. Circuit affirmed the dismissal of the plaintiffs' complaints "substantially for the reasons stated in the [district] court's thorough opinion." The court also held that the organizational plaintiffs lacked standing to challenge the expedited removal procedures because there was nothing in the statute governing judicial review of an expedited order of removal that permitted litigants to bring claims on behalf of aliens subject to expedited removal. Although the U.S. District Court for the District of Columbia rejected a legal challenge to the expedited removal system itself, some courts have addressed challenges to the application of expedited removal in individual cases. Despite the jurisdictional limitations governing review of expedited removal orders, courts have entertained such challenges in a few notable cases. The majority of reviewing courts, however, have dismissed such challenges based on jurisdictional limitations. For example, a federal district court in Michigan held that INA Section 242(e)(2) allowed the court to consider in habeas corpus proceedings whether the expedited removal statute was "lawfully applied" to the petitioners. Because INA Section 242(e)(2) permits judicial inquiry in habeas proceedings into "whether the petitioner was ordered removed" under the expedited removal statute, the district court determined it could consider "whether such an order in fact was issued and whether it relates to the petitioner." Such review, the court reasoned, necessarily entails a determination by a reviewing court of whether the expedited order was "lawfully applied" to the alien. Applying this standard, the court struck down the implementation of expedited removal to a group of Lebanese nationals who had entered the United States with fraudulent advance parole documents because they were not "arriving aliens" subject to the statute. In a separate case, the Third Circuit disagreed with the Michigan federal district court's determination that judicial review in habeas proceedings of whether an expedited removal order "relates to the petitioner" includes consideration of whether the order was "lawfully applied." The Third Circuit found that this construction of the statute was "not just unsupported, but also flatly contradicted by the plain language of the [expedited removal] statute itself," which explicitly bars judicial review of the application of expedited removal to individual aliens. Similarly, the Fifth Circuit has held that a district court in habeas proceedings could not consider whether the agency properly applied the expedited removal statute to an alien. The court observed that the statutory language permitting habeas review of "whether the petitioner was ordered removed" expressly limits such inquiry to "whether such an order in fact was issued and whether it relates to the petitioner," and that "the matter ends there." Outside of the habeas context, some courts have exercised jurisdiction to review expedited removal orders that served as predicates for unlawful reentry prosecutions under INA Section 276. As discussed in the preceding section, the Ninth Circuit has held that, under INA Section 276(d), a court may review whether an alien's underlying expedited removal proceedings were "fundamentally unfair" when the resulting expedited removal order serves as a basis for the unlawful reentry prosecution. Applying this standard, the court found that an arriving alien's contention that his expedited removal violated his right to counsel lacked merit because nonadmitted aliens have no right to representation, and "are entitled only to whatever process Congress provides." By contrast, in another unlawful reentry case, the Ninth Circuit held that an alien was entitled to due process during his expedited removal proceedings because he was already within the United States when he was apprehended, and that the immigration officer's failure to provide the alien notice of his inadmissibility charge and an opportunity to review his sworn statement violated due process. Apart from habeas and criminal reentry cases, the courts have addressed challenges to expedited removal orders raised in petitions for review filed directly with the federal courts of appeals. In these cases, the petitioners have argued that their expedited removal proceedings violated their right to due process because they were detained, had no right to counsel, and did not have an opportunity to contest their charges of inadmissibility. As discussed in this report, an alien subject to a final order of removal generally may file a petition for review of that order in the judicial circuit where the administrative removal proceedings were completed. The courts of appeals, however, have dismissed petitions for review challenging expedited removal orders, citing INA Section 242(a)(2)(A)'s language barring judicial review of claims arising in the context of expedited removal proceedings. The courts have further determined that, although INA Section 242(a)(2)(D) restores jurisdiction to review constitutional claims or questions of law raised in a petition for review that is otherwise subject to jurisdictional limitations, this exception does not apply to the statutory provisions barring judicial review of an expedited removal order. Although some courts have expressed concern that the expedited removal process is "fraught with risk of arbitrary, mistaken, or discriminatory behavior," reviewing courts have nonetheless ruled that they are not "free to disregard jurisdictional limitations" imposed by statute on the review of expedited removal orders. Since the enactment of the expedited removal statute, immigration authorities have implemented expedited removal with respect to three overarching categories of aliens: (1) those who arrive in the United States at a designated port of entry; (2) those who arrived in the United States by sea, and who have been in the country for less than two years; and (3) those found within 100 miles of the U.S. border, within 14 days of entering the country. The overwhelming majority of aliens subject to expedited removal, in other words, have been inspected or apprehended at a designated port of entry or near the international border when attempting to enter, or shortly after entering, the United States. But as previously discussed, the expedited removal statute permits the Secretary of DHS to apply expedited removal to any alien inadmissible due to a lack of entry documents or because he sought to obtain entry through fraud or misrepresentation, regardless of the alien's location, provided that the alien has not been admitted or paroled and has been in the country for less than two years. Thus, DHS has the statutory authority to expand expedited removal on a much larger geographic and temporal scale. To that end, on January 25, 2017, President Trump issued an executive order directing the DHS Secretary to apply expedited removal within the broader framework of INA Section 235(b)(1). Less than a month later, then-DHS Secretary John Kelly announced a series of border security and immigration enforcement initiatives. Among other measures, Secretary Kelly announced that "[t]o ensure the prompt removal of aliens apprehended soon after crossing the border illegally, the Department will publish in the Federal Register a new Notice Designating Aliens Subject to Expedited Removal Under [INA] Section 235(b)(1)(a)(iii)," which may "depart from the limitations set forth in the designation currently in force." As reasons for this policy change, Secretary Kelly pointed to a "surge of illegal immigration at the southern border," a "historic backlog" of immigration court cases, and an increase in the number of apprehensions between ports of entry on the southern border. In response, some immigrant rights advocates reportedly "denounced the proposed expansion ... warning that the policy would strip more immigrants of due process rights to seek asylum or other legal protections that would allow them to remain in the country." While federal statute clearly confers DHS with authority to employ expedited removal in a broader fashion, extending the process to aliens away from the border or its functional equivalent would likely prompt legal challenge. As previously discussed, the Supreme Court has long recognized that, while aliens seeking entry into the United States have no constitutional rights regarding their applications for admission, aliens who have entered the United States, even unlawfully, are entitled to some due process protections before they can be removed. Such due process protections typically involve the right to a hearing and a meaningful opportunity to be heard. As discussed in this report, an alien subject to expedited removal has no right to a hearing or further review of a determination that he should be removed from the United States. Thus, expanding expedited removal to cover aliens present in any part of the United States could come into conflict with these constitutional notions. Moreover, although some courts have, in light of the entry fiction doctrine, determined that aliens apprehended near the border may not avail themselves of these constitutional protections, the extent to which this principle may be applied to aliens in the interior, or who have developed ties to the United States, is far from certain. However, the Supreme Court, at times, has appeared to view admission into the United States by immigration authorities as the key factor that determines whether an alien is entitled to constitutional protections. For example, in Landon v. Plasencia , the Supreme Court stated that "once an alien gains admission to our country and begins to develop the ties that go with permanent residence his constitutional status changes accordingly." The Court has also suggested that the length of time that an alien has spent in the United States may inform the scope and degree of constitutional protections. These principles might support the argument that expedited removal can be applied on a wider basis to aliens within the interior of the United States who have been in the country for relatively short periods of time. But notwithstanding the language in Landon, the Supreme Court has continued to describe an alien's physical presence in the United States, whether lawful or unlawful, as the critical factor in assessing whether due process attaches. Therefore, if DHS undertakes a future expansion of expedited removal, the courts may be confronted with further challenges to the agency's implementation of that procedure down the road. Until now, courts have addressed such challenges only within the confines of enforcement actions at or near the border. If DHS implements expedited removal on a broader scale throughout the United States, the courts may need to address critical questions concerning the scope of the federal government's plenary power over the admission of aliens, and the limits of that "sovereign prerogative" with respect to aliens already present in the United States. Appendix A. Glossary Appendix B. Implementation and Expansion of Expedited Removal: 1997-2017 The following discussion is a more comprehensive overview of the Executive's implementation and expansion of expedited removal following the passage of IIRIRA in 1996. Arriving Aliens Initially, the former INS limited the application of its expedited removal authority to aliens arriving in the United States. In order to clarify the scope of the term "arriving alien," the INS issued regulations that defined the term to include aliens seeking admission into the United States at a port of entry, aliens seeking transit through the United States at a port of entry, and aliens who have been interdicted at sea and brought into the United States "by any means, whether or not to a designated port-of-entry, and regardless of the means of transport." In response to opposition to the inclusion of aliens interdicted at sea in the definition of "arriving alien," the INS pointed to BIA precedent holding that "the mere crossing into the territorial waters of the United States has never satisfied the test of having entered the United States," and reasoned that "[a]liens who have not yet established physical presence on land in the United States cannot be considered as anything other than arriving aliens." Furthermore, the INS declared, "[t]he inclusion of aliens interdicted at sea in the definition of arriving alien will support the Department's mandate to protect the nation's borders against illegal immigration." The INS further determined that "[a]n arriving alien remains an arriving alien even if paroled pursuant to INA Section 212(d)(5), and even after any such parole is terminated or revoked." The INS explained that the inclusion of paroled aliens was based on the language of INA Section 212(d)(5), which indicated that the parole of an alien did not constitute an admission into the United States, and that the alien would be considered an applicant for admission once the purpose of the parole had been served. Looking ahead, the INS "reserve[d] the right to apply expedited removal procedures to additional classes of aliens within the limits set by the statute , if, in the Commissioner's discretion, such action is operationally warranted." This expanded category of aliens, the INS explained, "may be localized, in response to specific needs within a particular region, or nationwide, as appropriate." The agency declared that "a proposed expansion of the expedited removal procedures may occur at any time and may be driven either by specific situations such as a sudden influx of illegal aliens motivated by political or economic unrest or other events or by a general need to increase the effectiveness of enforcement operations at one or more locations." The INS, however, recognized that expanding the reach of expedited removal would "involve more complex determinations of fact and will be more difficult to manage," and indicated that, for the time being, it would apply the new procedures "on a more limited and controlled basis." Therefore, upon IIRIRA's passage, the new expedited removal statute covered only arriving aliens in the United States, which, in turn, encompassed (1) aliens arriving at a port of entry, (2) aliens in transit at a port of entry, and (3) aliens interdicted at sea who have been brought into the United States. Nevertheless, at the outset, the INS's expedited removal authority "dramatically affect[ed] the pool of persons subject to expedited procedures." Criminal Aliens Held in Texas Correctional Facilities (Proposed but Not Implemented) In 1999, the INS considered, but ultimately did not implement, a "pilot program" that would have extended expedited removal to aliens who (1) had been convicted of unlawful entry; (2) had not been admitted or paroled into the United States, and had been physically present in the United States for less than two years; and (3) were serving criminal sentences in designated correctional facilities in Texas. To support its proposed expansion, the INS cited INA Section 235(b)(1)(A)(iii) and its implementing regulations, which gave it the authority to apply expedited removal to aliens who entered the United States without being admitted or paroled, and who have not been in the United States for at least two years. Citing a lack of detention space and an increase in the number of criminal alien apprehensions, the INS determined that a more effective procedure to remove aliens serving short criminal sentences was warranted. Despite this proposed expansion, neither the INS nor DHS implemented this policy. Aliens Who Arrived in the United States by Sea In 2002, the INS authorized expedited removal for a "newly designated class" of aliens: those who arrived in the United States by sea, "either by boat or other means," and who (1) have not been admitted or paroled, and (2) have not been physically present in the United States for a continuous period of at least two years at the time of their apprehension. As it had done before, the INS cited INA Section 235(b)(1)(A)(iii) as the statutory authority for expanding expedited removal to aliens "who arrive illegally by sea." The INS noted that this expansion did not include aliens who arrived in the United States at a designated port of entry, or who were interdicted at sea and brought into the United States, because they were already subject to the expedited removal process for arriving aliens. In addition, the INS did not apply its expansion to Cuban nationals who arrived in the United States by sea because of the "longstanding U.S. policy to treat Cubans differently from other aliens." Therefore, apart from Cuban nationals, all aliens who unlawfully arrived by sea in the United States, in a location other than a port of entry, would now be subject to expedited removal, and, with limited exceptions, detained pending any determination as to whether they had a credible fear of persecution. The INS claimed that this expansion would "assist in deterring surges in illegal migration by sea, including potential mass migration, and preventing loss of life." The agency explained that "[a] surge in illegal migration by sea threatens national security by diverting valuable U.S. Coast Guard and other resources from counterterrorism and homeland security responsibilities." In addition, channeling the original legislative intent behind IIRIRA's amendments, the agency determined that its decision was "necessary to remove quickly from the United States aliens who arrive illegally by sea and who do not establish a credible fear." The INS thus announced that it would implement expedited removal for aliens who arrived in this country by sea on or after November 13, 2002. Aliens Unlawfully Present in the United States Within 100 Miles of the Border A few years later, in 2004, DHS (which had now replaced the INS) authorized CBP to implement expedited removal for aliens who were unlawfully present in the United States without being admitted or paroled, if (1) they were apprehended within 100 miles of the border, and (2) they had not been physically present in the United States for a continuous period of at least 14 days. As the statutory basis for this expansion, the agency again cited INA Section 235(b)(1)(A)(iii), which gave it the discretion to apply expedited removal to aliens who were physically present in the United States without being admitted or paroled, and who could not establish their continuous physical presence in this country for up to two years. In support of its decision to extend expedited removal to border areas, DHS pointed to "an urgent need to enhance [its] ability to improve the safety and security of the nation's land borders, as well as the need to deter foreign nationals from undertaking dangerous border crossings, and thereby prevent the needless deaths and crimes associated with human trafficking and alien smuggling operations." DHS thus determined that expanding the reach of expedited removal to aliens encountered shortly after they unlawfully entered the United States through the border would improve national security, "increase the deterrence of illegal entries by ensuring that apprehension quickly leads to removal," and "impair the ability of smuggling organizations to operate." Ultimately, though, DHS limited its new designation of expedited removal to aliens who were neither nationals of Mexico nor Canada, and Mexican and Canadian nationals who had histories of criminal or immigration violations. With regard to non-Mexican and non-Canadian nationals ("third-country nationals"), DHS explained that there were logistical difficulties of initiating formal removal proceedings against nearly 1 million aliens apprehended each year, particularly along the southern border with Mexico, and that, while the majority of those aliens were Mexican nationals who could be "voluntarily returned" to Mexico without any formal removal process, aliens from other countries could not simply be returned to Mexico. Instead, they had to be detained pending arrangements for their return by aircraft, or pending formal removal proceedings. Given the agency's lack of resources to detain all third-country nationals, DHS explained, many of these aliens were released with instructions to appear for their removal proceedings, only to subsequently disappear in the United States. For these reasons, DHS had a greater incentive to apply expedited removal to third-country nationals in border areas, than it did for Mexican and Canadian nationals. On the other hand, given the agency's interest in improving national security and public safety, Mexican and Canadian nationals with prior criminal or immigration violations would be subject to expedited removal. DHS also limited the scope of its new expedited removal designation to border areas. The agency recognized that INA Section 235(b)(1)(A)(iii) did not geographically restrict expedited removal for aliens present in the United States without being admitted or paroled, and that the statute permitted expedited removal for aliens who could not establish their continuous physical presence in this country for up to two years. Nevertheless, the agency concentrated its enforcement resources "upon unlawful entries that have a close spatial and temporal nexus to the border." Therefore, instead of implementing expedited removal nationwide, DHS limited it to "aliens who are apprehended immediately proximate to the land border and have negligible ties or equities in the U.S." The agency determined that an area within 100 miles of the border was "immediately proximate" to the border "because many aliens will arrive in vehicles that speedily depart the border area, and because other recent arrivals will find their way to near-border locales seeking transportation to other locations within the interior of the U.S." DHS also cited to agency regulations that had already established that the 100-mile range was a "reasonable distance" from the external boundary of the United States. Accordingly, DHS limited its new application of expedited removal to aliens apprehended within 14 days after they entered the United States, and within 100 miles of any international land border. Aliens falling into this category would be detained pending their removal and any determination as to whether they feared persecution. Consistent with other expedited removal designations, however, DHS excluded Cuban nationals because their removal to Cuba "[could not] presently be assured and for other U.S. policy reasons." DHS indicated that it would implement expedited removal for aliens apprehended in border areas beginning on August 11, 2004. Based on this latest expansion, DHS could now apply its expedited removal authority not only to aliens who arrived in the United States at ports of entry or by sea, but also to aliens who were encountered within this country's border regions between ports of entry. Expansion to Entire Southwest Border Initially, DHS limited the implementation of its new expedited removal authority to parts of the southwestern United States, specifically the border sectors of Tucson, Arizona; Yuma, Arizona; McAllen, Texas; Laredo, Texas; San Diego, California; and El Centro, California. On September 14, 2005, DHS announced the expansion to three additional border sectors in Del Rio, TX; Marfa, TX; and El Paso, TX—thereby implementing the policy across the entire Southwest border. Former Secretary of Homeland Security Michael Chertoff, who headed the agency at the time, declared that the expansion "gives Border Patrol agents the ability to gain greater control of our borders and to protect our country against the terrorist threat." Further, according to DHS, the expedited removal process "will disrupt the vicious human smuggling cycle that occurs along the southwest border." Following the announcement, DHS implemented expedited removal along the entire land border with Mexico. Expansion to Entire U.S. Border A few months later, on January 30, 2006, DHS announced the implementation of expedited removal along the entire U.S.-Canadian border and all U.S. coastal areas. Noting decreased unlawful border crossings since expedited removal began in the southwestern United States, Secretary Chertoff asserted that expanding the process along all borders "will provide DHS agents and officers with an additional tool to protect our nation's boundaries and quickly remove those who entered our country illegally." According to the agency, expedited removal had proven to be "an effective border management process that swiftly returns illegal aliens to their countries of origin while maintaining protections for those who fear persecution." DHS also pointed to the disruption of "human smuggling cycles" as a factor warranting the expansion of expedited removal. Therefore, with this expansion in place, DHS could now implement expedited removal in the northern border sectors of Blaine, WA; Spokane, WA; Havre, MT; Grand Forks, ND; Detroit, MI; Buffalo, NY; Swanton, VT; and Houlton, ME. Cuban Nationals Arriving in the United States On July 20, 2015, the United States formally restored diplomatic relations with Cuba. In addition, on January 12, 2017, former President Barack Obama announced an end to the long-standing "wet-foot, dry-foot" policy, which allowed Cubans who arrived on American soil the right to remain in the United States and apply for lawful permanent resident status, while those who were detained at sea were returned to Cuba. In response to the restoration of diplomatic relations, DHS eliminated the exception to expedited removal for Cuban nationals who arrive in the United States at a designated port of entry by aircraft. The agency observed, moreover, that the policy justifications for exempting Cuban nationals were no longer valid given Cuba's agreement to facilitate the return of Cuban nationals ordered removed from the United States. In addition, DHS determined that "a significant increase in attempts by Cuban nationals to illegally enter the United States" meant that an exception for Cuban nationals would significantly undermine efforts to remove aliens who had no authorization to be in this country. Therefore, Cuban nationals who arrived in the United States at a designated port of entry by aircraft were now subject to expedited removal. DHS additionally eliminated the exception for Cuban nationals who arrive in the United States by sea, who have not been admitted or paroled, and who have not been physically present in this country for less than two years. DHS also removed the exception for Cuban nationals who are encountered within 100 miles of the border, who have not been admitted or paroled, and who have not been in the United States for less than 14 days. The agency again cited the restoration of diplomatic relations between the United States and Cuba and other "significant changes" in the relationship between the two countries as factors that warranted a change in policy that "reflect[ed] these new realities." Therefore, regardless of the manner in which they came to the United States, Cuban nationals were now subject to expedited removal if they met the statutory criteria for that process.

The federal government has broad authority over the admission of non-U.S. nationals (aliens) seeking to enter the United States. The Supreme Court has repeatedly held that the government may exclude such aliens without affording them the due process protections that traditionally apply to persons physically present in the United States. Instead, aliens seeking entry are entitled only to those procedural protections that Congress has expressly authorized. Consistent with this broad authority, Congress established an expedited removal process for certain aliens who have arrived in the United States without permission. In general, aliens whom immigration authorities seek to remove from the United States may challenge that determination in administrative proceedings with attendant statutory rights to counsel, evidentiary requirements, and appeal. Under the streamlined expedited removal process created by the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 and codified in Section 235(b)(1) of the Immigration and Nationality Act (INA), however, certain aliens deemed inadmissible by an immigration officer may be removed from the United States without further administrative hearings or review. INA Section 235(b)(1) applies only to certain aliens who are inadmissible into the United States because they either lack valid entry documents or have attempted to procure their admission through fraud or misrepresentation. The statute generally permits the government to summarily remove those aliens if they are arriving in the United States. The statute also authorizes, but does not require, the government to apply this procedure to aliens who are inadmissible on the same grounds if they have been physically present in the country for less than two years. As a matter of practice, however, immigration authorities have applied expedited removal in more limited fashion than potentially authorized by statute—in general, the process is applied strictly to (1) arriving aliens apprehended at a designated port of entry; (2) aliens who arrived in the United States by sea without being admitted or paroled into the country by immigration authorities, and who have been physically present in the United States for less than two years; or (3) aliens who are found in the United States within 100 miles of the border within 14 days of entering the country, who have not been admitted or paroled into the United States by immigration authorities. Nevertheless, expedited removal accounts for a substantial portion of the alien removals each year. And in January 2017, President Trump issued an executive order directing the Department of Homeland Security to expand expedited removal within the broader framework of INA Section 235(b)(1). The agency has yet to promulgate regulations implementing this directive. In some circumstances, however, an alien subject to expedited removal may be entitled to certain procedural protections before he may be removed from the United States. For example, an alien who expresses a fear of persecution may obtain administrative review of his claim, and if his fear is determined credible the alien will be placed in formal removal proceedings where he can pursue asylum and related protections. Additionally, an alien may seek administrative review of a claim that he is a U.S. citizen, lawful permanent resident, admitted refugee, or asylee. Unaccompanied alien children also are statutorily exempted from expedited removal. Given the streamlined nature of expedited removal and the broad discretion afforded to immigration officers to implement that process, challenges have been raised contesting the procedure's constitutionality. In particular, some have argued that the procedure violates aliens' due process rights because aliens placed in expedited removal do not have the opportunity to seek counsel or contest their removal before a judge or other arbiter. Reviewing courts have largely dismissed such challenges for lack of jurisdiction, or, in the alternative, rejected the claims on the grounds that aliens seeking entry into the United States generally do not have constitutional due process protections. But such cases have concerned aliens arriving at the U.S. border or designated ports of entry, and such aliens may be entitled to lesser constitutional protections than aliens located within the United States. Expanding the expedited removal process to aliens located within the interior could compel courts to tackle questions involving the relationship between the federal government's broad power over the entry and removal of aliens and the due process rights of aliens located within the United States.

govreport

D uring the New York debates ratifying the U.S. Constitution, Alexander Hamilton commented that "the true principle of a republic is, that the people should choose whom they please to govern them." This principle is embodied in congressional redistricting, the drawing of district boundaries from which the people choose their representatives to the U.S. House of Representatives. Prior to the 1960s, court challenges to redistricting plans were considered non-justiciable political questions that were most appropriately addressed by the political branches of government, not the judiciary. In 1962, in the landmark ruling of Baker v. Carr , the Supreme Court pivoted and held that a constitutional challenge to a redistricting plan was not a political question and was justiciable. Since then, a series of constitutional and legal challenges have significantly shaped how congressional districts are drawn. Furthermore, recent and pending Supreme Court cases will likely continue to impact the process of congressional redistricting, and the degree to which challenges to redistricting plans will be successful. For example, the Supreme Court recently clarified how a court should evaluate whether race was a predominant factor in the development of a redistricting plan when considering a Fourteenth Amendment equal protection claim. It also recently upheld, under the Elections Clause, an Arizona constitutional provision, enacted by initiative, which established an independent commission for drawing congressional districts. During the 2015 Supreme Court term, the Court is continuing to focus on redistricting. In April 2016, the Court ruled that states may draw their legislative districts based on total population rather than based on eligible or registered voters. In addition, as of the date of this report, two redistricting cases are currently pending before the Court: one case presents the question of whether partisanship can justify differences in population in the context of state legislative redistricting; another case presents the question of whether, in proving that race was a predominant factor in the creation of a redistricting plan, challengers must demonstrate that considerations of race predominated over politics. This report first examines key constitutional and federal statutory requirements applicable to congressional redistricting, including the standard for equality of population among districts, and the Voting Rights Act (VRA). It then analyzes case law interpreting the constitutional requirement of congressional district equality—the "one person, one vote" standard—including the degree to which districts must be drawn to achieve exact population equality. It also explores the unsettled question of whether partisanship can justify differences in population, which the Supreme Court is considering in the pending case of Harris v. Arizona Independent Redistricting Commission . Then, it discusses the question of who should be counted for the purposes of achieving equality among districts, focusing on the Court's recent ruling in Evenwel v. Abbott . Next, it examines the application of Section 2 of the VRA to congressional redistricting, and relatedly, limits to VRA compliance under the Fourteenth Amendment. This section includes discussion of a pending Supreme Court case, Wittman v. Personhuballah, regarding what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan. Case law in this area demonstrates a tension between compliance with the VRA and conformance with standards of equal protection. The report then addresses the Court's 2015 ruling in Arizona State Legislature v. Arizona Independent Redistricting Commission , upholding an Arizona constitutional provision—enacted through initiative—that established an independent commission for drawing congressional districts. Finally, the report provides an overview of selected legislation in the 114 th Congress that would establish additional statutory requirements and standards for congressional redistricting. The legal framework for congressional redistricting involves, in addition to various state processes, both constitutional and federal statutory requirements, and case law interpretations of each. The Elections Clause of the Constitution, Article I, Section 4, clause 1, provides that the times, places, and manner of holding congressional elections be prescribed in each state by the legislature thereof, but that Congress may at any time make or alter such laws. Article I, Section 2, clause 3 requires a count of the U.S. population every 10 years, and based on the census, requires apportionment of seats in the House of Representatives among the states, with each state entitled to at least one Representative. A federal statute requires that apportionment occur every 10 years. In order to comport with the constitutional standard of equality of population among districts, discussed below, at least once every 10 years, in response to changes in the number of Representatives apportioned to it or to shifts in its population, most states are required to draw new boundaries for its congressional districts. The Supreme Court has interpreted the Constitution to require that each congressional district within a state contain approximately the same population. This requirement is known as the "equality standard" or the principle of "one person, one vote." In 1964, in Wesberry v. Sanders , the Supreme Court interpreted Article I, Section 2, clause 1 of the Constitution, which states that Representatives be chosen "by the People of the several States" and "apportioned among the several States ... according to their respective Numbers," to require that "as nearly as is practicable, one man's vote in a congressional election is to be worth as much as another's." With regard to state legislative redistricting, later that year, the Court issued its ruling in Reynolds v. Sims . In Reynolds , the Supreme Court held that the one person, one vote standard also applied in the context of state legislative redistricting, holding that the Equal Protection Clause requires all who participate in an election "to have an equal vote." Congressional districts must be drawn consistent with the Voting Rights Act (VRA). The VRA was enacted under Congress's authority to enforce the Fifteenth Amendment, providing that the right of citizens to vote shall not be denied or abridged on account of race, color, or previous servitude. In a series of cases and evolving jurisprudence, the U.S. Supreme Court has interpreted how the VRA applies in the context of congressional redistricting. Congressional district boundaries in every state are required to comply with Section 2 of the VRA. Section 2 provides a right of action for private citizens or the government to challenge discriminatory voting practices or procedures, including minority vote dilution, the diminishing or weakening of minority voting power. Specifically, Section 2 prohibits any voting qualification or practice—including congressional redistricting plans—applied or imposed by any state or political subdivision that results in the denial or abridgement of the right to vote based on race, color, or membership in a language minority. The statute further provides that a violation is established if, based on the totality of circumstances, electoral processes are not equally open to participation by members of a racial or language minority group in that its members have less opportunity than other members of the electorate to elect representatives of their choice. Based on this legal framework, this report next analyzes legal issues that arise in the context of congressional redistricting, addressing: the extent to which precise or ideal mathematical population equality among districts is required; whether partisanship justifies small differences in population between districts; whether the total population or eligible voters should be counted for the purposes of achieving equality among districts; when creation of a majority-minority district is required under the VRA; what limits the Fourteenth Amendment places upon congressional redistricting; and who is authorized to draw and implement a redistricting plan. In a series of cases since 1964, the Supreme Court has described the extent to which precise or ideal mathematical population equality among districts is required. Ideal or precise equality is the average population that each district would contain if a state population were evenly distributed across all districts. The total or "maximum population deviation" refers to the percentage difference from the ideal population between the most populated district and the least populated district in a redistricting map. It is important to note that for congressional districts, less deviation from precise equality has been found to be permissible than for state legislative districts. For example, in Kirkpatrick v. Preisler , the Supreme Court invalidated a congressional redistricting plan where the district with the greatest population was 3.13% over the equality ideal, and the district with the lowest population was 2.84% below it. The Court considered the maximum population deviation of 5.97% to be too great to comport with the "as nearly as practicable" standard set forth in Wes berry . Further, in Karcher v. Dagett , the Court held that "absolute" population equality is the standard for congressional districts unless a deviation is necessary to achieve "some legitimate state objective." These include "consistently applied legislative policies" such as achieving greater compactness, respecting municipal boundaries, preserving prior districts, and avoiding contests between incumbents. In Karcher , the Court rejected a 0.6984% deviation in population between the largest and the smallest district. More recently, in Tennant v. Jefferson County Commission , the Court further clarified that the "as nearly as is practicable" standard does not require congressional districts to be drawn with precise mathematical equality, but instead requires states to justify population deviation among districts with "legitimate state objectives." Relying on Karcher , the Court outlined a two-prong test to determine whether a congressional redistricting plan passes constitutional muster. First, the challengers have the burden of proving that the population differences could have been practicably avoided. Second, if successful, the burden shifts to the state to demonstrate "with some specificity" that the population differences were needed to achieve a legitimate state objective. The Court emphasized that this burden is "flexible," and depends on the size of the population deviations, the importance of the state's interests, the consistency with which the plan reflects those interests, and whether alternatives exist that might substantially serve those interests while achieving greater population equality. In Tennant , the Court determined that avoiding contests between incumbents, maintaining county boundaries, and minimizing population shifts between districts were neutral, valid state policies that warranted the relatively minor population disparities. The Court also determined that none of the alternative redistricting plans that achieved greater population equality came as close to vindicating the state's legitimate objectives. Therefore, the Court upheld the 0.79% maximum population deviation between the largest and smallest congressional district. As discussed above, Supreme Court case law has permitted state legislative districts a greater deviation from precise equality than congressional districts. Nonetheless, such deviation can be found to be improper if it is motivated by partisanship. In Cox v. Larios , the Supreme Court summarily affirmed a district court decision striking down a state legislative redistricting plan, with a maximum population deviation of 9.9%, as a violation of the one-person, one-vote principle of the Equal Protection Clause. (A summary affirmance does not necessarily signal that the Court agrees with the district court's reasoning in this case, just the result.) Among other things, the district court held that the plan was intentionally designed for partisan purposes. Specifically, the district court determined that the plan allowed Democrats to maintain or increase their delegation by under-populating the districts held by incumbent Democrats, over-populating those held by Republicans, and deliberately pairing numerous Republican incumbents in districts to run against one another. During the 2015 term, the Supreme Court has the opportunity to clarify the scope of the Larios decision. In Harris v. Arizona Independent Redistricting Commission , the Court is considering whether partisan goals can justify the drawing of state legislative districts that deviate from the principle of population equality. This case also presents the Court with an opportunity to address whether the goal of obtaining preclearance under the VRA justified the creation of unequal districts, and if so, whether that justification still exists in light of the Supreme Court's 2013 decision in Shelby County v. Holder rendering the preclearance requirement inoperable. Although this case is currently limited to addressing permissible deviations from precise population equality in the context of state legislative redistricting, a broad ruling by the Court might also impact congressional redistricting. A decision is expected by June 2016. The lower court in Harris held that population deviations among the state legislative districts primarily resulted from efforts to comply with the Voting Rights Act, and that even though partisanship played some role in the map's design, the Fourteenth Amendment challenge failed. Among other things, the three-judge district court panel held that bipartisan support for changes that lead to the population deviations undermine the notion that partisanship, rather than compliance with the Voting Rights Act, motivated the population deviations. Among the districts in the state legislative map, the district with the largest population is 4.1% above the ideal population, and the district with the smallest population is 4.7% below the ideal population, creating a maximum population deviation of 8.8%. While the Supreme Court has issued several decisions on the extent to which precise mathematical equality among districts is constitutionality required, until recently, it had not addressed who should be counted (i.e., total population, eligible voters, or some other measure of population) within districts in order to achieve such equality. It had left that determination to the states. When the Court refused to review a case presenting this issue in 2001, Justice Thomas dissented, arguing that the Court should settle the matter: "[t]he one-person, one-vote principle may, in the end, be of little consequence if we decide that each jurisdiction can choose its own measure of population. But as long as we sustain the one-person, one-vote principle, we have an obligation to explain to States and localities what it actually means." In April 2016, the Court addressed this issue. In Evenwel v. Abbott , a unanimous Supreme Court upheld, against a Fourteenth Amendment equal protection claim, a state's decision to draw its legislative districts based on total population. Notably, however, the Court declined to rule specifically on the constitutionality of a state drawing district lines based on some other measure of population, such as eligible or registered voters. Justice Ginsburg wrote the opinion for the Court, which was joined by five Justices; while concurring in the judgment, Justices Alito and Thomas wrote separate concurrences and did not join in Justice Ginsburg's opinion. The majority opinion in Evenwel relied on constitutional history, Court precedent, and longstanding practice in analyzing the question presented. First, the opinion pointed to the analogous determination made by the framers of the Constitution who decided that apportionment of seats in the U.S. House of Representatives was to be based on all inhabitants, not just voters, even though the states were free to deny many inhabitants the right to vote for such representatives. Likewise, the opinion noted, when it debated the Fourteenth Amendment, Congress reconsidered the proper basis for apportioning House seats, and expressly rejected allocation based on voter population. Therefore, the Court reasoned, "[i]t cannot be that the Fourteenth Amendment calls for the apportionment of congressional districts based on total population, but simultaneously prohibits States from apportioning their own legislative districts on the same basis." The Court also determined that Court precedent reinforces its holding. For example, the Court in Evenwel noted, in Reynolds , discussed above, it "described 'the fundamental principle of representative government in this country' as 'one of equal representation for equal numbers of people.'" Finally, the Court in Evenwel discussed the significance of the representational duties of legislators, emphasizing that they are elected to "serve all residents, not just those eligible or registered to vote." Nonvoters—including children—have an "important stake" in many legislative debates, and in receiving constituent services. Therefore, the Court concluded that drawing district lines based on the total population of inhabitants serves to promote equitable and effective legislative representation. In a concurrence, Justice Thomas reiterated his earlier observation that the Court's case law addressing the principle of one person, one vote lacks clarity, and criticized the majority for once again failing to provide a sound basis for the principle in this case. In Justice Thomas' view, the Constitution does not prescribe any one basis for drawing district lines, and states have "wide latitude" to decide whether to draw districts based on total population, eligible voters, or "any other nondiscriminatory voter base." If the Court had ruled differently in this case, that is, by requiring the drawing of district lines based on the number of eligible or registered voters, the consequences could have been significant. For example, some have argued that redistricting based on such populations could reduce the number of districts in densely inhabited urban areas, and increase the districts in more rural or suburban areas. It is important to note, however, that the Evenwel decision did not foreclose a state from choosing to use such a practice in the future. As the Court expressly announced, it did not resolve the question—as Texas had advocated in this case—of whether states may draw districts based on the population of eligible voters. The question resolved was only that states were not required to do so as opposed to using total population. Therefore, that question could come before the Court in a future case. Finally, although it does not appear that the Court's ruling in Evenwel affects congressional redistricting, and instead impacts only state legislative and local redistricting, arguments based on Evenwel could be relevant to congressional redistricting cases in the future. Under certain circumstances, the creation of one or more "majority-minority" districts may be required in a congressional redistricting plan. A majority-minority district is one in which a racial or language minority group comprises a voting majority. The creation of such districts can avoid racial vote dilution by preventing the submergence of minority voters into the majority, and the denial of an equal opportunity to elect candidates of choice. In the landmark decision Thornburg v. Gingles , the Supreme Court established a three-prong test that plaintiffs claiming vote dilution under Section 2 must prove: First, the minority group must be able to demonstrate that it is sufficiently large and geographically compact to constitute a majority in a single-member district.... Second, the minority group must be able to show that it is politically cohesive.... Third, the minority must be able to demonstrate that the white majority votes sufficiently as a bloc to enable it—in the absence of special circumstances, such as the minority candidate running unopposed—usually to defeat the minority's preferred candidate. The Court also discussed how, under Section 2, a violation is established if based on the "totality of the circumstances" and "as a result of the challenged practice or structure plaintiffs do not have an equal opportunity to participate in the political processes and to elect candidates of their choice." In order to facilitate determination of the totality of the circumstances, the Court listed the following factors, which originated in the legislative history accompanying enactment of Section 2: 1. the extent of any history of official discrimination in the state or political subdivision that touched the right of the members of the minority group to register, to vote, or otherwise to participate in the democratic process; 2. the extent to which voting in the elections of the state or political subdivisions is racially polarized; 3. the extent to which the state or political subdivision has used unusually large election districts, majority vote requirements, anti-single shot provisions, or other voting practices or procedures that may enhance the opportunity for discrimination against the minority group; 4. if there is a candidate slating process, whether the members of the minority group have been denied access to that process; 5. the extent to which members of the minority group in the state or political subdivision bear the effects of discrimination in such areas as education, employment and health, which hinder their ability to participate effectively in the political process; 6. whether political campaigns have been characterized by overt or subtle racial appeals; 7. the extent to which members of the minority group have been elected to public office in the jurisdiction. Further interpreting the Gingles three-prong test, in Bartlett v. Strickland , the Supreme Court ruled that the first prong of the test—requiring geographical compactness sufficient to constitute a majority in a district—can only be satisfied if the minority group would constitute more than 50% of the voting population if it were in a single-member district. In Bartlett , it had been argued that Section 2 requires drawing district lines in such a manner to allow minority voters to join with other voters to elect the minority group's preferred candidate, even where the minority group in a given district comprises less than 50% of the voting age population. Rejecting that argument, the Court held that Section 2 does not grant special protection to minority groups that need to form political coalitions in order to elect candidates of their choice. To mandate recognition of Section 2 claims where the ability of a minority group to elect candidates of choice relies upon "crossover" majority voters would result in "serious tension" with the third prong of the Gingles test. The third prong of Gingles requires that the minority be able to demonstrate that the majority votes sufficiently as a bloc to enable it usually to defeat the minority's preferred candidate. As the discussion above indicates, in certain circumstances, Section 2 can require the creation of one or more majority-minority districts in a congressional redistricting plan. By drawing such districts, a state can avoid racial vote dilution, and the denial of minority voters' equal opportunity to elect candidates of choice. As the Supreme Court has determined, minority voters must constitute a numerical majority—over 50%—in such minority-majority districts. However, as examined in the section below, there are constitutional limits on the creation of minority-majority districts. Congressional redistricting plans must also conform with standards of equal protection under the Fourteenth Amendment to the U.S. Constitution. According to the Supreme Court, if race is the predominant factor in the drawing of district lines, above other traditional redistricting considerations—including compactness, contiguity, and respect for political subdivision lines—then a "strict scrutiny" standard of review is applied. In this context, strict scrutiny review requires that a court determine that the state has a compelling governmental interest in creating a majority-minority district, and that the redistricting plan is narrowly tailored to further that compelling interest. These cases are often referred to as "racial gerrymandering" claims, in which plaintiffs argue that race was improperly used in the drawing of district boundaries. Case law in this area demonstrates a tension between compliance with the VRA and conformance with standards of equal protection. The Supreme Court has held that, to prevail in a racial gerrymandering claim, the plaintiff has the burden of proving that racial considerations were "dominant and controlling" in the creation of the districts at issue. In Easley v. Cromartie (Cromartie II) , the Supreme Court upheld the constitutionality of the long-disputed 12 th Congressional District of North Carolina against the argument that the 47% black district was an unconstitutional racial gerrymander. In this case, North Carolina and a group of African American voters had appealed a lower court decision holding that the district, as redrawn by the legislature in 1997 in an attempt to cure an earlier violation, was still unconstitutional. The Court determined that the basic question presented in Cromartie II was whether the legislature drew the district boundaries "because of race rather than because of political behavior (coupled with traditional, nonracial redistricting considerations)." In applying its earlier precedents, the Court determined that the party attacking the legislature's plan had the burden of proving that racial considerations are "dominant and controlling." Overturning the lower court ruling, the Supreme Court held that the attacking party did not successfully demonstrate that race, instead of politics, predominantly accounted for the way the plan was drawn. In the 2015 case of Alabama Legislative Black Caucus v. Alabama , the Court held that in determining whether race is a predominant factor in the redistricting process, and thereby whether strict scrutiny is triggered, a court must engage in a district-by-district analysis instead of analyzing the state as an undifferentiated whole. The Court further confirmed that in calculating the predominance of race, a court is required to determine whether the legislature subordinated traditional race-neutral redistricting principles to racial considerations. The "background rule" of equal population is not a traditional redistricting principle and therefore should not be weighed against the use of race to determine predominance, the Court held. In other words, the Court explained, if 1,000 additional voters need to be moved to a particular district in order to achieve equal population, ascertaining the predominance of race involves examining which voters were moved, and whether the legislature relied on race instead of other traditional factors in making those decisions. The Alabama Court also determined that the preclearance requirements of Section 5 of the VRA, which are no longer operable, did not require a covered jurisdiction to maintain a particular numerical majority percentage of minority voters in a minority-majority district. Instead, the Court held that Section 5 required that a minority-majority district be drawn in order to maintain a minority's ability to elect a preferred candidate of choice. The Supreme Court vacated the lower court's ruling and remanded for reconsideration using the standards it articulated. The principal dissent, written by Justice Scalia, joined by the Chief Justice and Justices Thomas and Alito, characterized the Court's ruling as "sweeping." The dissent cautioned that the Court's ruling will have "profound implications" for future cases involving the principle of one person, one vote; the VRA; and the primacy of states to manage their own elections. In a separate dissent, Justice Thomas criticized the Court's voting rights jurisprudence generally, and this case specifically, calling it "nothing more than a fight over the 'best' racial quota." Alabama is notable in that minority voters successfully challenged, under the Equal Protection Clause, districts that the state maintained were created to comply with the Voting Rights Act. The decision also represents the Court's most recent interpretation of the requirements of Section 5 of the VRA. This could be of interest to Congress should it decide to draft a new coverage formula in order to reinstitute Section 5 preclearance. In another pending case, Wittman v. Personhuballah , the Supreme Court is poised to clarify what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan. In Wittman , appellants are appealing a federal district court ruling that invalidated, for a second time, Virginia's Third Congressional District—comprised of a 56.3% majority African-American voting age population—as an unconstitutional racial gerrymander. The three-judge panel, by a 2-1 vote, ordered the Virginia legislature to draw a new congressional district map. In addition to citing circumstantial evidence of the district's shape and other characteristics, the court found that in establishing the district's racial composition, the legislature's predominant purpose was compliance with Section 5 of the VRA. The court also observed that the Supreme Court has not yet decided whether continued compliance with the VRA is a compelling state interest for a district drawn prior to the Court's ruling in Shelby rendering Section 5 inoperable. Relying on Alabama , discussed above, the court explained that Section 5 does not require a covered state, in drawing a redistricting plan, to maintain a particular numerical minority percentage in majority-minority districts. Instead, it is proper to inquire as to what extent existing minority percentages need to be preserved in order to maintain the minority's ability to elect its candidate of choice. As compared to Virginia's earlier redistricting plan, the 2012 plan increased the African-American voting age population in the Third Congressional District from 53.1% to 56.3%. Noting that African-American voters in the district had successfully elected representatives of choice for two decades, the court determined that the increase in African-American voters was not justified in order to avoid retrogression and therefore, was not narrowly tailored to achieve the goal of complying with Section 5. The dissent argued that the plaintiffs failed to prove that race was the predominant factor in drawing the district lines, and instead, maintained that the creation of the district was motivated by traditional redistricting principles and incumbency protection. Intervenor-defendants in the lower court proceeding, consisting of current and former Members of Congress, appealed to the Supreme Court. They argued that the lower court failed to require the challengers to the redistricting plan to prove, as required by Alabama , that the legislature subordinated the traditional race-neutral redistricting principles of incumbency protection and political affiliation to racial considerations. Further, they maintained that because race and political affiliation are often highly correlated, challengers must prove that race rather than politics caused subordination of traditional redistricting principles. In addition to questions relating to the merits of the case, as a threshold matter, the Court is also considering the question of whether the appellants lack standing because they neither reside in, nor represent, the congressional district that is being challenged. A decision in this case is expected by June 2016. In the bulk of the states, the legislature has primary authority over congressional redistricting. Due in part to concerns about partisan political gerrymandering—the drawing of districts for partisan political advantage—some states have adopted independent commissions for conducting redistricting. For example, Arizona and California created such independent redistricting commissions by ballot initiative, thereby removing control of congressional redistricting from the states' legislative bodies and vesting it in commissions. The ballot initiatives specify how commission members are to be appointed, and the procedures to be followed in drawing congressional (and state legislative) districts. In Arizona, the state legislature filed suit challenging the constitutionality of the independent commission. In 2015, in Arizona State Legislature v. Arizona Independent Redistricting Commission , the Supreme Court upheld the constitutionality of an independent commission, established by initiative, for drawing congressional district boundaries. Affirming a lower court ruling, the Supreme Court held that the Elections Clause of the Constitution, Article I, Section 4 , clause 1, permits a commission—instead of a state legislature—to draw congressional districts. The Elections Clause provides that the times, places, and manner of holding congressional elections be prescribed in each state "by the Legislature thereof." It further specifies that the Congress may at any time "make or alter" such laws. Announcing that "all political power flows from the people," the Court stated that the history and purpose of the Elections Clause do not support a conclusion that the people of a state are prevented from creating an independent commission to draw congressional districts. The main purpose of the Elections Clause, in the Court's view, was to empower Congress to override state election laws, particularly those that involve political "manipulation of electoral rules" by state politicians acting in their own self-interest. It was not designed to restrict "the way" that states enact such legislation. As the Court has recognized in other cases, the term "legislature" is used several times in the U.S. Constitution. The Court reviewed the cases in which it had considered the term, and read them to evidence that the meaning of the term differs according to its context. For example, in a 1916 case , the Court held that the term "legislature" was not limited to the representative body alone, but instead, encompassed a veto power held by the people through a referendum. Similarly, in a 1932 case , the Court held that a state's legislative authority included not just the two houses of the legislature, but also the veto power of the governor. In a 1920 case, however, the Court held that in the context of ratifying constitutional amendments, the term "legislature" has a different meaning, one that excludes the referendum and a governor's veto. While acknowledging that initiatives were not addressed in its prior case law, the Court found no constitutional barrier to a state empowering its people with a legislative function. Furthermore, even though the framers of the Constitution may not have envisioned the modern initiative process, the Court ruled that legislating through initiative is in "full harmony" with the Constitution's conception that the people are the source of governmental power. The Court further cautioned that the Elections Clause should not be interpreted to single out federal elections as the one area where states cannot use citizen initiatives as an alternative legislative process. The Court also held that Arizona's congressional redistricting process comports with a federal redistricting statute, codified at 2 U. S. C. Section 2a(c), providing that until a state is redistricted as provided "by the law" of the state, it must follow federally prescribed congressional redistricting procedures. Examining its legislative history, the Court determined that Congress clearly intended that the statute provide states with the full authority to employ their own laws and regulations—including initiatives—in the creation of congressional districts. When Congress replaced the term "legislature" in the congressional apportionment laws of 1862 through 1901, to "the manner provided by the laws" of the state in the 1911 law, the Court determined that Congress was responding to several states supplementing the representative legislature mode of lawmaking with a direct lawmaking role for the people through initiative and referendum. As Congress used virtually identical language when it enacted Section 2a(c) in 1941, the Court concluded that Congress intended the statute to include redistricting by initiative. This case was decided by a 5-4 vote. In contrast to the majority, the dissent advocated for greater reliance on the text of the Elections Clause, maintaining that the meaning of the term "legislature" is unambiguous, with one consistent meaning throughout the text of the Constitution: a representative body that makes the laws of the people, rather than, as the Court held, differing meanings depending on its context. Writing the primary dissent in this case, Chief Justice Roberts pointed out that the Constitution contains 17 references to a state's legislature. All such references, he argued, are consistent with the understanding of a legislature as a representative body. More importantly, he maintained, many of these references to "legislature" in the Constitution are only consistent with the concept of an institutional legislature, and are indeed incompatible with the majority's interpretation that the term means the people as a whole. In sum, the dissent concluded that the Court's ruling had no basis in the text, structure, or history of the Constitution. While Congress retains the power under the Constitution to make or alter election laws affecting congressional elections, this decision clarifies that states can enact such laws through the initiative process. For example, as discussed above, California has an initiative-established independent commission for drawing congressional district boundaries similar to Arizona. Furthermore, election laws in other states, such as Ohio, prohibiting ballots providing for straight-ticket voting along party lines, and Oregon, shortening the deadline for voter registration to 20 days before an election, were enacted through the initiative process. This ruling suggests that such state laws regulating congressional elections are likely to withstand challenge under the Elections Clause. H.R. 75 , the Coretta Scott King Mid-Decade Redistricting Prohibition Act of 2015, would prohibit the states from carrying out more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA. H.R. 1347 , the John Tanner Fairness and Independence in Redistricting Act, would prohibit the states from conducting more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA, and would require the states to conduct redistricting through independent commissions. H.R. 934 , the Redistricting and Voter Protection Act of 2015, would require any state that, after enacting a congressional redistricting plan following a decennial census and apportionment, enacts a subsequent congressional redistricting plan prior to the next decennial census and apportionment, to obtain a declaratory judgment or preclearance as provided under Section 5 of the VRA in order for the subsequent plan to take effect. H.R. 1346 , the Redistricting Transparency Act of 2015, would require the states to conduct the process of congressional redistricting in such a manner that the public is informed about proposed redistricting plans through a public Internet site, and has the opportunity to participate in developing congressional redistricting plans before they are adopted. H.R. 2173 , the Redistricting Reform Act of 2015, would prohibit the states from conducting more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA, and would require the states to conduct redistricting through independent commissions. The legal framework for congressional redistricting resides at the intersection of the Constitution's limits and powers, requirements prescribed under federal law, and the various processes imposed by the states. Since the 1960s, after determining that constitutional challenges to redistricting plans are justiciable, the Supreme Court has issued a series of rulings balancing these competing commands. The Court's case law has significantly shaped how congressional districts are drawn. For example, a recent redistricting decision held that the Constitution permits states to create, by ballot initiatives and referenda, nonpartisan independent redistricting commissions for congressional redistricting. If more states adopt similar laws, it could change the process of congressional redistricting nationwide. Another recent Court decision construed the inoperable preclearance requirements in Section 5 of the Voting Rights Act to require a covered jurisdiction to maintain minority voters' ability to elect candidates of choice in a new redistricting plan, not to require that a particular numerical percentage of minority voters in a minority-majority district be maintained. Looking ahead, pending Supreme Court cases could likewise impact the process of congressional redistricting, and the degree to which challenges to redistricting plans will be successful.

Congressional redistricting is the drawing of district boundaries from which the people choose their representatives to the U.S. House of Representatives. The legal framework for congressional redistricting resides at the intersection of the Constitution's limits and powers, requirements prescribed under federal law, and the various processes imposed by the states. Prior to the 1960s, court challenges to redistricting plans were considered non-justiciable political questions that were most appropriately addressed by the political branches of government, not the judiciary. In 1962, in the landmark ruling of Baker v. Carr, the Supreme Court pivoted and held that a constitutional challenge to a redistricting plan was not a political question and was justiciable. Since then, a series of constitutional and legal challenges have significantly shaped how congressional districts are drawn. Key Takeaways from This Report The Constitution requires that each congressional district contain approximately the same population. This equality standard was set forth by the Supreme Court in a series of cases articulating the principle of "one person, one vote." In order to comport with the equality standard, at least every 10 years, in response to changes in the number of Representatives or shifts in population, most states are required to draw new congressional district boundaries. Congressional districts are also required to comply with Section 2 of the Voting Rights Act (VRA), prohibiting any voting qualification or practice—including congressional redistricting plans—that results in the denial or abridgement of the right to vote based on race, color, or membership in a language minority. Under certain circumstances, the VRA may require the creation of one or more "majority-minority" districts, in which a racial or language minority group comprises a voting majority. However, if race is the predominant factor in the drawing of district lines, then a "strict scrutiny" standard of review applies. In 2015, in Alabama Legislative Black Caucus v. Alabama, the Supreme Court set forth standards for determining whether race is a predominant factor in creating a redistricting map when considering a Fourteenth Amendment equal protection claim. Alabama also held that the inoperable preclearance requirement in Section 5 of the VRA does not require that a new redistricting plan maintain the same percentage of minority voters in a majority-minority district. Instead, the Court held that Section 5 requires that the plan maintain a minority's ability to elect candidates of choice. Last year, in Arizona State Legislature v. Arizona Independent Redistricting Commission, the Court held that states can establish independent commissions, by ballot initiative, to conduct congressional redistricting. In April 2016, in Evenwel v. Abbott, the Court held that states may draw their legislative districts based on total population rather than based on eligible or registered voters. As of the date of this report, two redistricting cases are pending before the Supreme Court: Harris v. Arizona Independent Redistricting Commission, regarding whether partisanship can justify differences in population; and Wittman v. Personhuballah, regarding what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan.

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Severe fire seasons in the past decade have prompted substantial debate and proposals related to fire protection programs and funding. President Clinton proposed a new National Fire Plan in 2000 to increase funding to protect federal, state, and private lands; Congress largely enacted this request. The severe 2002 fire season led President Bush to propose a Healthy Forests Initiative to expedite fuel reduction on federal lands. In 2003, Congress enacted the Healthy Forests Restoration Act to expedite fuel reduction on federal lands and to authorize other forest protection programs. In 2009, Congress enacted the Federal Land Assistance, Management, and Enhancement (FLAME) Act ( P.L. 111-88 ) to insulate other agency programs from high wildfire suppression costs. Wildfire funding has continued at relatively high levels since 2000, and now constitutes a substantial portion of land management agency budgets. Severe fire seasons seem to have become more common since 2000. (See Figure 1 .) Total wildfire funding for FY2008 was a record high of $4.46 billion. The high costs of firefighting continue to attract attention. This report briefly describes the three categories of federal programs for wildfire protection. One category involves protection of the federal lands managed by the U.S. Department of Agriculture's Forest Service (FS), and by the U.S. Department of the Interior (DOI), whose wildfire programs traditionally were funded through the Bureau of Land Management (BLM) but are now a department-wide funding item. A second category addresses protection of non-federal lands through programs to assist state and local governments and communities; these programs can be used by the state and local governments to reduce wildland fuels, to otherwise prepare for fire control, to contain and control wildfires, and to respond after severe wildfires have burned. A third category of federal programs supports fire research, fire facilities, and improvements in forest health. The last section of this report discusses issues associated with the high wildfire costs, including pending legislation. The FS was created in 1905 with the merger of the USDA Bureau of Forestry (which conducted research and provided technical assistance to states and private landowners) and the Forestry Division of the General Land Office (a predecessor of the BLM). An early focus was on halting wildfires in the national forests following several large fires that burned nearly 5 million acres in Montana and Idaho in 1910. Efforts to control wildfires were founded on a belief that fast, aggressive control was efficient, because fires that were stopped while small would not become the large, destructive conflagrations that are so expensive to control. The goals were to protect human lives, then private property, then natural resources. In 1926, the agency developed its 10-acre policy —that all wildfires should be controlled before they reached 10 acres in size—clearly aimed at keeping wildfires small. Then, in 1935, the FS added its 10:00 a.m. policy —that, for fires exceeding 10 acres, efforts should focus on control before the next burning period began (at 10:00 a.m.). Under the 10:00 a.m. policy, the goal in suppressing large fires is to gain control during the relatively cool and calm conditions of night and early morning, rather than spending major efforts during the heat of the day. In the 1970s, these aggressive FS fire control policies began to be questioned. Research had documented that, in some situations, wildfires brought ecological benefits to the burned areas—aiding regeneration of native flora, improving the habitat of native fauna, and reducing infestations of pests and of exotic and invasive species. The Office of Management and Budget (OMB) challenged proposed budget increases based on FS policies, and a subsequent study suggested that the fire control policies would increase expenditures beyond efficient levels. Following the 1988 fires in Yellowstone, concerns were raised about unnaturally high fuel loads leading to catastrophic fires and spiraling suppression costs. Congress established the National Commission on Wildfire Disasters, whose 1994 report described a situation of dangerously high fuel accumulations. The summer of 1994 was another severe fire season, leading to more calls for action to prevent future severe fire seasons. In addition to the concerns about fuel loads, concerns were voiced that, in a fire in Washington in 1994, federal firefighting resources had been diverted from protecting federal lands and resources to protecting nearby private residences and communities. The Clinton Administration directed a review of federal fire policy, and the agencies released the new Federal Wildland Fire Management Policy & Program Review: Final Report in December 1995. The report recommended altering federal fire policy from priority for private property to equal priority for private property and federal resources, based on values at risk. (Protecting human life is the first priority in firefighting.) The recommended change became effective after the report was accepted by the Secretaries of Agriculture and the Interior. Concerns about wildfire threats persist. In 1999, the General Accounting Office (GAO, now the Government Accountability Office) issued two reports recommending a cohesive wildfire protection strategy for the FS and a combined strategy for the FS and BLM to address certain firefighting weaknesses. GAO reiterated the need for a cohesive strategy in 2009. To address the severe 2000 fire season, the Clinton Administration developed the National Fire Plan and a supplemental budget request. Congress enacted this additional funding in the FY2001 Interior appropriations act, and has since largely maintained the higher funding. (See Figure 2 and Table A-2 .) During the severe 2002 fire season, the Bush Administration developed the Healthy Forests Initiative to expedite fuel reduction projects in priority areas through administrative and legislative changes. Some elements of the initiative have been addressed through regulatory changes; others were addressed in the Healthy Forests Restoration Act of 2003 ( P.L. 108-148 ). Wildfire management appropriations have risen over the past 15 years, as shown in Figure 2 . The tables below present data on funding for the three categories of federal fire programs—protection of federal lands ( Table 1 and Table 2 ); assistance for protection of non-federal lands ( Table 3 and Table 4 ); and other fire-related expenditures (also Table 3 and Table 4 ). The FS and DOI use three fire appropriation accounts—preparedness, suppression operations, and other operations—to fund most federal fire programs. However, the agencies include different activities in the accounts (e.g., the BLM historically included fire research and fire facility funding in the preparedness account), and the accounts change over time (e.g., the agencies split operations funding into suppression and other operations in 2001). Thus, the data, taken from the agency budget justifications for the National Fire Plan, have been rearranged in this report to present consistent data and trends on the three categories of federal wildfire programs since 1999. Many wildfire management funds are used to protect federal lands. Table 1 shows wildfire management appropriations for FY1999-FY2007; more recent data are shown in Table 2 . The data in these tables exclude funding for the other two categories of federal wildfire funding—assistance to state and local governments, communities, and private landowners; and other fire-related activities (research, fire facility maintenance, forest health improvement, etc.). Federal funding to protect federal lands differs from federal funding to protect non-federal lands primarily in that the funding is predetermined to assist with certain efforts, such as suppression or preparedness. Federal funding for non-federal lands tends to give the states and other entities substantial discretion on how the funds will be used. The BLM included funds for fire research and fire facilities under its preparedness budget line item through FY2004; these funds have been excluded from Table 1 . The tables show appropriations by fiscal year, with emergency funding identified for the year in which it was provided, rather than in the year it was spent. The agencies traditionally were authorized to borrow from other accounts for fire suppression, and emergency funds generally repay these borrowings. The tables show that total federal land fire management appropriations rose substantially in FY2001 and have since remained relatively high, with fluctuations generally depending on the severity of the fire season in the preceding calendar year. Fire preparedness appropriations provide funding for fire prevention and detection as well as for equipment, training, and baseline personnel. Preparedness funding rose substantially (58%) in FY2001 from the prior year, with DOI funding rising more (81%) than FS funding (49%). In FY2004, preparedness funding rose by a lesser amount (7%), with the rise entirely in FS preparedness. (DOI preparedness funding declined slightly.) Funding was relatively stable for FY2004 through FY2011. However, for FY2012, the appropriations law provided a substantial ($332 million, 49%) increase in FS preparedness, and a modest ($14 million, 5%) decline in DOI preparedness. The budget overview notes that the increase in FS preparedness (and roughly comparable decline in suppression funding) stems from a realignment of various preparedness costs that were shifted to the suppression account over the previous several fiscal years. Funds for fighting wildfires—appropriations for fire suppression and supplemental, contingency, or emergency funds—have fluctuated widely over the past decade, from less than $430 million in FY1999 to $2.41 billion in FY2008. Some of the variation results from differences in the severity of the fire season in the preceding year, particularly for supplemental and emergency funding. Such fluctuations have long been part of the agencies' funding; for example, total appropriations in FY1997 were double the FY1996 levels owing to a severe season in the summer of 1996. Appropriations for fire suppression rose steadily and sharply for both agencies from FY2002 through FY2008, then stabilized through FY2011. The FY2012 appropriations law substantially reduced suppression appropriations—down $457 million (46%) for FS fire suppression and $128 million (32%) for DOI fire suppression. However, this was offset by increases in supplemental, contingency, and emergency funds (including FLAME funds; see below). Title V of the FY2010 Interior, Environment, and Related Agencies Appropriations Act ( P.L. 111-88 ) was the Federal Land Assistance, Management, and Enhancement (FLAME) Act. This title established FLAME Wildfire Suppression Reserve Accounts for the FS and DOI, to be funded from annual appropriations. The FLAME funds can be used if the Secretary declares that (1) an individual wildfire covers at least 300 acres or threatens lives, property, or resources, or (2) cumulative wildfire suppression and emergency response costs will exceed, within 30 days, appropriations for wildfire suppression and emergency responses. FLAME funds allow both FS and DOI to pull from a reserve account to continue routine wildfire suppression and protection efforts if funds from other accounts are depleted. The FY2010 act also included $413 million for the FS FLAME fund and $61 million for the DOI FLAME fund. For FY2011, FLAME fund appropriations were much lower for the FS—$90 million (including the $200 million rescission)—while being stable for DOI. For FY2012, the appropriations law included $316 million for the FS FLAME fund and $92 million for the DOI FLAME fund. The sum total of these accounts for wildfire suppression for FY2012 was less than the total funds available for wildfire suppression in FY2010 or FY2011. For the FS, the request totaled $855 million ($539 million in the suppression account, $316 million in the FLAME fund); this is $231 million (21%) less than the FY2011 funding total of $1.09 billion, and $556 million (39%) less than the FY2010 funding total of $1.41 billion. For DOI, the request totaled $363 million ($271 million in the suppression account, $92 million in the FLAME fund); this is $97 million (21%) less than the FY2011 funding total of $460 million, and $82 million (18%) less than the FY2010 funding total of $445 million. Wildfire appropriations for rehabilitating burned areas have been relatively stable, except in a few fiscal years. Most wildfire site rehabilitation funds have gone to the BLM for treating burned DOI lands. Except for a fivefold increase for FY2001 and a doubling in FY2008, DOI site rehabilitation funds generally have ranged between $20 and $25 million annually since FY2000. The FY2012 appropriations law provides $13 million for DOI site rehabilitation funding, a decrease of $20 million (61%) from FY2011. The FS generally receives few wildfire funds for site rehabilitation (none prior to FY2001), and instead uses funds appropriated to other accounts, such as watershed improvement and vegetation management. However, the FS was appropriated $142 million of wildfire funds for site rehabilitation in FY2001, $63 million in FY2002, and $111 million in FY2008 (including $100 million in emergency supplemental funding). These three years account for 81% of FS wildfire appropriations for site rehabilitation since FY2000. For FY2012, no funding was provided for FS site rehabilitation. Fuel reduction funding is intended to protect lands and resources from wildfire damages by lowering the fuel loads on federal lands, and thus making the fires less intense and more controllable. Total fuel reduction funding more than tripled in FY2001. Fuel reduction funding rose slowly from FY2001 through FY2007. Funding rose substantially (24%) in FY2008 and again in FY2009 (another 28%), owing to funding in the economic stimulus, P.L. 111-5 (the American Recovery and Reinvestment Act of 2009). For FY2010, the appropriations declined substantially (41% for the FS and 5% for DOI), and FY2011 appropriations were lower still (down slightly for the FS and down another 11% for DOI). The FY2012 appropriations law brought further declines. DOI fuel reduction funding for FY2012 was $157 million, 14% below FY2011, which was the lowest level since FY2000. For the FS, fuel reduction funding for FY2012 is $57 million. The FS proposed shifting fuel reduction funding for areas outside the Wildland-Urban Interface (WUI) into a new line item within the National Forest System account—Integrated Resource Restoration—along with funding from several other line items. The FY2012 appropriations law directs both the FS and DOI to remove the requirement that 75% and 90%, respectively, of hazardous fuels funding be spent in the WUI; instead, funds are to be spent on the highest-priority projects in the highest-priority areas. Some FS fuel reduction funds have been used and proposed for wood energy programs. For FY2009-FY2012, $5 million annually was used for biomass grants. In FY2010, $10.0 million was used for the Collaborative Forest Landscape Restoration Fund, to be used in large part to restore national forest landscapes through fuel reduction, and thus is included in the fuel reduction funding in Table 1 . (In FY2011, this program was funded within the National Forest System account, and was proposed to be included in the new Integrated Resource Restoration line item for FY2012.) These programs can contribute to fuel reduction for the national forests, since they provide markets for the fuels to be removed. However, they are not limited to woody biomass from national forests, and no allocation of funding between fuels from national forests and biomass from non-federal lands is specified. Thus, these programs are included below, under assistance for non-federal lands. States are responsible for fire protection of non-federal lands, except for lands protected by the federal agencies under cooperative agreements. The federal government, primarily through the FS, has a group of wildfire programs to provide assistance to states, local governments, and communities to protect non-federal (both government and private) lands from wildfire damages. Most FS fire assistance programs are funded under the agency's State and Private Forestry (S&PF) branch. State fire assistance includes financial and technical help for fire prevention, fire control, and prescribed fire use for state foresters, and through them, for other agencies and organizations. In cooperation with the General Services Administration (GSA), the FS is encouraged to transfer "excess personal property" (equipment) from federal agencies to state and local firefighting forces. The FS also provides assistance directly to volunteer fire departments. Since FY2001, fire assistance funding also has come through wildfire appropriations. The economic stimulus legislation, P.L. 111-5 , contained wildfire funds for state and private forestry activities, including fuel reduction, forest health improvement activities (discussed under " Other Fire Funding ," below), and wood energy grants. In addition, the 2002 farm bill ( P.L. 107-171 ) created a new community fire protection program, authorizing the FS to assist communities in protecting themselves from wildfires and to act on non-federal lands (with the consent of landowners) to assist in protecting structures and communities from wildfires. The 2008 farm bill ( P.L. 110-246 ) created two biomass energy grant programs—the Community Wood Energy Program and the Forest Biomass for Energy Program. These subsidies may stimulate markets for fuel removed from non-federal lands for wildfire protection. Wildfire funds have also been provided for economic assistance. For three years (FY2001-FY2003), FS wildfire appropriations were added to the S&PF Economic Action Program (EAP) for training and for loans to existing or new ventures to help local economies. In addition, in FY2001, the FS received fire funds to directly aid communities recovering from the severe fires in 2000. DOI also received funding to assist rural areas affected by wildfires for FY2001 through FY2010 (except for FY2007). Total assistance funds for protecting non-federal lands increased substantially in FY2001, from $27 million (all FS S&PF funds) to $148 million. Funding dropped about 20% in FY2002 (to $118 million) and fluctuated widely (by as much as 35% annually) through FY2007. Funding nearly tripled in FY2008, and jumped again (up another 42%) in FY2009. In FY2010, funding fell substantially (by 63%), to below the FY2001 level. Funding fell (by another 12%) in FY2011 and continued the downward trend in FY2012, falling by another 12%. Funding for assistance programs is shown in Table 3 and Table 4 . There appear to be multiple reasons for the fluctuations over time; no one theme explains them. Wildfire funds for assistance programs were enacted initially in FY2001, and have been maintained for FS state and volunteer assistance programs. For FY2008, some of the emergency funds provided for FS fuel reduction (in P.L. 110-116 and in P.L. 110-329 ) were directed to fuel reduction on non-federal lands; these funds have been included in state fire assistance in Table 4 , and excluded from Table 2 . FS wildfire funding for state fire assistance more than quadrupled in FY2008, and rose another 50% in FY2009, with funding in the economic stimulus. Funding declined substantially (by 74%) in FY2010, fell further (by 9%) in FY2011, and declined again (by 14%) in FY2012. FS community assistance to aid communities affected by fires in the summer of 2000 was a one-time appropriation, and FS EAP funds from wildfire appropriations were enacted for only three years. Appropriations for DOI rural assistance were provided annually from FY2001 through FY2010, except for FY2007. However, no funds were provided for FY2011 and FY2012. In contrast, funding for the two FS biomass energy programs—Forest Biomass for Energy and Community Wood Energy Program—has been minimal. Discretionary funding of $12 million annually was authorized to be appropriated for FY2009-FY2012 for the Forest Biomass for Energy program; however, no funding has been appropriated through FY2012. Discretionary funding of $5 million annually for the Community Wood Energy Program was authorized to be appropriated for FY2009-FY2012. No funding was appropriated for this program between FY2009 and FY2012; however, the FS awarded $49 million in funding from the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ) for wood-to-energy projects, and the appropriations committee reports for FY2010 and FY2011 directed that $5 million in Hazardous Fuels be used to fund biomass energy projects. The sustained level of funding authorized to be appropriated, although not appropriated, reflects some interest in fuel reduction, particularly on federal lands for wildfire protection, combined with the desire to produce renewable energy and transportation fuels. Additionally, the FY2012 appropriations law provided the FS with $5 million under the hazardous fuels line item for biomass grants through the Woody Biomass Utilization Grant Program. While some renewable and bioenergy programs allow biomass fuels from federal lands, others restrict such use. Wildfire appropriations are also provided for several other activities, including wildfire research, construction and maintenance of fire facilities, and forest health management, as shown in Table 3 and Table 4 . Wildfire funds for fire research have been enacted for both DOI and the FS for the Joint Fire Science program. For FY2012, the appropriations law reduced the FS funding by 9%. The FS also has been appropriated wildfire funds for fire plan research and development, beginning in FY2001 and averaging more than $22 million annually; for FY2012, the appropriations law provided $22 million. These funds supplement monies for wildfire research in the FS research account, but the amount of FS research funding for wildfire research is not specified. Both DOI and the FS have received funds to improve deteriorating fire facilities. The BLM long used a portion of its fire preparedness funds for "deferred maintenance and capital improvements" (i.e., for fire facilities), but the level fluctuated. DOI's FY2012 appropriation for fire facilities matched the annual appropriations of $6 million for FY2008 through FY2011. FS wildfire funds for fire facilities declined after the initial $43.9 million in FY2001 and ended in FY2004, except for $14.0 million of emergency funds in FY2008. The FS also builds and maintains fire facilities with its capital construction and maintenance account, but the portion used for fire facilities is unknown. Finally, the FS has received wildfire funds for forest health management. This S&PF program focuses on assessing and controlling insect and disease infestations on federal and cooperative (i.e., non-federal) lands, but includes efforts to control invasive species. In FY2001 and FY2002, the FS received nearly $12 million annually in wildfire funds for forest health management. Appropriations rose to nearly $25 million in FY2004, and have generally remained near that level. For FY2010 and FY2011, appropriations rose to $32 million of wildfire funding for forest health management, but FY2012 appropriations dropped to $24.3 million. Four issues related to wildfire funding have arisen in the last few years. The one receiving the most congressional attention is the high cost of wildfire management and its effect on other aspects of federal land management. Another issue is the level of fire protection funding to reduce fuel loads on federal lands. A third, related issue is the federal role in fire protection of non-federal lands and structures, and the funding of the relevant federal activities. During the 109 th Congress and again recently, a fourth issue was raised, about post-fire rehabilitation. Federal costs for wildfire management are substantially higher than they were in the 1990s, as shown in Figure 2 . Federal wildfire appropriations averaged $1.1 billion for FY1994-FY1999, and ranged from $772 million to $1.4 billion. For FY2004-FY2009, federal wildfire appropriations averaged $3.4 billion—more than three times above the FY1994-FY1999 average—and ranged from $2.7 billion to $4.5 billion. (The data are not adjusted for inflation.) Furthermore, the higher costs seem to be continuing, since FY2008 and FY2009 had the highest wildfire funding in history. This has been followed by lower FY2010, FY2011, and FY2012 appropriations, but funding has not declined as much as the decline in area burned. Management costs have risen in response to increasingly severe wildfire seasons, as shown in Figure 1 . The average acreage burned was 3.32 million acres annually for 1990-1999 and 6.93 million acres annually for 2000-2009. The six biggest fire seasons of the past 50 years—2000, 2002, 2004, 2005, 2006, and 2007—have occurred in the past decade. The threat of severe wildfires and the costs of fire protection have grown because many forests have unnaturally high amounts of biomass to fuel the fires (discussed further below). Increased costs have also been attributed to the increasing numbers of homes and people in and near forests—the wildland-urban interface . As more people and valuable homes are exposed to wildfire threats, the costs to suppress wildfires to protect those people and houses rises substantially. Wildfire management has also become relatively more important for the agencies. In addition to the absolute rise in wildfire management costs, a greater share of discretionary appropriations have been spent on wildfire management in recent years. For FY1993-FY2000, wildfire management appropriations were 25% of discretionary appropriations for the FS, ranging from 16% in FY1993 to 30% in FY1997. However, for FY2003 through FY2011, wildfire management funding averaged 47% of discretionary FS appropriations, ranging from 42% in FY2006 to 56% in FY2008. (The FY2012 appropriations law provided 45% of discretionary funding for FS wildfire management.) Concerns have focused on the continued high costs of wildfire management, especially of fire suppression expenditures, and on the indirect effects of those high costs on other agency management programs. Numerous organizations have examined wildfire suppression costs and made recommendations to the agencies for how to contain those costs. These reports present three general conclusions: (1) a fair share of wildfire suppression should be paid by state and/or local governments; (2) more, better, and better-focused fuel reduction efforts are needed (discussed below); and (3) better accountability for cost control is needed. Several reports have noted that wildfire suppression cost-share agreements are inconsistent and inequitable, and that cost apportionment and responsibilities among the various levels of government are unclear. This has led to increasing reliance by homeowners and local governments on federal fire protection, despite the relatively clear direction in the 1995 federal fire policy review to increase local responsibility for wildfire protection and suppression for non-federal lands and structures. The reports note that significant local cost responsibility is necessary to give incentives to homeowners and local governments to take actions to protect themselves, and that without such incentives, federal costs will continue to escalate. The reports also discuss the need for better cost control and accountability. Most have noted the inconsistent cost tracking and the weak measures of the benefits of fire suppression efforts. GAO noted: the agencies need to establish clear goals, strategies, and performance measures to help contain wildland fire costs. Although the agencies have taken certain steps to help contain wildland fire costs, the effectiveness of these steps may be limited because agencies have not established clear cost containment goals for the wildland fire program, including how containing costs should be considered in relation to other wildland fire program goals such as protecting lives, resources, and property; strategies to achieve these goals; or effective performance measures to track their progress. Another part of cost control and accountability is integrating wildfire management in land and resource planning and in budgeting. One aspect of this integration is maintaining local capacity for initial attack on new wildfires. Most of the reports assert that, without that local capacity, new fires could grow into additional conflagrations if resources are too focused on suppressing current large fires. However, the very high cost of implementing this vision (essentially the 10-acre policy of the 1920s) and lack of evidence of the benefits led the agencies to abandon this approach for wildfire planning in the 1970s. This leads to questions about the effectiveness of fire suppression. The Strategic Issues Panel noted that the high cost of large fires was the result of the "unwillingness to take greater risks, unwillingness to recognize that suppression techniques are sometimes futile, the 'free' nature of wildland fire suppression funding, and public and political expectations." FS policy results in fire managers generally not being held accountable for "excess" spending on fire control or for fire damages if they clearly put forth valiant efforts to control the conflagration. However, they are blamed for fire damages if the fire control efforts are seen as insufficient—too few people, too little equipment, not enough air tanker drops, or similar problems. The Strategic Issues Panel recommended better fire cost data and "a benefit cost measure as the core measure of suppression cost effectiveness." Wildfire suppression appropriations—including emergency supplemental funding—exceeded $1 billion for the first time in FY2001, and have remained above $1 billion annually since FY2003, exceeding $2.4 billion in FY2008. Furthermore, wildfire suppression expenditures have exceeded agency appropriations annually for more than a decade. How can an agency spend more than its appropriations? In most situations, it can't. However, provisions in the annual Interior appropriations acts authorized DOI and the FS to borrow unobligated funds from other accounts for emergency firefighting. This, in effect, was an open-ended reprogramming authority. Historically, the authority to borrow funds from other accounts was not a significant problem. The FS has several mandatory spending accounts, funded primarily from timber receipts; prior to 1990, several of these accounts had substantial running balances. One, the Knutson-Vandenberg (K-V) Fund, was particularly useful, since it had a running balance of about $500 million (about three years of spending). Firefighting funds could be borrowed from the K-V Fund (or other accounts), and repaid later with regular or supplemental appropriations, without a significant effect on agency activities, such as reforestation. The decline in timber sales since 1990 has led to a comparable decline in K-V (and other mandatory spending account) balances, and thus the FS has had to turn to other accounts to borrow funds to pay for firefighting. Another reason why the borrowing authority was not a problem historically is that, prior to FY2000, there were more discretionary funds to borrow. As noted above, FY1993-FY2000 wildfire management appropriations averaged 25% of discretionary FS appropriations for the FS, leaving significant funds in other accounts to borrow from. (This is less of an issue for DOI, since it can borrow from any DOI accounts.) However, since FY2001, fire management expenditures have averaged 47% of discretionary FS appropriations, and totaled 56% of FS discretionary appropriations in FY2008. Thus, there were relatively fewer funds available to borrow, and borrowing to pay for firefighting was having a relatively greater effect on those other accounts. Various interests increasingly expressed concerns about the effects of firefighting borrowing on the agencies' abilities to implement other programs. Legislation was introduced to address the situation. Freestanding bills in the 110 th and 111 th Congresses sought to establish a separate fund for major wildfire suppression efforts. One, the Federal Land Assistance, Management and Enhancement (FLAME) Act, was enacted in Title V of P.L. 111-88 . It established separate FLAME Wildfire Suppression Reserve Funds for the FS and DOI, to be funded from annual appropriations. The FLAME funds can be used if the Secretary declares that (1) an individual wildfire covers at least 300 acres or threatens lives, property, or resources, or (2) cumulative wildfire suppression and emergency response costs will exceed, within 30 days, appropriations for wildfire suppression and emergency responses. It also directed the Secretaries to report annually on use of the funds, and to report on estimated suppression costs periodically through the year. The funds terminate if there have been no appropriations to or withdrawals from the accounts for three consecutive fiscal years. In addition, the FLAME Act required the agencies to prepare a "cohesive wildland fire management strategy" as recommended by the GAO, and to revise the cohesive strategy at least every five years. The FLAME funds effectively insulate federal land and resource management programs from the financial impacts of borrowing to pay for wildfire suppression efforts. However, they do not reduce the effects of lost resource management time when agency personnel are assigned to wildfire suppression efforts. In addition, this approach offers no incentives to fire managers to reduce or constrain the costs of fire-fighting efforts, and thus is unlikely to reduce wildfire suppression costs. Since 1990, recognition of unnaturally high fuel loads of dead trees, dense understories of trees and other vegetation, and non-native species has spurred interest in fuel management activities. This substantial fuel accumulation has been attributed to various causes: past land management practices (through grazing and logging that altered the vegetation); successful historic fire suppression (by reducing surface fires that burned small-diameter fuels); decreased logging (by reducing removals of burnable materials); climate change (by exacerbating drought and insect and disease infestations and raising ambient air temperatures); and other factors that affect the ecological health of forests. Table 5 shows the acreage, by ownership class, of lands at low, moderate, and high risk of significant ecological damage from wildfire due to high fuel loads. Fuel reduction efforts, as discussed above, are commonly proposed as a means of reducing wildfire suppression costs. Fuel management is a collection of activities—primarily prescribed burning and thinning—intended to reduce the threat of significant damages by wildfires. Fuel treatment acreage increased after the mid-1990s. (Earlier data were not reported comparably.) Table 6 shows that the acreage treated from FY1995 to FY2004 increased by 400%. However, treatment acreage fell in FY2005 and again in FY2006, and has not been proposed to return to the FY2004 level. Data on treatments since FY2007 are not included in Table 6 , because the FS and DOI revised their reporting systems to include acreage of wildland fire use (natural wildfires that are allowed to burn within the prescriptions of fire plans) as fuel treatments; previous data did not include wildland fire use acreage. Fuel reduction may have increased in FY2008 and FY2009, as funding (including under the economic stimulus legislation) continued to rise. (See Table 1 and Table 2 .) However, the annual fuel treatment acreage appears to have stabilized at less than 3 million acres annually, which is less than 1% of federal lands. At this average treatment level, it would take nearly 25 years to treat the FS and DOI lands at high risk of ecological damage from wildfire, and another 52 years to treat the lands at moderate risk. Furthermore, the FY2010 and FY2011 appropriations for fuel reduction were below the FY2008 and FY2009 levels, and the FY2012 appropriations is lower than any funding level since FY2004. Funding might not be the only limiting factor for fuel treatment. Increasing fuel reduction activities was one of the primary rationales for enacting the Healthy Forests Restoration Act of 2000 (HFRA; P.L. 108-148 ). Many observers described the need for expeditious action to reduce fuel loads and fuel ladders, and the difficulties in achieving expeditious action because of the environmental documentation and public participation required by the National Environmental Policy Act of 1969 (NEPA; P.L. 91-190, 42 U.S.C. §§4321-4347). HFRA established an expedited process for environmental review and public involvement in fuel reduction activities. In addition, the FS and DOI established categorical exclusions (CEs) from NEPA for hazardous fuel reduction activities; however, in December 2007, the Ninth Circuit Court of Appeals ruled that the CE violated NEPA, and stopped the use of that CE until NEPA had been followed. It is unclear how much fuel reduction has occurred under either of these authorities. Some oppose expedited actions with limited public oversight, fearing the potential for commercial harvests of large trees (which might provide little or no wildfire protection) and the associated road construction disguised as fuel reduction. Others have suggested focusing fuel treatment in the wildland-urban interface (WUI), to enhance protection of homes and other structures. The proportion of fuel treatments in the WUI increased after FY2001 (the first year for which such data area available), from 37% (45% for the FS, 22% for DOI) to about 60% from FY2003 to FY2006 (73% for the FS, 42% for DOI), and 70% in FY2008 (83% for the FS, 47% for DOI). Research has documented that reducing fuels close to structures (within about 131 feet) is essential to protecting those structures from wildfire, but that fuel reduction beyond that close-in area (about 2 acres) provides no additional protection for structures. In addition, GAO testified that the agencies still needed to: develop a cohesive strategy that identifies the options and associated funding to reduce fuels and address wildland fire problems.… In 2005 and 2006, because the agencies had not yet developed one, GAO reiterated the need for such a strategy but broadened its focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. The presumption behind fuel treatment is that lower fuel loads and a lack of fuel ladders will reduce the extent of wildfires, the damages they cause, and the cost of controlling them. Numerous on-the-ground anecdotes support this belief. However, little empirical research has documented this presumption. As noted in one research study, "scant information exists on fuel treatment efficacy for reducing wild-fire severity." This study also found that "fuel treatments moderate extreme fire behavior within treated areas, at least in" frequent fire ecosystems. Others have found different results elsewhere; one study reported "no evidence that prescribed burning in these [southern California] brushlands provides any resource benefit ... in this crown-fire ecosystem." A recent summary of wildfire research reported that, although prescribed burning generally reduced fire severity, mechanical fuel reduction did not consistently reduce fire severity, and that limited research had examined the potential impacts of mechanical fuel reduction with prescribed burning or of commercial logging. Thus, it is unclear whether, or to what extent, increasing fuel treatment funding and efforts will protect communities and ecosystems from damaging wildfires. Some have suggested combining the need to reduce potentially hazardous biomass fuels from the forest with the desire to produce renewable energy. Biomass can be used to produce liquid transportation fuels (e.g., ethanol) or to produce heat and electricity (most commonly through co-generation, also known as combined-heat-and-power). In either case, virtually any biomass can be used to supplant fossil fuels for energy production, and could provide a beneficial use for the fuels that need to be removed from forests. Some FS fuel reduction funds have been used for wood energy programs. For FY2009-FY2011, $5 million annually was used for biomass grants, authorized in Title II of the Healthy Forests Restoration Act ( P.L. 108-148 ). For FY2011, the Administration proposed, but Congress did not fund, $5 million for the Community Wood Energy Program and $15 million for the Forest Biomass to Energy Program, two programs established in the 2008 farm bill ( P.L. 110-246 ). These programs can contribute to fuel reduction for federal forests, since they provide markets for the fuels to be removed, but they are not limited to woody biomass from federal lands, and are also likely to be used to remove woody biomass from non-federal lands. Furthermore, this relatively limited funding provides very modest markets for the substantial volumes of biomass to be removed from federal lands. Other federal programs exist to provide incentives for renewable energy production, including from biomass. However, some prohibit the use of biomass from federal lands for the renewable energy targets and incentives. This is due at least partly to concerns about diverting federal woody biomass from traditional markets—lumber, plywood, and pulp and paper—to renewable energy markets. The validity of such concerns was illustrated by the initial payments under USDA's Biomass Crop Assistance Program (BCAP). While the goal was, in part, to stimulate removal of woody biomass waste from the forest, much of the initial funding was spent on transporting wood waste from existing wood production facilities (e.g., sawmills) to energy production facilities; previously such wood waste was sold to pulp mills, particleboard plants, and other such users who were unable to compete against the BCAP subsidies for wood-waste-to-energy. The principal difficulty in using woody biomass from forests is that, while the fuel loads might be very high by historical standards in some ecosystems, they are widely scattered and highly diverse in size and structure, making collection and transport very expensive. The states are responsible for protecting non-federal lands from wildfires, but FS cooperative fire assistance to states has been authorized since the Clarke-McNary Act of 1924. Cooperative fire assistance was questioned during the Reagan, George H. W. Bush, and Clinton Administrations, with budget proposals to substantially reduce funding (generally to less than 30% of enacted appropriations) from FY1984 through FY1995. The debate over the federal role in assisting states shifted following the severe fire season in summer of 1994. The Federal Wildland Fire Management Policy & Program Review: Final Report , released in December 1995, altered federal fire policy from priority for private property to equal priority for private property and federal resources, based on values at risk. (Protecting human life remains the first priority in firefighting.) The increased emphasis on state and local responsibility for protecting non-federal lands also led to a recognition of the importance of federal assistance to state and local agencies. (Sharing fire suppression costs with state and local governments is discussed above, under " Wildfire Management Costs .") In contrast to White House efforts to cut fire assistance funding in the 1980s and early 1990s, federal funding for state and volunteer fire assistance more than tripled in 2001, rising from $27 million to $91 million, pulled along by the broad rise in federal wildfire funding under the National Fire Plan. (See Table 3 .) State and volunteer fire assistance funding continued to rise for a few years, peaking at $314 million in FY2009, including the funding in the economic stimulus legislation. The 2002 farm bill ( P.L. 107-171 , the Farm Security and Rural Investment Act of 2002) authorized a new fire assistance program, the Community Fire Protection Program. The program authorizes the FS, working with and through state forestry agencies, to assist local fire protection planning, education, and activities. The program was authorized at $35 million annually for FY2002-FY2007, and "such sums as are necessary" thereafter; to date, no explicit budget line items have been enacted for this program. Questions persist about the appropriate role of federal firefighters and funds in protecting structures, communities, and privately owned resources. States bear the responsibility for fire protection on all non-federal lands. The FS and others also support the FIREWISE program to educate landowners and communities about how to protect their properties and structures from wildfire. The National Interagency Fire Center coordinates the movement of firefighting forces (federal, state, and private contractors) to areas with lots of wildfires. The federal agencies are also directed to give "excess personal property" (such as surplus firefighting equipment) to state or local fire departments. Some question whether these programs are sufficient; others suggest that perhaps federal financial assistance could be terminated. Still others question federal firefighting actions, where state or local responsibility for structure fires has been used as an excuse for inaction. On the other hand, federal firefighters are not trained to fight structure fires, and such efforts without proper training might endanger the firefighters, it has been argued. The appropriate federal response following wildfire damages to private lands and resources has also been questioned. Catastrophic wildfires sometimes lead to disaster declarations, and thus to recovery efforts coordinated and assisted by the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security. Wildfire damages not in declared disaster areas are sometimes, but not always, covered by private insurance (which is regulated by the states). Homeowners without fire insurance or whose fire insurance does not cover wildfires may be left without compensation for their losses. Similarly, landowners with resource losses (e.g., many trees killed by wildfire) may receive no compensation or recovery assistance. It seems unfair to some that wildfire damages are substantially covered only when total damages are sufficient to declare the area a disaster. To address these concerns, some have suggested that the National Flood Insurance Program might provide a model for federal wildfire insurance for private landowners. Others assert that private insurance exists and is more efficient than a government insurance program, and that the National Flood Insurance Program has not prevented building in flood zones or repetitive flood losses, despite these being among its goals. Rehabilitation of burned sites following intense wildfires has been a generally accepted practice. As shown in Table 1 and Table 2 , the DOI has traditionally received modest appropriations for rehabilitation of DOI lands, except in FY2001; in contrast, the FS has generally funded burned area rehabilitation from regular appropriations for vegetation management, wildlife habitat, watershed management, and other accounts, with modest appropriations (less than $13 million annually) for rehabilitation except in FY2001, FY2002, and FY2008. Attention to post-fire rehabilitation has increased since 2000. The Bush Administration finalized regulations authorizing NEPA categorical exclusions for post-fire rehabilitation activities affecting up to 4,200 acres in June 2003. These (and other) regulations were successfully challenged as violating the Forest Service Decision Making and Appeals Reform Act (§322 of P.L. 102-381 ; 16 U.S.C. §1612 note), and the FS suspended many proposed actions in response to the court's order. Legislation was introduced relating to post-fire rehabilitation in the 109 th Congress. One bill that passed the House ( H.R. 4200 , the Forest Emergency Recovery and Research Act of 2006) would have directed the FS and BLM to establish research protocols for catastrophic events affecting forests, to provide an expedited process for recovery of forests from catastrophic events, and to authorize financial assistance to restore landscapes and communities affected by catastrophic events. The expedited process would have required catastrophic event recovery assessments, with pre-approved management practices and alternative NEPA arrangements, and foreshortened administrative and judicial reviews of related activities. The bill has not been introduced in subsequent Congresses. More recently, other bills have proposed national or regional post-fire and other forest restoration programs with modified procedures for assessing and implementing practices. The Collaborative Forest Landscape Restoration Act was included as Title IV in the Omnibus Public Lands Management Act of 2009 ( P.L. 111-11 ). It provides a collaborative (diverse, multi-party) process for geographically dispersed, long-term (10-year), large-scale (at least 50,000-acre) strategies to restore forests, reduce wildfire threats, and utilize the available biomass, with multi-party monitoring of and reporting on activities. For FY2012, the Obama Administration requested funding for this program as part of a new line item (Integrated Resource Restoration) within the National Forest System appropriation account. This request was permitted on a pilot basis. Other bills typically address specific areas or specific restoration needs. Post-fire rehabilitation needs and funding have arisen again in the 112 th Congress, in the wake of the worst wildfire in Arizona history. Attention is being given to the burned area emergency response (BAER) program—authorized activities, funding mechanisms, public involvement, and more. To date, no legislation has been introduced, nor have any oversight hearings been held or scheduled. Nonetheless, given the importance of the process and the concerns about conditions, the BAER program may receive congressional consideration in the 112 th Congress. No data or assessments have examined the adequacy of current rehabilitation activities. It is unclear how often rehabilitation activities are necessary or feasible. It is also unclear whether NEPA environmental reviews or public involvement have delayed rehabilitation activities significantly. Opponents of legislated changes to existing environmental review and public involvement processes have expressed concerns that changes could reduce review and oversight of salvage logging decisions, since salvage logging is not generally precluded as a rehabilitation activity. They note that salvage logging can cause significant environmental damage. Proponents of changes contend that timber salvage can help in site rehabilitation, both by reducing costs and by removing dead biomass that may interfere with vegetative regrowth on the site, and that expedited processes are necessary to utilize the timber before it deteriorates. Table A-1 presents the data on acres burned annually in the United States since 1960. These data are presented graphically in Figure 1 . Table A-2 presents data on the total appropriations to the FS and DOI wildland fire management accounts. These data are presented graphically in Figure 2 .

The Forest Service (FS) and the Department of the Interior (DOI) are responsible for protecting most federal lands from wildfires. Wildfire appropriations nearly doubled in FY2001, following a severe fire season in the summer of 2000, and have remained at relatively high levels. Acres burned annually have also increased over the past 50 years, with the six highest annual totals occurring since 2000. Many in Congress are concerned that wildfire costs are spiraling upward without a reduction in damages. With emergency supplemental funding, FY2008 wildfire funding reached a record high of $4.46 billion. There are three basic categories of federal programs for wildfire: federal lands protection, non-federal lands protection, and other fire-related expenditures. The vast majority (about 95%) of federal wildfire funds are spent to protect federal lands—for fire preparedness (equipment, baseline personnel, and training); fire suppression operations (including emergency funding); post-fire rehabilitation (to help sites recover after the wildfire); and fuel reduction (to reduce wildfire damages by reducing fuel levels). Since FY2001, FS fire appropriations have included funds for state fire assistance, volunteer fire assistance, and forest health management, as well as for community assistance, fire research, and fire facilities. Four issues have dominated wildfire funding debates. One is the high cost of fire management and its effects on other agency programs. Several studies have recommended actions to try to control wildfire costs, and the agencies have taken various steps, but it is unclear whether these actions will be sufficient. Wildfire suppression expenditures have exceeded agency appropriations annually for more than a decade. Borrowing to pay high wildfire suppression costs has affected other agency programs. The Federal Land Assistance, Management, and Enhancement (FLAME) Act of 2009 was enacted in P.L. 111-88 to insulate other agency programs from high wildfire suppression costs by creating a separate funding structure for emergency supplemental wildfire suppression efforts. Another issue is funding for fuel reduction. Funding and acres treated rose (roughly doubling) between FY2000 and FY2003, and have stabilized since. Currently about 3 million acres, less than 1% of federal lands, are treated annually. However, 75 million acres of federal land are at high risk, and another 156 million acres are at moderate risk, of ecological damage from catastrophic wildfire. Since many ecosystems need to be treated on a 10-35 year cycle (depending on the ecosystem), current treatment rates are insufficient to address the problem. A third issue is the federal role in protecting non-federal lands, communities, and private structures. In 1994, federal firefighting resources were apparently used to protect private residences at a cost to federal lands and resources in one severe fire. A federal policy review recommended increased state and local efforts to match their responsibilities, but federal programs to protect non-federal lands have also expanded, reducing incentives for local participation in fire protection. Finally, post-fire rehabilitation is raising concerns. Agency regulations and legislation in the 109th Congress focused on expediting such activities, but opponents expressed concerns that this would restrict environmental review of and public involvement in salvage logging decisions, leading to greater environmental damage. Legislation was introduced but not enacted in the 110th Congress to provide alternative means of addressing post-fire restoration in particular areas. The large wildfires to date in 2011 have reignited concerns about post-fire rehabilitation. Except for appropriations, legislative action regarding this issue since the 110th Congress has been minimal.

govreport

Across the United States, about 27.5% of state and local government employees (about 6.6 million persons) work in positions that are not covered by Social Security. Coverage rates vary considerably across states. Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who were not already covered by public pension plans. Under current law, public employees who have a pension plan, but who are not covered by Social Security, may hold a referendum on whether to elect Social Security coverage. Once Social Security coverage is provided, it generally cannot be terminated, and all future employees in covered positions are required to participate in Social Security. Proposals to mandate Social Security coverage for all state and local government employees hired in the future have been part of the Social Security policy debate for many years. Under such a proposal, all state and local government positions eventually would be covered by Social Security. This report describes current law, provides some historical background, and discusses some of the potential advantages and disadvantages of mandating Social Security coverage for newly hired state and local government employees from a variety of perspectives. Social Security coverage is extended to state and local government employees through "Section 218 Agreements" between a state and the Social Security Administration (SSA). All states, as well as Puerto Rico and the Virgin Islands, have a voluntary Section 218 Agreement with SSA. A state's Section 218 Agreement details which state and local government positions are covered by Social Security and Medicare. Each state, as well as Puerto Rico and the Virgin Islands, designates a State Social Security Administrator who is responsible for administering, preparing modifications for, and monitoring coverage of, its subdivisions under the state's Section 218 Agreement. The Administrator, who is a state employee, serves as a bridge between state and local public employers and SSA. Coverage under Section 218 Agreements differs greatly from state to state. For example, within a state, teachers in one county may be covered under Social Security, whereas teachers in the neighboring county may not be covered. The State Social Security Administrator is the main resource for information about Social Security and Medicare coverage and reporting issues for state and local government employers and employees. Section 218 Agreements cover positions, not individuals. If the government position is covered by Social Security and Medicare under a Section 218 Agreement, then any employee (current or future) filling that position is subject to Social Security and Medicare payroll taxes. Coverage is extended to groups of employee positions known as "coverage groups;" coverage may not be extended on an individual basis. Various laws and regulations govern how coverage may be extended via employee referendums. All states are authorized to use a majority vote referendum process, and 23 states also are authorized to use a divided vote referendum process created in 1956 (see below). Most often, state governments allow their subdivisions (e.g., a school board) to decide whether to hold a referendum on coverage. Generally, a Section 218 Agreement may be modified to increase, but not reduce, the extent of coverage. With certain exceptions, once Social Security coverage is provided, it cannot be terminated, and all future employees in covered positions are required to participate in Social Security. The 1935 Social Security Act did not extend Social Security coverage to state and local government workers. In 1950, Congress added Section 218 to the Social Security Act to allow all 50 states, Puerto Rico, and the Virgin Islands to elect Social Security coverage for certain state and local government employees. In 1954, Congress extended voluntary coverage to employees who were already covered by pension plans, effective starting in 1955, if a majority of employees who were members of a pension system voted in favor of Social Security coverage. Further amendments in 1956 permitted certain states to split state or local retirement systems into "divided retirement systems" based on groups of employees that voted for Social Security coverage and groups of employees that voted against Social Security coverage. Currently, 23 states are authorized to operate a divided retirement system. Until April 1983, public employers could opt in and out of the Social Security program. In 1983, legislation prohibited public employees from withdrawing from the Social Security program once they are in it. The state of California challenged the 1983 law, however the Supreme Court rejected California's arguments. In 1984, Congress extended Social Security coverage to many groups that had not been covered previously, including many state and local government employees, Members of Congress, and federal civilian employees hired on or after January 1, 1984. Until 1984, federal employees were not covered by Social Security, but instead participated in the Civil Service Retirement System. In 1990, Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who are not covered by an alternative public pension plan. Across the United States, about 27.5% of state and local government employees (about 6.6 million persons) work in positions that are not covered by Social Security. Coverage rates vary considerably across the states, as shown in Table 1 . In 26 states, 90% or more of state and local government employees work in positions that are covered by Social Security. In three states, more than 95% of state and local government employees are covered by Social Security: Arizona (95.3%), New York (96.7%), and Vermont (97.9%). In two states, fewer than 5% of state and local government employees work in positions covered by Social Security: Massachusetts (4.1%) and Ohio (2.5%). States in which less than half of state and local government employees are in positions covered by Social Security include California (43.6%), Colorado (29.1%), Louisiana (27.9%), Nevada (17.6%), and Texas (47.9%). About 70% of non-covered state and local government employees reside in seven states: California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas. Almost half (48.4%) of non-covered state and local government employees reside in three states: California, Texas, and Ohio. Mandatory Social Security coverage of newly hired state and local government employees has been recommended by recent deficit reduction groups. For example, in November 2010, the Bipartisan Policy Center's Debt Reduction Task Force, co-chaired by former Senator Pete Domenici and Dr. Alice Rivlin, recommended that all newly hired state and local government employees be covered under the Social Security system, beginning in 2020, to increase the universality of the program. In addition, the Bipartisan Policy Center recommended that state and local pension plans be required to share data with SSA until the transition is complete. The Bipartisan Policy Center noted that implementation should be delayed until 2020 to give state and local governments time to "shore up and reform their pension systems" pointing to the poor fiscal condition of state and local governments and the underfunding of public employee pensions. Similarly, in December 2010, the National Commission on Fiscal Responsibility and Reform established by President Obama recommended that all newly hired state and local government employees be covered under the Social Security system beginning in 2021. The commission noted that, as states face prolonged fiscal challenges and an aging workforce, maintaining separate retirement systems (i.e., outside of Social Security) could pose risks for plan sponsors and participants. In the commission's view, mandatory Social Security coverage could mitigate these risks, as well as a potential future bailout risk for the federal government. In addition, the commission recommended that state and local pension plans be required to share data with SSA to improve the coordination of benefits for current workers who spend part of their careers working in state and local government positions. The following discussion highlights some of the issues underlying potential advantages and disadvantages of mandatory Social Security coverage: the financial status of the Social Security system, benefit protections for workers and their families, the impact on states and localities that currently maintain pension systems outside of Social Security, and a broader social perspective. Long-range projections published by the Social Security Board of Trustees in May 2011 show that Social Security expenditures will exceed income by 16% on average over the next 75 years. Stated another way, the projected average 75-year funding shortfall is an amount equal to 2.22% of taxable payroll. The trustees project that Social Security expenditures will exceed total income (tax revenues plus interest income) starting in 2023, and that trust fund assets will be exhausted in 2036. Social Security benefits scheduled under current law can be paid in full until trust fund assets are exhausted (2036). After trust fund exhaustion, annual Social Security revenues are projected to cover about three-fourths of benefit payments scheduled under current law. SSA's Office of the Chief Actuary has estimated the impact of covering newly hired state and local government employees on the Social Security Trust Funds. These estimates are based on the intermediate assumptions of the 2010 Trustees Report, which differ somewhat from the 2011 Trustees Report. Two variations of this option are discussed below—one with an immediate implementation date (2011) and one with a delayed implementation date (2020). As shown in Table 2 , mandatory Social Security coverage for newly hired state and local government employees is projected to have a net positive effect on the Social Security Trust Funds on average over the 75-year projection period. SSA's Office of the Chief Actuary estimates that, if mandatory coverage were implemented in 2011, it would close 9% of the system's projected long-range funding shortfall and extend the projected trust fund exhaustion date to 2040. Similarly, if mandatory coverage were implemented in 2020, it would close 8% of the system's projected long-range funding shortfall and extend the projected trust fund exhaustion date to 2039. Although mandatory coverage is projected to have a net positive effect on the Social Security Trust Funds on average over the 75-year projection period , the greatest positive effect with respect to Social Security's finances would occur during the initial period following implementation. Mandatory coverage of newly hired state and local government employees is projected to result in a net increase in payroll tax revenues to the Social Security system. These payroll tax revenues are credited to the Social Security Trust Funds in the form of special-issue Treasury securities, and as a result of this exchange the revenues become available in the Treasury's general fund for other government operations. A report published by the Congressional Budget Office (CBO) in March 2011, Reducing the Deficit: Spending and Revenue Options , provides revenue estimates for an option that would expand Social Security coverage to include all state and local government employees hired after December 31, 2011. This option is projected to increase revenues by about $24 billion over 5 years (2012 to 2016) and $96 billion over 10 years (2012 to 2021). CBO points out that the estimates do not include any effect on outlays during the 2012 to 2021 period, because most state and local government employees that would be hired during this period would not begin receiving benefits for many years. Beyond the 10-year projection window, although this option would increase the number of Social Security beneficiaries, CBO estimates that the additional benefit payments would be about half the size of the additional revenues. Detailed annual estimates are shown in Table 3 . Some observers point out that making Social Security coverage more universal could simplify retirement planning and benefit coordination for workers who divide their careers between state and local government positions and other positions. In addition, they maintain that mandatory Social Security coverage of newly hired state and local government employees would prevent gaps in pension or Social Security coverage, resulting in better retirement, survivor, and disability insurance protections for workers who move between state and local government positions and other positions. For example, under Social Security Disability Insurance, a recency of work test requires the worker to have at least 20 quarters of Social Security coverage in the 40 quarters preceding the onset of disability (generally 5 years of Social Security-covered employment in the last 10 years). Supporters of mandatory coverage also point out that it could result in better benefit protections for workers and their families through the provision of dependents' and survivors' benefits under Social Security. Social Security provides dependents' and survivors' benefits that generally are not available under state and local pension plans. For example, Social Security provides spouses or former spouses a benefit equal to 50% of the worker's basic monthly benefit amount. Most state and local pension plans do not provide benefits for spouses while the worker is alive. In addition, Social Security provides widow(er)s a benefit equal to 100% of the deceased worker's basic monthly benefit amount. Most state and local pension plans provide only modest benefits to young widow(er)s, and provide benefits for widow(er)s at retirement age only if the deceased worker elected a joint-and-survivor annuity option. In addition, supporters point out that mandatory coverage could result in better benefit protections through the provision of full cost-of-living adjustments under Social Security. Although state and local pension plans are more likely than private sector plans to provide inflation protection, state and local pension plans generally cap cost-of-living adjustments at 3%. Some observers point to the current funding status of state and local pension plans and argue that non-covered pensions may be subject to benefit reductions, or contribution increases, in future years. For example, in a recent report, CBO stated: "By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans' assets is less than their accrued pension liabilities for current workers and retirees." Some view the addition of a Social Security benefit component to state and local pension plans as a way to provide better benefit protections for workers whose future non-covered pensions may be at risk. The net effect on a worker's total benefits, however, would depend in part on how state and local governments modify their existing non-covered pension plans in response to mandatory coverage. Opponents argue that mandatory Social Security coverage would not necessarily result in better benefit protections for workers because state and local governments could reduce some pension benefits currently available under non-covered pension plans to keep overall pension costs down. Moreover, Congress could enact changes to the Social Security contribution and benefit structure that result in higher payroll taxes and lower benefits for current workers (compared with current law) in response to Social Security's projected long-range funding shortfall. In addition, state and local government employees tend to be higher-wage workers. According to data from the Bureau of Labor Statistics (BLS), state and local government workers have higher hourly earnings, on average, than the rest of the population. Because Social Security has a progressive benefit formula, higher-wage workers receive lower replacement rates under Social Security compared to lower-wage workers. Therefore, the potential advantages and disadvantages of mandatory Social Security coverage could depend in part on a worker's wage level. Still others who oppose mandatory Social Security coverage maintain that, while Social Security may provide better benefit protections for some workers, others may be better off in a separate retirement system (i.e., outside of Social Security) in which eligibility rules and other plan features are tailored to workers in certain occupations. For example, public pension plans for fire fighters and police officers typically provide full pension benefits at younger ages and with fewer years of service compared to other public pension plans. In contrast to some specialized public pension plans, Social Security retired-worker benefits are available beginning at the age of 62, and benefits claimed before the full retirement age (age 65 to age 67, depending on the person's year of birth) are permanently reduced for early retirement. In addition, Social Security benefits are based on a worker's 35 highest years of earnings in covered employment. If a worker has fewer than 35 years of covered earnings, years with no earnings are counted as zeros in the benefit computation, resulting in a lower initial monthly benefit amount. Some believe that the eligibility requirements under public pension plans for certain categories of workers (e.g., fire fighters and police officers) reflect the circumstances of these occupations, such as physical demands and higher disability rates. The International Association of Fire Fighters (IAFF), for example, opposes mandatory Social Security coverage for non-covered public sector employees. The IAFF points out that an estimated 70% of all fire fighters are covered by pension plans that are separate from Social Security. In a March 2011 document, the IAFF stated that "Opponents of mandatory coverage believe that forcing all public employees into Social Security—even if it is only new hires—would undermine existing pension systems that provide superior benefits and reflect the unique circumstances of public safety work." If Congress were to mandate Social Security coverage for all newly hired state and local government employees, as it did for newly hired federal employees in the 1980s, the Federal Employees' Retirement System (FERS) could serve as an example of how to address differences between an existing non-covered pension plan and Social Security with respect to eligibility requirements (retirement age, years of service, etc.) and other features. Under FERS, for example, certain categories of workers, including federal law enforcement officers and fire fighters, accrue benefits at higher rates than other federal employees. In addition, a temporary supplemental benefit is provided under FERS for workers who retire before the age of 62, the earliest age at which a Social Security retired-worker benefit is available. The FERS supplement is available to workers who retire at the age of 55 or older with 30 or more years of service, or at the age of 60 with 20 or more years of service. The FERS supplement, however, is available to law enforcement officers, fire fighters and air traffic controllers who retire at the age of 50 or older with 20 or more years of service. The FERS supplement is equal to the estimated Social Security benefit that the person earned while employed by the federal government, and it is paid only until the person attains the age of 62, regardless of whether the person claims Social Security retired-worker benefits at the age of 62. The portability of state and local pension plans (defined benefit plans) is usually limited to positions that fall within the same public pension system. By contrast, Social Security coverage is portable among most jobs, with the exceptions of non-covered public employment and certain other non-covered positions such as election workers and household workers earning less than an annual threshold amount. Retirement benefits from defined benefit plans are generally based on years of service and final pay. A worker who changes jobs frequently may not stay long enough in a given state or local government position to become vested in the retirement plan. Also, benefit amounts in defined benefit plans are generally based on earnings at the time the worker leaves the job, and many plans do not index earnings at departure for inflation. This may lower benefits significantly for a worker who leaves a state or local government position years before he or she retires from the workforce, or after only a few years of service. Social Security beneficiaries can move from job to job, continue to build years of service and earnings, and all covered earnings are indexed for inflation as part of the benefit computation, regardless of when the worker left covered employment. Under current law, two Social Security provisions affect individuals who are receiving a pension from work that was not covered by Social Security: the windfall elimination provision (WEP) and the government pension offset (GPO). If a worker qualifies for a Social Security retired-worker benefit based on fewer than 30 years of Social Security coverage and is also receiving a pension from work that was not covered by Social Security (a non-covered pension), he or she is subject to the WEP. Under the WEP, the worker's Social Security retirement benefit is computed using the windfall benefit formula, rather than the regular benefit formula, which results in a lower initial monthly benefit. The amount of the reduction in the worker's Social Security retirement benefit under the WEP is phased out for workers with between 21 and 30 years of Social Security-covered employment, and it is limited to one-half the amount of the worker's non-covered pension. The windfall benefit formula is designed to remove the unintended advantage that the regular benefit formula would otherwise provide to a worker who has less than a full career in Social Security-covered employment. The Social Security benefit formula is progressive. That is, it is structured to provide a long-term, low-wage worker with a benefit that replaces a greater percentage of his or her pre-retirement earnings (i.e., a higher replacement rate). The benefit formula, however, does not distinguish between a long-term, low-wage worker and a high-wage worker with a relatively short career in Social Security-covered employment. Both of these workers receive the advantage of Social Security's progressive benefit formula. The windfall benefit formula is designed to remove this unintended advantage for workers who have less than a full career in Social Security-covered employment (sometimes with high wages) because they also worked in non-covered employment and receive a pension based on non-covered work. If a person qualifies for a Social Security spousal benefit and is receiving a non-covered pension, he or she is subject to the GPO. Under the GPO, a person's Social Security spousal benefit is reduced by two-thirds the amount of his or her non-covered pension. The GPO is intended to replicate the dual entitlement rule, which affects persons who qualify for both a Social Security retired-worker benefit and a Social Security spousal benefit. Under the dual entitlement rule, a person's Social Security spousal benefit is reduced by 100% of the amount of his or her Social Security retired-worker benefit. The WEP and the GPO are unpopular provisions of Social Security law among the public and some policymakers. Some observers point out that the way Social Security benefit reductions are computed under the WEP and the GPO seems arbitrary and unfair. Legislation is introduced routinely to modify or repeal these provisions. In terms of administering these provisions, SSA must rely on self-reported data to determine if a person's Social Security retired-worker benefit should be reduced under the WEP, or if a person's Social Security spousal benefit should be reduced under the GPO, and what the Social Security benefit reduction should be under these provisions. In other words, a Social Security claimant or a current Social Security beneficiary must inform SSA that he or she is receiving a non-covered pension, and the amount of the non-covered pension, so that the WEP and the GPO can be applied in the Social Security benefit computation. Proposals have been made over the years to require state and local governments to provide information on their non-covered pension payments to SSA for purposes of administering the WEP and the GPO. President Obama's FY2012 budget request, for example, included up to $50 million for the development of a mechanism for SSA to enforce the WEP and the GPO and estimated that greater enforcement would result in Social Security program savings of almost $3.4 billion over 10 years. Mandatory Social Security coverage of newly hired state and local government employees would eventually eliminate the need for the WEP and the GPO, two provisions of Social Security law that are unpopular among the public and that present administrative difficulties for SSA. Some state and local government pension plans could be affected if newly hired state and local government employees were required to participate in Social Security. In response to mandatory Social Security coverage, employers might change the pension benefits of newly hired public employees to reflect the added Social Security coverage. The basic options for state and local governments include (1) maintaining the current pension structure for newly hired employees; (2) providing a different, presumably lower, benefit structure for newly hired employees within an existing pension plan; (3) closing the existing pension plan to new participants and creating a new pension plan for newly hired employees with a different, presumably lower, benefit structure; and (4) eliminating pension benefits (apart from Social Security) for new hires. Most state and local government workers currently participate in defined benefit (DB) pension plans. In DB pension plans, participants are guaranteed a monthly benefit in retirement that is determined using a formula based on an accrual rate, years of service, and the average of a number of years' final salary. In contrast, many private sector workers are covered by defined contribution (DC) pension plans. In DC pension plans, participants are provided with individual accounts that accumulate employees' (and often employers') contributions and investment returns. Employees use the funds in their accounts as a source of income in retirement. States would have to decide what pension benefits to offer new employees who would be covered by Social Security. Some of the changes that states and localities might consider include lowering the accrual rate for covered workers, increasing the number of high or final years of salary in the benefit formula, altering early retirement benefits, or creating defined contribution pensions. For example, one survey indicated that in 1997 the accrual rate for DB pensions provided to state and local government workers who were participating in Social Security at the time of the survey was 1.84%, compared with an accrual rate of 2.24% for workers who were not participating in Social Security. In some cases, state and local government employers might "freeze" their pension plans in which new hires or current employees do not accrue benefits. Plan sponsors have several types of pension freezes available. In a hard freeze, a pension plan is closed to new entrants and current participants cease accruing benefits. In a soft freeze, a pension plan is closed to new entrants but current participants continue to accrue benefits. Frozen pension plans remain subject to Internal Revenue Service rules that apply to state and local government pension plans. Bureau of Labor Statistics data from March 2009 indicated that 10% of state and local government workers who participated in a DB pension plan were in a frozen DB pension plan. The data indicated that 99% of the state and local government workers in frozen plans continued to accrue benefits; that is, the pension plan was a soft freeze. In addition, pension plans for 94% of workers in frozen plans were frozen more than five years prior to the survey, and 95% of the workers in frozen plans were offered a new DB pension plan. None of the workers in frozen DB pension plans were offered a new DC pension plan. Increased costs might come as a result of states operating several pension plans or several benefit structures within a single pension plan. For example, states could decide to offer some combination of DB and DC pension benefits. It could take several years to determine and fully implement the changes. Whether overall costs to employees and governments would increase, decrease, or remain the same depends on the type of pension benefit structure governments adopt in response to mandatory participation in Social Security. Factors that would affect this include the 6.2% Social Security payroll tax paid by employers, the 6.2% Social Security payroll tax paid by employees, the amount of employer contributions to retirement plans, and the amount of employee contributions, if any, to retirement plans. Because the pension benefits (apart from Social Security) that the plans would provide to new employees would likely decrease, pension plan contributions made by employers, and possibly employee contributions, would likely decrease as well. The impact would likely be minimal in plans that have sufficient assets from which to pay 100% of the benefits that participants have accrued. However, the resulting decrease in contributions could add financial strain to pension systems that are currently underfunded and do not have sufficient assets on hand. For example, a plan that is underfunded and ceases to have new participants will find that plan assets will have been used up and that some benefits for some participants do not have a funding source. Sponsors of pension plans that are not fully funded would have to eventually make up for the funding shortfalls that exist within their plans. Although many state and local government pension plans do not have enough assets set aside to pay 100% of promised benefits, participants are not at risk of not receiving their promised benefits in the short or medium term as most pension plans have enough funds set aside to pay benefits for many years. Potential sources of funding to make up for shortfalls include state or local general revenues, increased contributions from current employees, and greater returns on pension plan investments. Currently, many states and localities are facing revenue shortfalls and may be reluctant to set aside funds to cover pension benefits payable several years in the future. It may be difficult or impossible to require increased employee contributions from current employees. Pension plan sponsors may be tempted to increase the riskiness of their investments to capture market gains. However, in the event of a market downturn, riskier pension fund investments would lose value, exacerbating the situation. Unlike private-sector employers, state and local pension plans do not participate in a pension insurance system. Most private-sector employers participate in the Pension Benefit Guarantee Corporation (PBGC), which is a government run insurance company that pays pension benefits to retirees in bankrupt private-sector pension plans. State and local pension plans do not have the opportunity to transfer pension plan liabilities to a PBGC-like entity if they cannot pay benefits. Census Bureau data indicate that in 2007 there were 2,547 state and local pension plans, of which 2,115 responded to a Census Bureau survey of state and local pension plans. As shown in Table 4 , the 2,115 plans that responded to the survey had a total of 18.5 million participants. Although most of these plans (1,897 plans or 89.7%) were local pension plans, statewide plans accounted for more than 90% of plan participants. Some plans were very large; however, most plans had relatively few participants. The average number of participants per plan was 8,755, while the median number of participants per plan was 43. A common measure of the financial health of a DB pension plan is its funding ratio, which measures the adequacy of a DB pension plan's ability to pay promised benefits. The funding ratio is calculated as A funding ratio of 100% indicates that the DB pension plan has set aside enough funds, if the invested funds grow at the expected rate of return or better, to pay all of the benefit obligations. Funding ratios that are less than 100% indicate that the DB pension plan will not be able to meet all of its future benefit obligations. Table 5 details the funding ratios for 122 public pension plans in the Public Pension Plans Database, which was developed by the Center for State and Local Government Excellence and the Center for Retirement Research at Boston College. The pension plans in the database cover approximately 90% of the participants in state and local government pension plans. Funding ratios varied considerably among the pension plans in the database. Among the 122 pension plans for which actuarial information is provided for 2009, the median funding ratio was 77.5%. Some pension plans were well-funded: in 2009, 11 of the 122 pension plans had funding ratios of 100% or greater. Nearly one-third of the pension plans (31.2%), which covered 24.0% of plan participants, had funding ratios of less than 70%. Some argue that mandating Social Security coverage for all public employees would impose significant administrative burdens on state and local governments. State and local governments would have to administer two different systems, one for existing non-covered employees and another for employees who are newly covered by Social Security, until there were no more pensioners under the original pension system. Additional costs would include communicating with employees and actuarial reviews. SSA would also need to administer two systems for a while, one system for covered employees and a second system for remaining beneficiaries with pensions from non-covered employment who are subject to WEP or GPO reductions on their Social Security benefits. State and local governments would need to negotiate extensively with employees and legislatures about the redesign of existing pension systems, in order to adapt existing plans to Social Security coverage. When Congress mandated Social Security coverage for new federal workers in 1983, the federal government enacted a new federal pension plan after three years. GAO has suggested that four years might be required to complete negotiations among legislatures and employee representatives about adapting existing plans to Social Security coverage. Others counter that states and localities already withhold workers' federal income taxes, so the additional administrative costs associated with payroll tax deductions would not be significant. Opponents of mandatory coverage sometimes argue that mandated coverage would raise constitutional issues and might be challenged in court. GAO wrote in 1998, "we believe that mandatory coverage is likely to be upheld under current U.S. Supreme Court decisions." ( A discussion of t he potential legal issues associated with mandatory Social Security coverage is beyond the scope of this report. ) Some argue that non-covered state and local government workers should share in providing the poverty reduction that occurs through the Social Security system, which offers disability benefits, dependents' benefits and survivors' benefits, in addition to retirement benefits. In June 2011, retired workers and their dependents accounted for 73% of total benefits paid. The remaining 27% was paid to disabled workers and their dependents (16% of total benefits paid) and to the survivors of deceased workers (11% of total benefits paid). Social Security also redistributes income from workers with higher lifetime earnings to workers with lower lifetime earnings. According to data from BLS, state and local government workers have higher hourly earnings, on average, than the rest of the population. To the extent that state and local government workers do not participate in Social Security, they do not share in providing the poverty reduction that occurs through Social Security. This places an extra burden on higher-earning workers within the Social Security system. According to the 1994-1996 Advisory Council on Social Security, "an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where ... a few benefit both directly and indirectly, but are excused from contributing to the program." A related argument is that non-covered workers do not share the ongoing costs related to the start-up of the Social Security program. When Social Security was created, the first beneficiaries—often the parents and grandparents of current state and local government employees—paid into the system for a short period and received benefits far in excess of their contributions. About 25% of today's Social Security payroll tax revenues (about 3 percentage points of the current 12.4% payroll tax) go to cover the implicit interest costs of these net transfers to the first beneficiaries. Non-covered workers do not share in these costs, which are sometimes known as "legacy costs." In addition, as noted above, CBO projects that mandatory Social Security coverage would increase the number of Social Security beneficiaries in the long term, though the additional benefit payments would be about half the size of the additional revenues. The reason, as explained by CBO, is that most of the newly hired state and local government employees would receive Social Security benefits under current law because they may have held other covered jobs in the past or they were covered by a spouse's employment. Supporters of mandatory Social Security coverage argue that, if most non-covered state and local government employees will qualify for Social Security benefits under current law based on a second job or a spouse's employment, they should be required to pay into the Social Security system throughout their careers. Opponents of mandatory coverage maintain that Social Security benefit reductions under the WEP and the GPO already take into account that some workers participate in alternative public pension plans that operate outside of Social Security. Opponents argue that Social Security coverage has been available to state and local governments since the early 1950s. Thus, many states and localities have had the opportunity to weigh the pros and cons of Social Security coverage. States and localities that have chosen not to participate in the Social Security system would likely view mandatory Social Security coverage as unfair. The majority of state and local government employees are covered by Social Security (72.5% in 2008). Proposals to mandate Social Security coverage for all state and local government employees hired in the future have been part of the Social Security policy debate for many years. The underlying issues to consider in evaluating the potential advantages and disadvantages of mandatory Social Security coverage include Social Security's long-range financial status; benefit protections for workers and their families; the impact on states and localities that would be required to revise their public pension plans to incorporate a Social Security component; and a broader social perspective.

Social Security covers about 94% of all workers in the United States. Most of the remaining 6% of non-covered workers are public employees. About one-fourth of state and local government employees are not covered by Social Security for various historical and other reasons. The 1935 Social Security Act did not extend coverage to state and local government workers. Since the 1950s, Congress has passed laws to allow state and local government employees who have public pensions to elect Social Security coverage through employee referendums. In 1990, Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who are not covered by an alternative public pension plan. Some have proposed extending mandatory Social Security coverage to all newly hired public employees. Recently, this proposal was included in the recommendations of the Bipartisan Policy Center's Debt Reduction Task Force and the National Commission on Fiscal Responsibility and Reform. According to the Social Security Administration (SSA), mandatory Social Security coverage of newly hired state and local government workers would close an estimated 8% to 9% of Social Security's projected average 75-year funding shortfall (the greatest positive financial effect would occur during the initial period following implementation) and extend Social Security trust fund solvency by 2 to 3 years. The Congressional Budget Office estimates that the proposal would increase net federal revenues by $24 billion over 5 years and $96 billion over 10 years. Supporters of mandatory Social Security coverage maintain that it would result in better benefit protections for workers and their families through the provision of dependents' and survivors' benefits and full cost-of-living adjustments under Social Security. Opponents argue that mandatory coverage would not necessarily provide better benefit protections compared with existing non-covered pension plans; the net effect on a worker's total benefits would depend in part on how state and local governments modify their existing pension plans in response to mandatory coverage. Moreover, Congress could enact changes to the Social Security contribution and benefit structure that result in higher payroll taxes and lower benefits for current workers in response to Social Security's projected long-range funding shortfall. Supporters point out that, unlike state and local pension plan coverage, Social Security coverage is portable (i.e., coverage is transferrable as a worker moves from job to job). Mandatory Social Security coverage would prevent gaps in coverage that can adversely affect workers, especially those who become disabled. Some supporters of mandatory coverage argue that Social Security reduces poverty among retired and disabled workers, spouses, dependent children, and the survivors of deceased workers. They argue that all workers should share in providing this poverty reduction, which has national benefits. Many state and local government employers and employees oppose mandatory Social Security coverage, even if it were extended only to newly hired employees. State and local governments are concerned that mandatory coverage could increase pension system costs significantly at a time when many state and local pension systems are struggling financially. The extent of cost increases would depend on how states and localities adjust their existing pension plans in response to mandatory Social Security coverage. Some state and local government employees and advocacy groups express concern that existing non-covered pension plans, including those designed for specific categories of workers such as fire fighters and police officers, could be "undermined" if Social Security coverage were mandated.

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T rade Adjustment Assistance for Workers (TAA) provides federal assistance to workers who involuntarily lose their jobs due to foreign competition. The primary benefits for TAA-eligible workers are funding for training and reemployment services as well as income support while a worker is enrolled in training. Workers may also be eligible for other benefits, including a tax credit equal to a portion of qualified health insurance premiums. Workers age 50 and over may be eligible for Reemployment Trade Adjustment Assistance, a wage supplement program. After a brief discussion of the program's purpose and most recent reauthorization, this report describes TAA as reauthorized by the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA, Title IV of P.L. 114-27 ). Reduced barriers to international trade are widely acknowledged to offer benefits to consumers in the form of increased choices and lower prices. Expanded trade may also offer expansionary opportunities to firms that produce goods or services that see increased exports. Reduced barriers to trade may, however, have concentrated negative effects on domestic industries and workers that face increased competition. TAA is designed to provide readjustment assistance to workers who suffer dislocation (job loss) due to foreign competition or offshoring. Generally, TAA provides a more robust set of benefits and services than would be available to a worker who lost his or her job for reasons other than foreign competition. TAA is designed to assist workers who have been adversely affected by reduced trade barriers and increased trade. Its availability to workers who are adversely affected by declines in international trade may be limited. TAA was created in 1962 and, historically, has been reauthorized alongside expansionary trade policies. A detailed legislative history of the program is in the Appendix . In June 2015, TAA was reauthorized by TAARA. The eligibility and benefit provisions of TAARA are authorized to continue through June 30, 2021. TAARA was part of a bill that extended other trade-related policies. TAARA was also passed in conjunction with a separate bill that reauthorized the Trade Promotion Authority (TPA, Title I of P.L. 114-26 ). TPA (also known as "fast track") grants the President authority to negotiate trade agreements, which are then subject to an "up or down" vote in Congress. Since the reauthorization of TPA in 2015, Congress has not voted on any presidentially negotiated trade agreements. This report focuses on the eligibility and benefit provisions of TAA as enacted by TAARA. These provisions apply to all workers certified for TAA after the law's enactment. The law also had retroactivity provisions and, in some cases, workers who were parts of groups certified prior to the 2015 reauthorization may be covered under the TAARA provisions. In other cases, however, a worker who was certified under pre-2015 provisions may continue to receive benefits under the prior provisions. As such, while the version of the program described in this report will apply to all new program participants certified through June 30, 2021, it may not apply to some participants who are covered by a TAA petition that was certified prior to the enactment of TAARA. In these cases, states may operate multiple TAA programs to concurrently serve workers certified under the TAARA provisions and workers certified under other provisions. TAA is jointly administered by the federal government and the states. It is funded by the federal government. The respective roles of federal and state governments in administering and financing the TAA program were in place prior to TAARA and were not substantively changed by the reauthorization law. TAA is jointly administered by the U.S. Department of Labor (DOL) and cooperating state agencies. DOL makes group eligibility determinations, allots appropriated funds to cooperating state agencies, and oversees grantees. Individual benefits are provided through state workforce systems and state unemployment insurance systems. Workers may physically receive benefits and services through local American Job Centers (also known as One-Stop Career Centers). States are responsible for collecting participation and outcome data and reporting these data to DOL. The Health Coverage Tax Credit, which is available to qualified TAA-certified workers who purchase qualified health insurance, is administered by the Internal Revenue Service (IRS). It is administered separately from the TAA program's other benefits and services. TAA is funded by mandatory appropriations. Typically, Congress appropriates a single sum that supports all TAA activities. DOL then allocates these funds to various program activities. Under TAARA, funding for training and reemployment services is capped at $450 million per year. These funds are allotted to the states via a grant allocation formula that considers past and anticipated program usage. States may expend training and reemployment service funds in the year of allotment or in either of the next two fiscal years. Training subsidies are states' primary expenditures out of their reemployment services funding. TAARA specifies that states must allocate at least 5% of their reemployment services funding to case management and no more than 10% to administrative costs. Funds for the Trade Readjustment Allowance income support and Reemployment Trade Adjustment Assistance wage insurance program are not capped. Appropriations for these benefits are based on congressional estimates. Funding for these benefits that is not spent in the year of allotment is returned to the Treasury. TAA is a direct spending (also referred to as "mandatory") program and subject to sequestration under the Budget Control Act of 2011, as amended. For FY2018, the Office of Management and Budget (OMB) determined that the reduction for nonexempt, nondefense spending would be 6.6%. Sequester levels in subsequent years will be determined by OMB. In FY2018, Congress appropriated $790 million for the TAA for Workers programs. Of this amount, $450 million was for training and reemployment services and the remaining $340 million was for income support and wage insurance. The entire $790 million appropriation was subject to 6.6% sequestration ($52.14 million). DOL opted to apply the entirety of the sequestration to the training and reemployment services funding, reducing the funding for training and reemployment services from $450 million to $397.86 million and leaving the $340 million for income support and wage insurance unchanged. Obtaining TAA benefits is a two-stage process. First, a group of workers or their representative (e.g., firm, union, or state) must petition DOL to establish that their job loss was attributable to foreign trade and met statutory criteria. Once a group has been certified by DOL, individual workers covered by the group's petition apply for state-administered benefits at local American Job Centers (AJCs; also known as One-Stop Career Centers). TAA is available to workers in the 50 states, the District of Columbia, and Puerto Rico. To be eligible for TAA group certification, a group of workers from a firm (or a subdivision of a firm) must have become totally or partially separated from their employment or have been threatened with becoming totally or partially separated. Private sector workers who produce goods ("articles" in the law) or services are eligible for TAA. The petitioning workers must establish that foreign trade contributed importantly to their separation. The role of foreign trade can be established in one of several ways: An increase in competitive imports . The sales or production of the petitioning firm have decreased absolutely and imports of articles or services like or directly competitive with those produced by the petitioning firm have increased. A shift in production to a foreign country . The workers' firm has moved production of the articles or services that the petitioning workers produced to a foreign country or the firm has acquired, from a foreign provider, articles or services that are directly competitive with those produced by the workers. Adversely affected secondary workers . The petitioning firm is a supplier or a downstream producer to a TAA-certified firm and either (1) the sales or production for the TAA-certified firm accounted for at least 20% of the sales or production of the petitioning firm or (2) a loss of business with a TAA-certified firm contributed importantly to the workers' job losses. USITC workers . Workers separated from firms that have been publicly identified by the United States International Trade Commission (USITC) as injured by a market disruption or other qualified action. The TAA eligibility criteria are designed to target workers who lose their jobs due to increased international trade and increased imports. The structure of the eligibility criteria mean that the program may not be available to workers who are adversely affected by reductions in international trade or declines in exports. To establish TAA eligibility, a group of workers (or their representative, such as a union, firm, or state) must complete a two-page petition and submit it, along with any supporting documentation, to DOL. An additional copy of the TAA petition must also be filed with the governor of the state in which the affected firm is located. After receiving the petition, DOL investigates to determine if the petition meets any of the criteria outlined in the previous subsection of this report. Determinations of TAA petitions are published in the Federal Register and on the DOL website. If a petition is certified, DOL will also determine an impact date on which trade-related layoffs began or threatened to begin. This date can be as early as one year prior to the petition. A certified petition will cover all workers laid off by the firm (or applicable subdivision of the firm) between the impact date and two years after the certification of the petition. For example, if a petition is certified on November 1, 2015, and the impact date is found to be March 1, 2015, all members of the certified group laid off between March 1, 2015, and November 1, 2017, would be eligible for TAA benefits. If a petition is denied, the group may request administrative reconsideration by DOL. Reconsideration requests must be mailed within 30 days of the publication of the initial denial in the Federal Register . Workers who are denied certification may seek judicial review of DOL's initial petition denial or denial following administrative reconsideration. Appeals for judicial review must be filed with the U.S. Court of International Trade within 60 days of Federal Register publication of the initial denial or the administrative reconsideration denial. After DOL certifies a group of workers as eligible, the individual workers covered by the certification then apply to their local AJCs for individual benefits. To be eligible for Trade Readjustment Allowance payments, a worker must meet all of the following conditions: (1) separation from the firm on or after the impact date specified in the certification but within two years of DOL certification, (2) employment with the affected firm in at least 26 of the 52 weeks preceding layoff, (3) entitlement to state unemployment compensation (UC) benefits, and (4) no disqualification for extended unemployment benefits. Additionally, workers must be enrolled in an approved training program or have received a waiver from training. Group-certified workers who are denied individual benefits can appeal the decision. The determination notice that individual workers receive after filing their applications for each benefit explains their appeal rights and time limits for filing appeals. TAA benefits for individual workers include training and reemployment services and income support for workers who have exhausted their UC benefits and are enrolled in training. Workers age 50 and over may participate in the Reemployment Trade Adjustment Assistance (RTAA) wage insurance program. Certified workers may also be eligible for a tax credit for a portion of the premium costs for qualified health insurance. TAA-certified workers may receive several types of benefits and services to aid them in preparing for and obtaining new employment. The largest reemployment benefit from a budgetary standpoint is training assistance. Workers may also receive case management services and reimbursements for qualified job search and relocation expenses. TAARA caps annual funding for training and reemployment services at $450 million per year. Training and reemployment services funds are granted to state workforce agencies via formula. Eligible workers request training assistance through their local AJCs. Statute specifies that training for a worker shall be approved if all of the following conditions are met: there is no suitable employment available for an adversely affected worker, the worker would benefit from appropriate training, there is a reasonable expectation of employment following completion of such training, training approved by the Secretary is reasonably available to the worker from either governmental agencies or private sources, the worker is qualified to undertake and complete such training, and such training is suitable for the worker and available at a reasonable cost. Once approved, training can be paid on the worker's behalf directly to the service provider or through a voucher system. The range of approved training includes a variety of governmental and private programs. There is no federal limit on the amount of training funding an individual can receive, though some states have a cap. A concise summation of TAA training programs is difficult due to the range of acceptable activities and the decentralized nature of approval and training. Data from DOL, however, offer some insight into the nature and duration of TAA-sponsored training programs. In FY2015, approximately 88% of TAA training participants received what DOL describes as occupational skills training: training in a specific occupation, typically provided in a classroom setting. The remainder of training was classified as remedial, prerequisite, on-the-job, or other customized training. Among program participants who exited the TAA program in FY2015 and participated in training, 70% completed their program of training. Among the training participants who completed their training programs in FY2015, the average duration of enrollment in the program was 512 days and the average training cost was $13,062. TAA does not require training programs to lead to a degree or other credential. In its FY2015 annual report, DOL reported that 89% of workers who completed training earned an industry-recognized credential, or a secondary school diploma or equivalent. TAA funding may be the only source of funding for a worker's training costs. Statute addresses scenarios in which other resources are used in the pursuit of TAA-funded training. In determining if the cost of a training program is reasonable, an administering state agency may consider public and private non-TAA funding available to the worker. For example, a worker may voluntarily offer to pay for a portion of a program with personal funds so that an agency may approve a program for which the costs would not otherwise be reasonable. An administering state agency may not require a TAA-certified worker to contribute personal funds or apply for other assistance as a condition of approving a TAA training program. A key exception of the policy of administering state agencies considering non-TAA aid is that the Higher Education Act specifies that certain types of federal student aid (including Pell Grants) "shall not be taken into account in determining the need or eligibility of any person for benefits or assistance, or the amount of such benefits or assistance, under any Federal, State, or local program financed in whole or in part with Federal funds." As such, a TAA-certified worker's training benefit could not be reduced on the basis of that worker's access to a Pell Grant. Guidance from DOL notes that this policy "allows a worker to use student financial assistance for living expenses instead of tuition and thus provides the worker income support during long-term training." TAARA specifies that, through the administering state agencies and AJC system, DOL shall provide a series of case management and employment services to all TAA-certified workers. These services include a comprehensive assessment of a worker's skills and needs, assistance in developing an individual employment objective and identifying the training and services necessary to achieve that goal, and guidance on training and other services for which a worker may be eligible. Under TAARA, states are required to use at least 5% of their reemployment services allotments for case management and employment services. States may use their reemployment services funding to provide job search and relocation allowances. These allowances target workers who are unable to obtain suitable employment within their commuting areas. Certified workers can receive an allowance equal to 90% of each of their job search and relocation expenses, up to a maximum of $1,250 for each benefit. A Job Search Allowance may be available to subsidize transportation and subsistence costs related to job search activities outside an eligible worker's local commuting area. Subsistence payments may not exceed 50% of the federal per diem rate and travel payments may not exceed the prevailing mileage rate authorized under federal travel regulations. A Relocation Allowance may be available to workers who have secured permanent employment outside their local commuting area. The benefit covers 90% of the reasonable and necessary expenses of moving the workers, their families, and their household items. Relocating workers may also be eligible for a lump sum payment of up to three times their weekly wage, though the total relocation benefit may not exceed $1,250. Trade Readjustment Allowance (TRA) is a weekly income support payment to certified workers who have exhausted their UC benefits and who are enrolled in training. To be eligible for TRA, a worker must be enrolled in training within 26 weeks of separation from the worker's job or within 26 weeks of TAA certification, whichever is later. In limited circumstances, a worker may obtain a training waiver. TRA is funded by the federal government and administered by the states through their unemployment insurance systems. TRA is an individual entitlement and not subject to an annual funding cap. Appropriation levels are based on estimated usage and unused funds are returned to the Treasury at the end of the fiscal year. Individual TRA benefit levels are equal to a worker's final UC benefit. UC benefit levels are based on earnings during a base period of employment (typically, the first four of the last five completed calendar quarters). UC benefits typically replace a portion of a worker's wages up to a statewide maximum. Since states each administer their own UC programs, there is some variation in benefit levels. In July 2015, the highest maximum weekly UC benefit for a worker with no dependents was $698 in Massachusetts and the lowest maximum weekly benefit was $240 in Arizona. There are three stages of TRA Basic TRA. The weekly basic TRA payment begins the week after a worker's UC eligibility expires. To receive the basic TRA benefit, workers must be enrolled or participating in TAA-approved training, have completed such training, or have obtained a waiver from the training requirement. The total amount of basic TRA benefits available to a worker is equal to 52 times the weekly TRA benefit minus the total amount of UC benefits. For example, assuming a constant benefit level, a worker who received 20 weeks of UC benefits would be eligible for 32 weeks of basic TRA. Additional TRA. After basic TRA has been exhausted, workers who are enrolled in a TAA-approved training program are eligible for an additional 65 weeks of income support, for a total of 117 weeks of benefits. Additional TRA is limited to workers who are enrolled in a training program; workers who have received a training waiver are not eligible for additional TRA. TAA participants may only collect additional TRA as long as they remain enrolled in a qualified training program. In cases where a worker's training program is shorter than the maximum TRA duration, the worker is not entitled to the maximum number of TRA weeks. Completion TRA. In cases where a worker has collected 117 weeks of combined TRA and UC and is still enrolled in a training program that leads to a degree or industry-recognized credential, the worker may collect TRA for up to 13 additional weeks (130 weeks total) if the worker will complete the training program during that time. RTAA is an entitlement that provides a wage supplement for workers age 50 and over who are certified for TAA benefits and obtain reemployment at a lower wage. The program provides a cash payment to an eligible worker equal to 50% of the difference between the worker's wage at the trade-affected job and the worker's wage at his or her new job. The maximum benefit is $10,000 over a two-year period. Workers may not receive TRA and RTAA benefits simultaneously. To be eligible for RTAA, a worker must either (1) be reemployed on a full-time basis, as defined by the law of the state in which the worker is employed or (2) be reemployed at least 20 hours a week and be enrolled in a TAA-sponsored training program. Workers who receive RTAA payments while enrolled in training and working less than full time may be subject to a reduced benefit. Workers who are receiving TRA, UC in lieu of TRA, or RTAA benefits may also be eligible for a tax credit that covers a portion of eligible health insurance premiums. The Health Coverage Tax Credit (HCTC) is equal to 72.5% of qualified health insurance premiums. TAARA includes provisions specifying that a worker must elect between the HCTC and premium credits under the Patient Protection and Affordable Care Act ( P.L. 111-148 , amended). Unlike other provisions of TAARA, which are in effect through June 30, 2021, the HCTC is authorized through December 31, 2019. The Trade Act requires DOL to collect and publish specified data on TAA participation, benefits, outcomes, and spending. Data to be collected and reported include (but are not limited to) the following: Data on petitions filed, certified, and denied . These data include the number of petitions filed, certified, and denied, as well as the average processing time for such petitions. Certified petitions must be disaggregated on the basis of eligibility. Data on benefits received . These data include the number of workers receiving TRA and other benefits as well as the average duration for which workers received benefits. Data on training . These data include the number of workers who participated in training, the average duration of such training, and the average per-worker cost of training. Data on outcomes . These data include the percentage of workers who are in unsubsidized employment during the second calendar quarter after exit, the earnings of such workers, the percentage of workers who are in unsubsidized employment in the fourth quarter after exit, and the percentage of workers who received a recognized postsecondary credential. Data on rapid response activities . These data include whether or not a state provided rapid response services to each firm that petitioned for benefits. Data on spending . These data include state and national payments for TRA benefits, training, administration, and job search and relocation allowances. The data required by the Trade Act are collected by the state agencies that administer the TAA program. These data are submitted to DOL, which publishes the data and other relevant information in annual reports. Since 2014, DOL has also published quarterly data and analysis on its website. In addition to participation data, DOL maintains a database of individual firms' TAA petitions. Users can access firm-level information, including the firm's full petition and DOL's assessment and determination of the petition. Early History The first TAA programs were enacted in 1962 but little used until the Trade Act of 1974 eased eligibility requirements. Program use expanded through the 1970s and the number of certified workers increased from about 59,000 in FY1975 to nearly 600,000 in FY1980. In light of rapidly increasing program costs, the Omnibus Budget Reconciliation Act of 1981 ( P.L. 97-35 ) cut spending by reducing benefits and emphasizing training and other reemployment services. TAA participation levels fluctuated throughout the 1980s, but were mostly well below the levels of the 1970s. In 1988, the program was reauthorized through FY1993 by the Omnibus Trade and Competitiveness Act of 1988 ( P.L. 100-418 ). Among other changes, the 1988 reauthorization expanded eligibility for TRA but also placed a new emphasis on training by making it a program requirement. 1990s and NAFTA The Omnibus Reconciliation Act of 1993 ( P.L. 103-66 ) reauthorized TAA through 1998 with reductions in training funding. The North American Free Trade Agreement (NAFTA) Implementation Act of 1993 ( P.L. 103-182 ) established a new component of TAA that offered dedicated benefits to workers whose job loss was attributable to trade with Mexico and Canada. Trade Act of 2002 The next major reauthorization of TAA was part of the Trade Act of 2002 ( P.L. 107-210 ). This law combined TAA, TPA, and other trade-related issues into a single piece of legislation. Among other changes, the 2002 TAA reauthorization merged the NAFTA-TAA program into the general TAA program and created the Health Coverage Tax Credit for TAA workers. The Trade Act of 2002 reauthorized TAA through FY2007. Several short-term extensions continued the program until it was reauthorized in February 2009. American Recovery and Reinvestment Act In February 2009, TAA was reauthorized and expanded by the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ). Unlike other reauthorizations, which tended to be aligned with expansionary trade policy or budget reconciliations, this reauthorization was aligned with other domestic initiatives to spur economic activity during a time of above-average unemployment. The ARRA reauthorization of TAA expanded the program in several ways. Among other provisions, it increased funding for training, increased the maximum number of weeks that a worker could receive TRA, and extended eligibility to service sector and public sector workers who had been displaced by trade. The ARRA provisions of TAA were scheduled to expire after December 31, 2010. A short-term extension continued the program through February 12, 2011. After that date, TAA reverted to the more limited eligibility and benefit provisions that were in place prior to ARRA. 2011 Reauthorization: Trade Adjustment Assistance Extension Act In October 2011, the Trade Adjustment Assistance Extension Act (TAAEA; Title II of P.L. 112-40 ) was enacted. This reauthorization was aligned with the separate passage of three implementing bills of free trade agreements with Colombia, Panama, and South Korea. TAAEA reinstated some, but not all, of the expansions that had been enacted under ARRA. Most notably, it re-expanded eligibility to service sector (but not public sector) workers and increased training funding to near-ARRA levels. TAAEA also curtailed benefits by reducing the eligible reasons for training waivers from six to three. Sunset and Termination Provisions of 2011 Reauthorization The eligibility and benefit provisions initially enacted by TAAEA were scheduled to remain in place until December 31, 2013. Beginning January 1, 2014, the TAA program reverted to a more limited set of eligibility and benefit provisions ("Reversion 2014 provisions"). Among other changes, the Reversion 2014 provisions ended eligibility for service workers and reduced the cap on training funding to the 2002 levels. The Reversion 2014 provisions were scheduled to remain in place for one year before authorization expired after December 31, 2014, and the program was scheduled to begin to be phased out. The program did not, however, expire as scheduled at the end of 2014. Instead, the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ) provided funding for full operation of the program under the Reversion 2014 provisions through FY2015. 2015 Reauthorization: Trade Adjustment Assistance Reauthorization Act TAA continued to operate under the Reversion 2014 provisions until the enactment of the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA; Title IV of P.L. 114-27 ). This reauthorization was aligned with the separate extension of the Trade Promotion Authority (TPA, also known as "fast track"). Any agreements negotiated under TPA are subject to an "up or down" vote in Congress. TAARA reinstated many of the eligibility and benefit provisions that were enacted by TAAEA in 2011. TAARA reinstated eligibility for service workers and increased training funding to a level between those of TAAEA and the Reversion 2014 provisions. Sunset and Termination Provisions of 2015 Reauthorization TAARA contains sunset provisions similar to those in TAAEA that took effect in 2014. Beginning July 1, 2021, the TAA program is scheduled to revert to a more limited set of eligibility and benefit provisions that are similar to the Reversion 2014 provisions. These provisions are scheduled to remain in place for one year until authorization is set to expire after June 30, 2022, and then the program is scheduled to begin to be phased out.

Trade Adjustment Assistance for Workers (TAA) provides federal assistance to workers who have involuntarily lost their jobs due to foreign competition. It was last reauthorized by the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA; Title IV of P.L. 114-27). This report discusses the TAA program as enacted by TAARA. To be eligible for TAA, a group of workers must establish that they were separated from their employment either because their jobs moved outside the United States or because of an increase in directly competitive imports. Workers at firms that are suppliers to or downstream producers of TAA-certified firms may also be eligible for TAA benefits. Private sector workers who produce goods or services are eligible for TAA benefits. To establish eligibility for TAA benefits, a group of trade-affected workers (or their representative) must petition the Department of Labor (DOL) and a DOL investigation must verify the role of increased foreign trade in the workers' job losses. Once a petition is certified by DOL, covered workers may apply for individual benefits. Individual benefits are funded by the federal government and administered by state agencies through their workforce systems and unemployment insurance systems. Benefits available to individual workers include the following: Training and reemployment services are designed to assist workers in preparing for and obtaining new employment. Training subsidies are the largest reemployment services expenditure and support workers in developing skills for a new occupation. Workers may also receive case management services and job search assistance. In some cases, workers who pursue employment outside their local commuting area may be eligible for job search or relocation allowances. Trade Readjustment Allowance (TRA) is a weekly income support payment for TAA-certified workers who have exhausted their unemployment compensation (UC) and who are enrolled in an eligible training program. Weekly TRA payments are equal to the worker's final weekly UC benefit. Workers may collect UC and TRA for a combined maximum of 130 weeks, the final 13 of which are only available if necessary for the worker to complete a qualified training program. Reemployment Trade Adjustment Assistance (RTAA) is a wage insurance program available to certified workers age 50 and over who obtain reemployment at a lower wage. The wage insurance program provides a cash payment equal to 50% of the difference between the worker's new wage and previous wage, up to a two-year maximum of $10,000. The Health Coverage Tax Credit is a credit equal to 72.5% of qualified health insurance premiums. Eligibility is aligned with TRA. Unlike other TAA benefits, it is administered through the tax code. TAA is a mandatory program that is supported through annual appropriations. Appropriations for the program in FY2018 were $790 million.

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The Federal Employee Dental and Vision Benefits Enhancement Act of 2004 was enacted on December 23, 2004, requiring the Office of Personnel Management (OPM) to establish arrangements under which supplemental dental and vision benefits are available to federal employees, Members of Congress, annuitants, and dependents. OPM established the Federal Employees Dental and Vision Insurance Program (FEDVIP), with coverage first available on December 31, 2006. Enrollees are responsible for 100% of the premiums, and OPM does not review disputed claims. Employees who are eligible to enroll in the Federal Employees Health Benefits (FEHB) program, whether or not they are actually enrolled, may enroll in FEDVIP. Annuitants, survivor annuitants, and compensationers (someone receiving monthly compensation from the Department of Labor's Office of Workers' Compensation program) may also enroll in FEDVIP. Eligible family members include a spouse, unmarried dependent children under age 22, and continued coverage for qualified disabled children 22 years or older. Former spouses receiving an apportionment of an annuity, deferred annuitants, and those in FEHB temporary continuation of coverage are not eligible to enroll in FEDVIP. There are four nationwide dental plans, and three additional dental plans that are only available regionally. The nationwide plans also provide coverage overseas. There are three vision plans, which all provide both nationwide and overseas coverage. Eligible individuals may enroll in a FEDVIP plan during the standard open season for FEHB plans (for 2008 coverage, open season is from November 12 through December 10, 2007). Individuals may change plans during open season each year, or following a qualifying life event. As with FEHB, new employees have 60 days to enroll. FEDVIP enrollment can be done through the Internet at http://www.BENEFEDS.com , or, for those without Internet access, by calling 1-877-888-FEDS. Individuals may choose a self-only, self +1, or a family plan. This set of options differs from the FEHB plans, which only allow for two choices: a self-only or a family plan. Individuals who choose to enroll in FEDVIP are not required to enroll in both a dental and a vision plan; they may choose only one type of coverage or both. Individuals are not required to enroll in the dental plan offered by their FEHB plan; for example, an individual whose health insurance is provided by GEHA may enroll in MetLife's dental plan and in Blue Cross Blue Shield's vision plan. However, any coverage for dental and/or vision services provided under the individual's FEHB plan is the primary source of coverage, and the FEDVIP supplemental dental and vision plans pay secondary. Additionally, active workers (not annuitants) may still contribute to a Flexible Spending Account (FSA) to cover any qualified unmet medical expenses, such as dental copayments or deductibles. Premiums vary by plan, by whether the enrollment includes other family members, and by residency (for dental plans only). Unlike nationwide FEHB plans, individuals enrolled in a FEDVIP dental plan pay different premiums depending on where they live in the country or overseas. Active employees pay FEDVIP premiums on a pre-tax basis (called premium conversion). However, unlike FEHB plans, employees may not opt out of premium conversion. Pre-tax premiums are not available to annuitants, survivor annuitants, or compensationers. While there are no preexisting condition exclusions for this coverage, there are waiting periods for orthodontia. Individuals must be in the same plan for the entire waiting period, and switching to a new plan may require beginning the waiting period over again. There are no waiting periods for vision services. While the statutes allow for more stringent waiting periods for individuals who do not enroll at their first enrollment opportunity, the brochures for 2008 do not indicate that plans have imposed additional restrictions. Enrollees will pay less out-of-pocket costs if they use in-network services. For 2008, the four nationwide dental plans are Aetna, GEHA, MetLife, and United Concordia. Both GEHA and MetLife have two options—a high and a standard option. There are also three regional plans: Triple-S (covering Puerto Rico), GHI (covering New York and parts of Pennsylvania, Connecticut, and New Jersey), and CompBenefits (covering 19 states, Washington, D.C., and parts of Maryland). Only the nationwide plans also provide coverage overseas. The benefits provided by these plans include, but are not limited to, the following: (1) Class A (Basic) services—oral examinations, prophylaxis, diagnostic evaluations, sealants, and X-rays; (2) Class B (Intermediate) services—restorative procedures such as fillings, prefabricated stainless steel crowns, periodontal scaling, tooth extractions, and denture adjustments; (3) Class C (Major) services—endodontic services such as root canals, periodontal services such as gingivectomy, major restorative services such as crowns, oral surgery, and bridges, and prosthodontic services such as complete dentures; and (4) Class D (Orthodontic) service. Premiums for these plans vary by geographic area. For example, an Aetna enrollee in Washington, D.C., will pay a monthly premium of $28.97 for self-only coverage. Monthly premiums for Aetna's plan range from $26.35 to $36.83, depending on where the enrollee resides. For all dental plans, self + 1 premiums are approximately twice the plan's self-only premium, and family premiums are about three times the plan's self-only premium. Thus, comparing plan premiums is slightly more complex than comparing nationwide FEHB plan premiums, for which everyone in the same self-only plan pays the same premium, regardless of where they live, and for which there is no self + 1 option. Similar to the FEHB program, premiums also vary by high or standard options. Table 1 , below, compares the national dental plans, including the monthly premiums for the Washington, D.C., area. Monthly self-only premiums range from $22.71 for MetLife's standard plan to $37.90 for GEHA's high option plan. Only Aetna had no premium increase over last year, with other plans increasing self-only premiums from about $1 per month (GEHA high option, with about a 2% increase) to $4.50 per month (United Concordia, with about a 15% increase) per month. The percentage of services covered by a plan varies by class of service, with only GEHA's standard plan requiring a copayment for preventive services. Enrollees who choose out-of-network services pay their coinsurance plus any amount over the plan's payment. The United Concordia plan pays only for emergency out-of-network services. All of the plans cover underserved areas, as well as those overseas. The plans also impose an annual benefit limit for total Class A through C services of $1,200 for all plans, except MetLife's high option plan with a $3,000 limit. There is a lifetime orthodontia limit, which is $1,500 for all plans, except MetLife's high option plan, which has a $3,000 limit. For 2008, the three vision plans are FEP BlueVision (Blue Cross and Blue Shield), Spectera, and Vision Service Plans (VSP). Each of these plans has both a high and a standard option, and also provides both nationwide and overseas coverage. Annual premiums for the three plans are similar; annual self-only coverage is $71.76 for Spectera, $99.36 for VSP, and $103.20 for FEP BlueVision's plan. The high-option plans cost about $20 to $40 more per year. Premiums for self + 1 plans are about double the costs of self-only plans, and premiums for family plans are about triple the costs. For 2008, Spectera had a very small premium increase (for self-only standard coverage, premiums increased by $0.20 per month, and high plan premiums increased by $0.39 per month, each about a 5% increase). The other vision plans' premiums remained the same. The more significant differences are found in benefits and network limitations. For example, under the FEP BlueVision plan, enrollees must stay in-network for covered services, with two exceptions: those who living in a limited access area or those who receive services overseas. Enrollees are responsible for any difference between the amount billed by the provider and the actual plan payment. Spectera and VSP both allow for reimbursement for visits to out-of-network providers. Generally, covered services are limited to eye exams, a choice between lenses for glasses or contacts, and extra discounts and savings on non-covered services, such as progressive lenses and additional glasses. The services are provided according to a schedule, such as eye exams every 12 months and new frames every 24 months. Additionally, plans cover low vision coverage on a limited basis. As shown in Table 2 , an individual enrolled in either of Spectera's plans could have an exam and new lenses and frames once during the course of a year. The copayment would be $10 for the exam and $10 for the lenses, or $25 for both lenses and frames, if new frames were purchased. Spectera's standard option includes scratch-resistant coating and polycarbonate lenses, and the high option also covers basic progressive lenses, tinted lenses, and UV coating. Plan brochures provide more detail on the differences between the standard and high options. The choice of covered frames is also limited. For those using services outside the network, the plans provide a schedule of payments. Enrollees may opt for contact lenses in lieu of glasses, subject to each plan's limits (i.e., generally a limit on disposable contacts, supplying only enough for part of the year). Several factors should be considered in deciding whether or not to enroll in FEDVIP, including (1) coverage of these services in a FEHB plan—more likely for those enrolled in a Health Maintenance Organization (HMO), (2) likelihood of using services covered by the plans, and (3) placing the same dollar amount that would be used toward dental and/or vision benefits premiums in an FSA (available to employees and not annuitants). Each prospective enrollee must weigh these considerations and others against his or her own level of risk aversion, as well as the fact that the individual pays 100% of the premium. Under the FEDVIP program, any coverage provided by an individual's FEHB health plan is primary, and the FEDVIP plans are the secondary payers. However, generally, the nationally available FEHB plans, have limited dental and vision coverage. This year, GEHA added limited vision coverage under its plans, offering an annual eye exam with a $25 copayment. GEHA, similar to some of the other national plans, has an arrangement with certain providers for discounted eyewear, but the enrollee would still be responsible for 100% of the discounted cost. In contrast, some of the FEHB HMO-type plans offer more comprehensive dental and vision benefits. Some high-deductible plans also provide some coverage. It is important to compare FEHB coverage to determine if also enrolling in FEDVIP is beneficial. While some enrollees know that they will use services, such an individual who wears glasses or a dependent who will need orthodontics, some services cannot be as easily predicted, such as an individual needing a root canal. Individuals must weigh their expected benefits against the premiums. For example, an individual who wears glasses, has a yearly eye exam, and uses a provider in-network may find that paying the premium will result in lower costs than paying for each of these services separately, even with pre-tax FSA funds for employees. On the other hand, an individual who does not wear glasses may not benefit from vision supplemental insurance. There is not, however, a one-to-one correlation between buying any insurance and the expectation of using the services. There is still a large share of unknown risk that any insurance protects against, so that some individuals may find themselves using services that they did not anticipate using. Both FEDVIP premiums and FSA contributions are pre-tax for employees, so that they may decide to enroll in one, none, or both. (Annuitants can not contribute to an FSA or pay premiums with pre-tax dollars.) Enrollees who choose both can use funds in the FSA for any copayments, coinsurance amounts, deductibles, amounts exceeding annual or lifetime maximums, or amounts above the plan's payment for out-of-network services. Some individuals may decide that they prefer to only contribute to an FSA and not enroll in either the dental or vision plan, and instead use their FSA funds to pay for any dental or vision expenditures. While using FSA funds provides the most flexibility, it may be that the dental and vision premiums cover more than the same dollars in the FSA. Individuals who are not sure they will use the services provided under FEDVIP can "wait and see," and if they do not use dental or vision services, they can use the FSA dollars for other qualified medical expenses. Others may choose to enroll only in FEDVIP and minimize their out-of-pocket expenditures by staying in-network. Decisions about FEDVIP and FSA can be revisited every year during open season.

The Federal Employee Dental and Vision Benefits Enhancement Act of 2004 was enacted on December 23, 2004 ( P.L. 108-496 ), directing the Office of Personnel Management (OPM) to establish a supplemental dental and vision benefits program. OPM created the Federal Employees Dental and Vision Insurance Program (FEDVIP), with coverage first available on December 31, 2006. Enrollees are responsible for 100% of premiums and may choose a self-only, self + 1, or family plan. Coverage for dental and/or vision services provided through Federal Employees Health Benefits (FEHB) plans is the primary source of coverage, and the supplemental dental and vision plan is secondary. Employees may still contribute to a Flexible Spending Account (FSA) to cover any qualified unmet medical expenses.

govreport

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ), which the President signed into law on February 17, 2009, provided $17.15 billion in supplemental FY2009 discretionary appropriations for biomedical research, public health, and other health-related programs within the Department of Health and Human Services (HHS). ARRA also included new authorizing language to promote the widespread adoption of electronic health records and other health information technology (HIT), and established a federal interagency advisory panel to coordinate comparative effectiveness research. This report discusses the health-related programs and activities funded by ARRA and provides details on how the administering HHS agencies and offices are allocating and obligating the funds. ARRA funds were designated as emergency supplemental appropriations for FY2009. Unless otherwise specified in the law, the ARRA funds are to remain available for obligation through the end of FY2010 (i.e., September 30, 2010). Most of the health-related programs and activities for which ARRA provided supplemental funds also receive funding in annual appropriations acts through regular procedures. HHS FY2009 appropriations were included in the Omnibus Appropriations Act, 2009 ( P.L. 111-8 ), which was signed into law on March 11, 2009. The Consolidated Appropriations Act, 2010 ( P.L. 111-117 ), signed on December 16, 2009, included HHS appropriations for FY2010. For more information, see CRS Report RL34577, Labor, Health and Human Services, and Education: FY2009 Appropriations ; and CRS Report R40730, Labor, Health and Human Services, and Education: Highlights of FY2010 Budget and Appropriations . Table 1 summarizes ARRA's discretionary health funding, by HHS agency and office. Figure 1 shows the percentage distribution of the ARRA funds, by HHS agency and office. Two additional tables that appear at the end of this report provide more details on the ARRA funding. Table 4 shows the ARRA health funding, by type of activity funded, and includes a comparison of the amounts provided in ARRA with the regular FY2009 and FY2010 appropriations and the FY2011 budget request. Table 5 shows the obligation of ARRA funds, by type of activity funding, for FY2009 and FY2010. As part of its efforts to ensure transparency and accountability in the use of ARRA funds, the Office of Management and Budget (OMB) issued detailed government-wide guidance for implementing ARRA and established a website, "Recovery.gov," which allows the public to track ARRA spending. The guidance required each federal agency to establish a Recovery page on its existing website, linked to Recovery.gov, on which they must post all agency-specific information related to ARRA. In most cases, ARRA specified that the agency receiving funding had to submit an initial implementation plan before the funds could be obligated. Those plans are posted on the HHS Recovery Plans website. In addition, ARRA required that a report on the actual obligations, expenditures, and unobligated balances for each ARRA-funded activity be submitted by November 1, 2009, and each six months thereafter as long as funding remains available for obligation or expenditure. Each ARRA grant recipient is required to submit to the funding agency a quarterly report that includes the following information: (1) the total amount of ARRA funds received, (2) the amount of ARRA funds received that have been expended on projects and activities, and (3) details about the funded project or activity, including an estimate of the number of jobs created and the number of jobs retained by the project or activity. ARRA requires that the information submitted by grantees be posted on the funding agency's Recovery website. In addition to funding health-related programs and activities, ARRA included discretionary funds for human services programs administered by HHS. It provided $100 million to the Administration on Aging (AoA) for senior nutrition programs authorized under Title III of the Older Americans Act, and gave $5.15 billion to the Administration for Children and Families (ACF) for the Child Care and Development Block Grant, the Community Services Block Grant, and Head Start. For more information on those funds, see CRS Report RL33880, Older Americans Act: Funding ; and CRS Report R40211, Human Services Provisions of the American Recovery and Reinvestment Act . Throughout this report, unless otherwise specified, all references to the Secretary refer to the HHS Secretary. ARRA provided $2 billion to the Health Resources and Services Administration (HRSA) for grants to health centers authorized under section 330 of the Public Health Service (PHS) Act. Of this total, $1.5 billion is for the construction and renovation of health centers and the acquisition of HIT systems. The remaining $500 million is for operating grants to health centers to increase the number of underinsured and uninsured patients who receive health care services at these facilities. The implementation plan for ARRA funding of health center capital projects is available on the HHS Recovery Plans website. For more information on health centers, see CRS Report RL32046, Federal Health Centers Program . HRSA allocated the $1.5 billion for health center infrastructure as follows: $862.5 million for Capital Improvement Program (CIP) grants to support the construction, repair, and renovation of over 1,500 health center sites nationwide, including purchasing HIT and expanding the use of electronic health records (EHRs); $512.5 million for Facility Investment Program (FIP) grants to expand the capacity of health centers to provide primary and preventive health services; and $125 million for HIT systems/networks grants to support electronic health information exchange. Almost 60% of these funds were obligated in FY2009 (see Table 5 ). There is no regular appropriation for health center infrastructure. However, some health centers receive facilities and equipment funds in congressionally directed (i.e., earmarked) spending. Of the $500 million ARRA appropriation for health center operations, HRSA allocated $157 million for New Access Point (NAP) grants to support health centers' new service delivery sites, and $343 million for Increased Demand for Services (IDS) grants to increase health center staffing, extend hours of operations, and expand existing health care services. These funds, which were obligated in FY2009, supplemented the $2.2 billion provided for health centers in FY2009 through regular appropriations (see Table 4 and Table 5 ). HRSA awarded NAP competitive grants to establish 126 new health centers located in 39 states, Puerto Rico, and American Samoa. The award amounts range from $478,000 to $1,300,000. IDS grants were awarded to 1,128 federally qualified health centers in all 50 states, the District of Columbia, Puerto Rico, and the U.S. territories, based on a formula. The project period for all IDS grantees is limited to two years, from March 27, 2009, through March 26, 2011. The IDS funds are projected to create or retain approximately 6,400 jobs and provide care to an estimated additional 2.1 million patients, including 1 million uninsured people. ARRA provided $500 million to HRSA for health workforce programs authorized in the PHS Act. Of this total, $300 million is for the National Health Service Corps (NHSC) recruitment and field activities (PHS Act Title III), $75 million of which is to remain available through September 30, 2011. The remaining $200 million is for the health professions programs authorized in PHS Act Title VII (health professions education) and Title VIII (nursing workforce development). Some of these funds may also be used to develop interstate licensing agreements to promote telemedicine (PHS Act section 330L). The NHSC program provides scholarships and student loan repayments for medical students, nurse practitioners, physician assistants, and others who agree to a period of service as a health care provider in a federally designated health professional shortage area (HPSA). NHSC clinicians may fulfill their service commitments in health centers, rural health clinics, public or nonprofit medical facilities, or within other community-based systems of care. ARRA stipulated that 80% of the NHSC funds be used for scholarships and loan repayments, and the remaining 20% for field operations, including recruitment, placements and assignments, and HPSA designations. In regular appropriations, the NHSC program received $135 million for FY2009 and $142 million for FY2010 (see Table 4 ). For more information, see CRS Report R40533, Health Care Workforce: National Health Service Corps . Health professions programs authorized under Title VII provide grants, scholarships and loans to students and professionals in medicine and allied health professions. Nursing workforce programs authorized under Title VIII provide similar types of assistance to nursing students and professionals. Of the $200 million ARRA appropriation for health workforce programs, $148.4 million has been allocated for programs that target medical and dental professionals in primary care, nurses, disadvantaged students, and others; $50 million is for equipment grants to enhance the training of health professionals; and $1.5 million has been applied toward the development of interstate licensure agreements that promote telemedicine. In regular appropriations, Title VII and Title VIII programs received a total of $392 million for FY2009 and $497 million for FY2010 (see Table 4 ). For more information, see CRS Report RS22438, Health Workforce Programs in the Public Health Service Act (PHSA): Appropriations History, FY2001-FY2010 . ARRA provided $10.0 billion directly to the National Institutes of Health (NIH) for biomedical research and extramural research facilities, plus $400 million more through a transfer from AHRQ for comparative effectiveness research (discussed below). Of the $10.0 billion, the law provided $8.2 billion to the Office of the Director for broad support of NIH scientific research, both extramural and intramural. Most of that funding, $7.4 billion, was transferred to the NIH institutes and centers and the Common Fund in proportion to their regular appropriations. The remaining $800 million is being used at the Director's discretion, with an emphasis on short-term (two-year) projects, including $400 million that may be used under the Director's flexible research authority. Also included in the $10.0 billion total was $1 billion to the National Centers for Research Resources (NCRR) for grants to construct and renovate university research facilities, as well as $300 million to NCRR for grants for shared instrumentation and other capital research equipment at extramural research facilities. Finally, the Buildings and Facilities account received $500 million for construction, repair, and improvement of NIH intramural facilities. NIH received a program level total of $30.3 billion in regular FY2009 appropriations and $30.9 billion in FY2010 appropriations. The additional funds from ARRA, which are being obligated at roughly $5 billion in each of the two years, have therefore boosted NIH resources by about one-sixth each year. The $8.2 billion in ARRA research funding is being used by the institutes and centers and the Director for a wide variety of competitive grant programs, as is the case with the regular appropriations. The intent, however, is to "follow the spirit of the ARRA by funding projects that will stimulate the economy, create or retain jobs, and have the potential for making scientific progress in 2 years." The $1 billion for NCRR construction and renovation grants for extramural research facilities is being spent under a program that has received no regular funding since FY2005, while the $300 million for shared instrumentation grants is several times larger than the usual funding for that program (see Table 4 ). NIH activities with ARRA funding are being tracked on the NIH Recovery website, which includes links to news releases, information on current grant funding opportunities, awards already made, and ARRA-funded job postings at NIH. NIH's ARRA implementation plans for the various funding categories are available on the HHS Recovery Plans website. NIH is focusing activities on (1) funding new and recently peer-reviewed, highly meritorious research grant applications that can be accomplished in two years or less; (2) giving targeted supplemental awards to current grants to push research forward; and (3) supporting a new initiative called the NIH Challenge Grants in Health and Science Research for research on specific topics that would benefit from significant two-year jumpstart funds (grants have budgets under $500,000 per year). Another new program, called Research and Research Infrastructure "Grand Opportunities" (GO) grants, will devote about $200 million to large-scale research projects (budgets over $500,000 per year) that work in areas of specific knowledge gaps, create new technologies, or develop new approaches to multi- and interdisciplinary research teams. On September 30, 2009, President Obama spoke about the nearly $5 billion that NIH had awarded in ARRA funding in FY2009, supporting over 12,000 grants to research institutions in every state (see Table 5 ). A White House press release highlighted examples of research in cancer, heart disease, and autism, particularly over $1 billion in research applying the technology produced by the Human Genome Project. On February 1, 2010, NIH released actual FY2009 spending in 218 major research, disease, and condition categories, including the amounts provided under ARRA. Spending estimates for FY2010, FY2010 ARRA (partial), and FY2011 are also available. ARRA provided $1.1 billion to the Agency for Healthcare Research and Quality (AHRQ) for comparative effectiveness research (CER), also referred to as patient-centered health research. These funds are to be used to support research that (1) compares the clinical outcomes, effectiveness, and appropriateness of preventive, diagnostic, and therapeutic items, services, and procedures; and (2) encourages the development and use of clinical registries, clinical data networks, and other forms of electronic health data that can be used to generate or obtain outcomes data. Of the total amount of funding provided, $300 million is for AHRQ to invest in CER activities, $400 million was transferred to NIH, and $400 million is to be allocated at the discretion of the Secretary. ARRA also stipulated that AHRQ could use no more than 1% of the $300 million under its own discretion for additional FTEs. According to the agency, that amount (i.e., $3 million) provides sufficient funding to hire approximately 15 FTEs (two-year appointments). The $1.1 billion that ARRA provided for CER represents a substantial increase in federal research funding in this area. In its regular appropriations, AHRQ received $50 million in FY2009 for CER, and $21 million in FY2010. The agency's FY2011 budget request includes $286 million for CER (see Table 4 ). AHRQ's research on comparative effectiveness is authorized by Section 1013 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( P.L. 108-173 ) and is part of the agency's Effective Health Care Program. ARRA instructed the Secretary to contract with the Institute of Medicine (IOM) to produce a report with recommendations on national CER priorities. IOM released its report on June 30, 2009. Reflecting broad stakeholder input, the IOM report identified 100 health topics as high-priority areas for CER. Almost one-quarter of the priority topics address the health care delivery system. They include topics related to dissemination of CER study results; patient decision making; health behavior and care management; comparing settings of care; and utilization of surgical, radiological, and medical procedures. The IOM concluded that the country needs a robust CER infrastructure to sustain the research well into the future, including carrying out the research recommended in the report and studying new topics identified by future priority setting. In addition, ARRA established an interagency advisory panel to help coordinate and support CER. The Federal Coordinating Council for Comparative Effectiveness Research, composed of senior officials from federal agencies with health-related programs, was instructed to submit an initial report describing current federal CER activities and providing recommendations for future research. Thereafter, the council is to prepare an annual report on its activities and include recommendations on infrastructure needs and coordination of federal CER. Importantly, ARRA included language stating that (1) the council may not mandate coverage, reimbursement, or other policies for public and private payers of health care; and (2) council reports and recommendations may not be construed as mandates or clinical guidelines for payment, coverage, or treatment. The council published its initial report on June 30, 2009. The report's recommendations focused on (1) the importance of disseminating CER findings to doctors and patients; (2) targeting CER to the needs of priority populations such as racial and ethnic minorities, and persons with multiple chronic conditions; (3) researching high-impact health arenas such as medical and assistive devices, surgical procedures, and behavioral interventions and prevention; and (4) electronic data networks and exchange. Three implementation plans for ARRA-funded CER—one for funds to be obligated by AHRQ, a second for the NIH funds, and a third for the funds to be allocated at the discretion of the Secretary—are available on the HHS Recovery Plans website. While NIH obligated almost half of its ARRA funds for CER in FY2009, with the remainder to be obligated in FY2010, almost all of the ARRA funds for CER that are to be obligated by AHRQ or at the discretion of the Secretary will be awarded in FY2010 (see Table 5 ). AHRQ has published 11 CER funding announcements for ARRA funds to date; these announcements are available on AHRQ's website. ARRA provided $2 billion to the HHS Office of the National Coordinator for Health Information Technology (ONC) to fund activities and grant programs authorized by the Health Information Technology for Economic and Clinical Health (HITECH) Act, which was incorporated in ARRA. Of that amount, $300 million is to support regional health information exchange networks. In addition, the Secretary was instructed to transfer $20 million to the National Institute of Standards and Technology (NIST) for HIT standards analysis and testing. An implementation plan that discusses ONC's administrative and regulatory responsibilities under ARRA is available on the HHS Recovery Plans website. ONC received $61 million in regular appropriations in both FY2009 and FY2010 (see Table 4 ). Details of the allocation and obligation of ARRA funds for the various HITECH Act grant programs are provided below, following a brief overview of the HITECH Act. The HITECH Act is intended to promote the widespread adoption of HIT for the electronic sharing of clinical data among hospitals, physicians, and other health care providers. To that end, the HITECH Act included the following provisions. First, it codified ONC within the Office of the HHS Secretary. Created by a presidential executive order in 2004, ONC has played an important role directing HIT activities both inside and outside the federal government. It has focused on developing technical standards necessary to achieve interoperability among varying EHR applications; establishing criteria for certifying that HIT products meet those standards; ensuring the privacy and security of electronic health information; and helping facilitate the creation of prototype health information networks. The goal is to develop a national capability to exchange standards-based health care data in a secure computer environment. The HITECH Act required the HHS Secretary, by December 31, 2009, to issue a comprehensive set of interoperability standards and certification criteria for EHRs. Second, the HITECH Act established six grant programs to provide funding for investing in HIT infrastructure, purchasing certified EHRs, training, and disseminating information on best practices, among other things (see below). Third, the HITECH Act authorized HIT incentive payments under the Medicare and Medicaid programs. Beginning in 2011, the Medicare program will begin providing bonus payments to doctors and hospitals that adopt and use certified EHRs in such a way as to improve the quality and coordination of health care. Those incentive payments are phased out over time and replaced by financial penalties for physicians and hospitals that are not using certified EHRs. The HITECH Act also provides for a 100% federal match for payments to certain qualifying Medicaid providers who acquire and use certified EHR technology. Finally, the HITECH Act included a series of privacy and security provisions that amended and expanded the current federal standards under the Health Insurance Portability and Accountability Act (HIPAA). Among other things, it established a breach notification requirement for health information that is not encrypted, strengthened enforcement of the HIPAA standards, placed new restrictions on marketing activities by health plans and providers, and created transparency by allowing patients to request an audit trail showing all disclosures of their electronic health information. For more information, see CRS Report R40161, The Health Information Technology for Economic and Clinical Health (HITECH) Act . As noted above, ARRA included $2 billion in supplemental funding for the new HIT grant programs authorized under the HITECH Act. The allocation of those funds among the various programs and the status of their obligations are briefly summarized below. ONC has allocated $693 million of the ARRA funds for the Health IT Extension Program. Of that amount, $643 million is for cooperative agreements to support approximately 60 to 65 Regional Extension Centers (RECs) each serving a defined geographic area. The RECs will offer technical assistance, training, and other support services to help physicians and other providers in the adoption and meaningful use of EHR systems. The RECs are expected to support at least 100,000 priority primary care providers in rural and other medically underserved areas. In February 2010, ONC announced the first cycle of awards providing $375 million to create 32 RECs. A second round of REC awards is anticipated in April 2010. The remaining $50 million of the funds allocated for the Health IT Extension Program will be used to establish a national Health Information Technology Research Center (HITRC) to foster collaboration among the RECs and with other stakeholders to identify and share best practices in EHR adoption, effective use, and provider support. ONC has allocated $564 million for states and qualified state designated entities (SDEs) to facilitate electronic health information exchange (HIE) through the meaningful use of EHR systems. Legal, financial, and technical support is necessary to enable consistent, secure, statewide HIE across health care provider systems. The State HIE Cooperative Agreement Program will fund efforts at the state level to establish and implement appropriate governance, policies, and network services within the broader national framework to build capacity for connectivity between and among providers. States and SDEs will be required to match grant awards beginning in 2011. The first cycle of state HIE awards, announced in February 2010 along with the initial round of REC awards, provided a total of $386 million to 34 states (or SDEs), the District of Columbia, Puerto Rico, and the U.S. territories to develop HIE capability. In March 2010, a second round of state HIE awards was announced, providing a total of $162 million to the remaining 16 states (or SDEs). ONC has set aside a total of $120 million for the Health IT Workforce Development Program to establish and/or expand education programs for training HIT professionals. The funds will be used to award grants under four separate programs. Award announcements are expected soon. First, the Community College Consortia Program will provide approximately $70 million in assistance through cooperative agreements with about five institutions of higher education to create or expand HIT training programs at about 70 community colleges throughout the nation. Community colleges funded under this initiative will establish intensive, non-degree training programs that can be completed in six months or less by individuals with appropriate prior education and/or experience. ONC expects the participating colleges collectively to establish training programs with the capacity to train at least 10,500 students annually to be part of the HIT workforce. Second, the Curriculum Development Centers Program will provide approximately $10 million in assistance through cooperative agreements with about five non-profit institutions of higher education to develop curriculum and instructional materials to enhance workforce training programs primarily at the community college level. Third, the Competency Examination Program will provide approximately $6 million through a cooperative agreement to an institution of higher education to support the development and initial administration of a set of HIT competency examinations. Finally, the University-Based Training Program will provide approximately $32 million in assistance through cooperative agreements with eight or more institutions of higher education to establish programs for increasing the supply of individuals qualified to serve in specific HIT professional roles requiring university-level training. ONC has allocated a total of $235 million for the Beacon Community Program to strengthen the HIT infrastructure in the United States. Of that amount, $220 will be provided in cooperative agreements with integrated health systems, consortia of health care providers, or government entities to build on existing infrastructure to support electronic HIE. The remaining $15 million will be used to provide technical assistance to the grantees and evaluate the success of the program. Beacon Community awards are expected to be announced soon. Finally, ONC has allocated $60 million for the SHARP Program to fund research in areas where breakthrough advances are needed to address barriers to the widespread adoption of HIT. SHARP grantees will implement a research program in one of the following areas: (1) developing security and risk mitigation policies to build public trust in HIT; (2) harnessing HIT to support clinicians' decision making; (3) developing new applications and platforms for achieving electronic HIE; and (4) enhancing the secondary use of EHR clinical data to improve health care quality. SHARP awards are expected to be announced soon. ARRA provided $1 billion to the Secretary for a Prevention and Wellness Fund , for three specified activities: (1) $300 million to the Centers for Disease Control and Prevention (CDC) for PHS Act "Section 317" immunization grants; (2) $50 million for state activities to reduce health care-associated infections (HAIs); and (3) $650 million for evidence-based clinical and community prevention and wellness programs that address chronic diseases. On April 9, 2009, HHS announced the allocation of $300 million in ARRA funds for the Section 317 immunization program to the existing 64 state, territorial, and municipal public health department grantees. Funds were transferred to CDC, which administers the program, and were to be distributed as follows: $200 million in specified amounts to each grantee; $50 million for program operation grants for grantees to deliver vaccines and strengthen their immunization programs; and $18 million for innovation grants to increase vaccination rates and improve reimbursement practices. The remaining $32 million would be for immunization information, communication, education, and evidence development activities. Funds were to be obligated in both FY2009 and FY2010 (see Table 4 and Table 5 ). Of the $50 million in ARRA funds to reduce HAIs, HHS transferred $40 million to CDC for grants to state health departments to improve hospital infection control practices, and the remaining $10 million to the Centers for Medicare and Medicaid Services (CMS) for state survey agency oversight of infection control practices in ambulatory surgical centers (ASCs). On July 30, 2009, CMS announced that it was awarding $1 million, distributed among 12 states, for onsite reviews of ASCs to ensure that the facilities are following Medicare health and safety standards, and that the remaining $9 million would be available for all states in October 2009. On September 1, 2009, CDC announced plans to distribute the $40 million to health departments in 49 states, the District of Columbia, and Puerto Rico, for the following HAI prevention activities: (1) creating or expanding state and local efforts to implement recommendations in the HHS HAI action plan; (2) increasing health care facilities' and health departments' use of CDC's National Healthcare Safety Network, an HAI surveillance system; (3) hiring and training of public health staff to promote and lead HAI prevention initiatives; and (4) complementing HAI investments from other HHS agencies. Funds were to be obligated in both FY2009 and FY2010 (see Table 5 ). The Administration has noted that ARRA-funded CMS and CDC activities support a broader national strategy and action plan to reduce HAIs, published by HHS in January 2009. Congress provided funding to HHS for a variety of HAI prevention activities in FY2009 and FY2010 appropriations, and HHS requests additional HAI funding for CDC and AHRQ activities for FY2011. However, except for the ARRA funds, HHS has not generally presented comparable agency or departmental budget lines for HAI activities. The majority of the $650 million in ARRA funds for prevention and wellness programs is being administered by CDC. The agency notes that there are four program components, as presented in Table 2 . For each component, funds are to be used by grantees to deliver evidence-based prevention strategies and programs for adults and children, utilizing local resources and strengthening state capacity for chronic disease prevention. Each component is intended to focus on the following prevention and wellness goals: (1) increase levels of physical activity; (2) improve nutrition; (3) decrease obesity rates; and (4) decrease smoking prevalence, teen smoking initiation, and exposure to second-hand smoke. No funds for these activities were obligated in FY2009. As a result, according to the law, all of these funds must be obligated in FY2010 (see Table 5 ). In its budget request for FY2011, HHS did not provide amounts for comparable activities in regular appropriations. The CDC National Center for Chronic Disease Prevention and Health Promotion conducts activities that are somewhat similar. There is a key difference, however, between CDC's annual chronic disease prevention appropriations and the ARRA prevention and wellness funding. Regular appropriations are generally provided for disease-specific activities, whereas the ARRA funding was not designated for specific diseases. As noted earlier, ARRA funding goals instead target disease risk factors—often behavioral or lifestyle-based—that may predispose to multiple chronic conditions. As a result, ARRA prevention and wellness funding is not strictly comparable to activities funded through regular appropriations. Health reform proposals pending in the 111 th Congress would establish mechanisms to provide annual baseline funding for similar prevention and wellness activities. Also, in its FY2011 budget justification, CDC requests new appropriations language that would allow state grantees to reprogram up to 10% of funds from all CDC grants to carry out activities "to address one or more of the top six leading causes of death." These causes are not defined. ARRA provided a total of $500 million for the Indian Health Service (IHS)—$415 million for IHS health facilities-related activities, including maintenance and improvement, and $85 million for HIT activities. Within the health facilities account, IHS received $227 million for health care facilities construction, $100 million for facilities maintenance and improvement, $68 million for sanitation facilities construction, and $20 million for equipment (including HIT). The $85 million IHS received for HIT activities, including funds for telehealth services, were included in the IHS health services account but could also include HIT-related infrastructure activities. These funds were to be allocated at the discretion of the IHS director. As of January 29, 2010, IHS has obligated over 65% of these funds; the remaining funds will be obligated by the end of FY2010. Table 4 compares ARRA funding with regular IHS FY2009-FY2010 appropriations and FY2011-requested appropriations for the same activities. IHS constructs, maintains, and operates hospitals, clinics, and health centers throughout Indian Country, and also funds construction of Indian sanitation facilities. For health care facilities construction, ARRA required that the $227 million be used to complete up to two facilities from IHS's current priority list on which work had already begun. The facilities chosen are the Norton Sound Regional Hospital in Nome, AK, and the hospital and staff quarters at Eagle Butte Health Center in South Dakota. Both projects are expected to be completed by the fourth quarter of FY2012. As of January 29, 2010, approximately $150 million had been obligated, with an estimated 95 jobs created or saved as a result of the construction projects. Funds for facilities maintenance and improvement, sanitation, construction, and medical equipment were to be obligated in FY2009 and FY2010. Obligations for FY2009 through January 29, 2010 are included in Table 3 . The table also includes information on the scheduled completion data of projects and estimates on the number of jobs created or saved as of the end of the first quarter of FY2010 (i.e., end of December 2009). For a list of the IHS construction projects and equipment, organized by state and type of project, see the HHS Recovery website, Tribal Pre-Award Funding by State. IHS has existing HIT operations for both personal health services and public health activities, funded chiefly through the hospital and health clinics budget in IHS's health services account. ARRA directed that the additional $85 million in HIT funds be allocated by the IHS director. IHS distributed the HIT funds for the development of existing management and EHR software, and to telehealth infrastructure and development, with 20% allocated to hardware. IHS identified non-localized HIT projects, with $61.4 million going for EHR development and deployment, $2.45 million for personal health record development, $16.96 million for telehealth and network infrastructure, and $4.0 million for administration. Of the HIT funds, IHS obligated $53.55 million as of January 29, 2010, with the remainder to be obligated by the end of FY2010. Unlike the rest of HHS, IHS received its appropriations under ARRA's title for Interior and Environment appropriations (Title VII). The provision for IHS facilities in Title VII excluded IHS health facilities funds from the Interior and Environment appropriations bill's usual annual spending caps for medical equipment, and also excluded them from ARRA's general provision requiring payment of prevailing wage rates under the Davis-Bacon Act for construction and repair projects. (Separate prevailing wage rate requirements apply to IHS construction activities.) ARRA report language for Title VII allowed agencies covered by the title to expend up to 5% of ARRA funds for administrative and support costs, but also noted that oversight of IHS activities under ARRA was to be included in the general oversight of HHS's ARRA activities funded under ARRA's title for HHS appropriations (Title VIII). Further information on IHS's ARRA expenditures, by project category, with links to more detailed implementation plans, is available on the HHS Recovery website. For more on IHS appropriations in FY2009 and FY2010, see CRS Report R40685, Interior, Environment, and Related Agencies: FY2010 Appropriations . For general information on IHS, see CRS Report RL33022, Indian Health Service: Health Care Delivery, Status, Funding, and Legislative Issues .

The American Recovery and Reinvestment Act of 2009 (ARRA), the economic stimulus legislation signed into law on February 17, 2009 (P.L. 111-5), included supplemental FY2009 discretionary appropriations for biomedical research, public health, and other health-related programs within the Department of Health and Human Services (HHS). Generally, the appropriations are to remain available through September 30, 2010. P.L. 111-5 also incorporated new authorizing language to promote health information technology (HIT) and established a federal interagency advisory panel to coordinate comparative effectiveness research. As enacted, ARRA included $17.15 billion for community health centers, health care workforce training, biomedical research, comparative effectiveness research, HIT, disease prevention, and Indian health facilities. This report discusses the health-related programs and activities funded by ARRA and provides details on how the administering HHS agencies and offices are allocating, awarding, and spending the funds. It will be regularly updated as new information becomes available.

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T he Livestock Mandatory Reporting Act ( P.L. 106-78 , Title IX; LMR ) requires that meat packers report prices and other information on purchases of cattle, hogs, lamb, boxed beef, wholesale pork, and lamb carcasses and boxed lamb to the U.S. Department of Agriculture (USDA). Authority for mandatory reporting was set to expire on September 30, 2015. Livestock industry stakeholders supported the reauthorization of the act, and producer groups put forward proposals amending mandatory reporting. The House passed a reauthorization bill ( H.R. 2051 ) in June 2015. In September 2015, the Senate amended the House-passed bill, and Congress reauthorized LMR until September 30, 2020, in the enacted Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ). Before livestock mandatory price reporting was enacted by Congress in 1999, the USDA's Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). AMS market reporters collected and reported prices from livestock auctions, feedlots, and packing plants. The information was disseminated through hundreds of daily, weekly, monthly, and annual written and electronic USDA reports on sales of live cattle, hogs, and sheep and wholesale meat products from these animals. The goal was to provide all buyers and sellers with accurate and objective market information. By the 1990s, the livestock industry had undergone many sweeping changes, including increased concentration in meat packing and animal feeding, more production specialization, and more vertical integration (firms controlling more than one aspect of production). Fewer animals were sold through negotiated (cash; or "spot") sales, and more frequently sold under alternative marketing arrangements (e.g., formula sales based on a negotiated price established in the future) with prices not publicly disclosed or reported. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine "fair" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. USDA had estimated in 2000 that the former voluntary system was not reporting 35%-40% of cattle, 75% of hog, and 40% of lamb transactions. During debate on mandatory price reporting, opponents, including some meat packers and other farmers and ranchers, argued that a mandate would impose costly new burdens on the industry and could cause the release of confidential company information. Nonetheless, some of these earlier opponents decided to support a mandatory price reporting law. Livestock producers had been hit by very low prices in the late 1990s and were looking for ways to strengthen the markets. Some meat packers also decided to support a national consensus bill at least partly to preempt what they viewed as an emerging "patchwork" of state price reporting laws that could alter competition between packers operating under different state reporting laws. The Livestock Mandatory Reporting Act of 1999 (LMR, P.L. 106-78 , Title IX; 7 U.S.C. §1635 et seq.) was enacted in October 1999 as part of the FY2000 Agriculture appropriations act. The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. The law authorized appropriations as necessary and required USDA to implement regulations no later than 180 days after the law was enacted. Mandatory price reporting was authorized for five years, until September 30, 2004. USDA issued a final rule on December 1, 2000. Although reporting for lamb was optional in the LMR statute, USDA established mandatory reporting for lamb in the final rule. The rule was to be implemented on January 30, 2001, but USDA delayed implementation for two months until April 2, 2001, to allow for additional time to test the automated LMR program to ensure program requirements were being met. The implementation of mandatory reporting did not affect the continuation of the AMS voluntary price-reporting program. AMS continues to publish prices from livestock auctions, and feeder cattle and pig sales, through voluntary-based market news reports. LMR authority lapsed briefly in October 2004 before Congress extended mandatory price reporting for one year to September 30, 2005. Authority for LMR lapsed again on September 30, 2005. At that time, USDA requested that all packers who were required to report under the 1999 act continue to submit required information voluntarily. About 90% of packers voluntarily reported, which allowed USDA to publish most reports. In October 2006, Congress passed legislation to reauthorize reporting through September 30, 2010. This act also amended swine reporting requirements from the original 1999 law, by separating the reporting requirements for sows and boars from barrows and gilts, among other changes. Because statutory authority for the program had lapsed, USDA determined that it had to reestablish regulatory authority through rulemaking in order to continue LMR operations. On May 16, 2008, USDA issued the final rule to reestablish and revise the mandatory reporting program. This rule incorporated the swine reporting changes and was intended to enhance the program's overall effectiveness and efficiency based on AMS' experience in the administration of the program. The rule became effective on July 15, 2008. Mandatory wholesale pork price reporting was not included in the original price-reporting act because the hog industry could not agree on reporting for pork. Section 11001 of the 2008 farm bill ( P.L. 110-246 ) directed USDA to conduct a study on the effects of requiring packers to report the price and volume of wholesale pork cuts, which was a voluntary reporting activity at the time. The farm bill study on wholesale pork pricing was released in November 2009 and concluded that there would be benefits from a mandatory pork reporting program. On September 27, 2010, the Mandatory Price Reporting Act of 2010 ( P.L. 111-239 ) was enacted, reauthorizing mandatory price reporting through September 30, 2015. The act added a provision for mandatory reporting of wholesale pork cuts, directed the Secretary to engage in negotiated rulemaking to make required regulatory changes for mandatory wholesale pork reporting, and established a negotiated rulemaking committee to develop these changes. The committee was composed of representatives of pork producers, packers, processors, and retailers. The committee met three times, was open to the public, and developed recommendations for mandatory pork reporting. USDA released the final rule on August 22, 2012, and the regulation was implemented on January 7, 2013. See the Appendix for a description of selected LMR reporting provisions, marketing definitions, confidentiality rules, and USDA reporting and enforcement. The House Agriculture Subcommittee on Livestock and Foreign Agriculture started the reauthorization process by holding a hearing on April 22, 2015, that included producer representatives from the National Pork Producers Council (NPPC), the National Cattlemen's Beef Association (NCBA), and the American Sheep Industry Association (ASI) and a representative from the North American Meat Institute (NAMI), which represents meat packers. All representatives voiced support for mandatory reporting, and the producer representatives identified changes to specific reporting requirements they would like to see incorporated into LMR. All stakeholders agreed that the loss of reporting during the October 2013 government shutdown was disruptive to the market, and they would like LMR to be deemed an "essential" service that operates if another government shutdown should occur. On April 28, 2015, the Mandatory Price Reporting Act of 2015 ( H.R. 2051 ) was introduced in the House. The House Committee on Agriculture marked up the bill on April 30. H.R. 2051 reauthorized LMR through September 30, 2020, and included several sections that addressed hog and lamb market issues that livestock stakeholders raised about LMR. (See " Livestock Sector Issues for Reauthorization in 2015 " for a discussion of LMR issues of interest to the livestock industry.) On June 9, 2015, the House passed H.R. 2051 on a voice vote. On September 17, 2015, by voice vote, the Senate Agriculture Committee marked up and reported to the full Senate an amended version of the House-passed H.R. 2051 . Amended H.R. 2051 , the Agriculture Reauthorizations Act of 2015, included provisions to reauthorize Mandatory Price Reporting, the U.S. Grain Standards Act, and the National Forest Foundation Act, three laws that were set to expire on September 30, 2015. On September 21, 2015, the Senate passed the bill by unanimous consent, and the House passed the Senate-amended bill on September 28 by voice vote. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) was signed into law on September 30, 2015. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) extended mandatory price reporting until September 30, 2020. In addition, the act makes several changes to swine reporting, revises definitions in lamb reporting, and requires USDA to conduct a study on LMR ahead of the next reauthorization. The provisions in P.L. 114-54 on swine and lamb were proposed to Congress by livestock industry stakeholders as measures that would improve LMR (see " Livestock Sector Issues for Reauthorization in 2015 " for selected industry proposals for reauthorization). The cattle industry did not formally propose any changes to cattle LMR requirements, but several swine and lamb industry proposals were incorporated in the House-passed Mandatory Price Reporting Act of 2015 ( H.R. 2051 ). The Senate-amended version included most of the House-passed provisions. However, the section of the House-passed bill that granted emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations, which was widely supported by the cattle, swine, and lamb industries, was not included in the enacted law. (See " LMR as an "Essential" Service " below for industry views.) The enacted legislation establishes the new negotiated formula purchase reporting category. Under this category, swine purchases are based on a formula, negotiated on a lot-by-lot basis, and the swine are scheduled for delivery to the packer no later than 14 days after the formula is negotiated and the swine are committed to packers. The enacted legislation also amends swine LMR by requiring the reporting of the low and high range of net swine prices, to include the number of barrows and the number of gilts within the ranges, and the total number and weighted average price of barrows and gilts. Lastly, the act requires that next-day reports include transaction prices that were concluded after the previous day's reporting deadlines. The enacted swine reporting provisions are the same as those in Section 3 of the House-passed bill. (See " New Reporting Proposals for Swine " below for industry views.) P.L. 114-54 amends the regulations (7 C.F.R. 59.300) for lamb reporting to redefine lamb importers and lamb packers. Now, importers are defined as entities that import an average of 1,000 metric tons of lamb meat per year during the immediately preceding four years. The original limit was 2,500 metric tons. If an importing entity does not meet the volume limit, the Secretary still may determine that an entity should be considered an importer. In P.L. 114-54 , lamb packers are defined as entities having 50% or more ownership in facilities, and include federally inspected facilities that slaughter and process an average of 35,000 head per year over the immediately preceding five years. The original threshold was 75,000 head. Also, other facilities may be considered packers if the Secretary determines they should be considered a packer based on processing plant capacity. These enacted revised definitions for lamb importers and packers are the same as those in Section 4 of the House-passed bill. (See " Concentrated Lamb Markets " below for industry views.) USDA is required to conduct a study of the price-reporting program for cattle, swine, and lamb in P.L. 114-54 . The study is to be submitted to the House and Senate Agriculture Committees by March 1, 2018. The study, to be conducted by USDA's Agricultural Marketing Service and the Office of Chief Economist, is directed to analyze current marketing practices and to identify legislative and regulatory recommendations that are readily understandable; reflect current market practices; and are relevant and useful to producers, packers, and other market participants. Also, the study is to analyze USDA reporting services. This LMR study provision was included in Section 5 of the House-passed bill, but with a later deadline of January 1, 2020. A simple reauthorization of mandatory reporting would amend the termination date in Section 260 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1636i). However, like past reauthorizations, livestock industry stakeholders suggested changes that were intended to improve mandatory reporting and to address issues that emerged since the last reauthorization. Several of the issues are discussed below. During the nearly 15 years that LMR has been in place, livestock producers, processors, and industry analysts have come to rely on the AMS mandatory price reporting data to make marketing decisions. Many livestock contracts between buyers and sellers are based on prices reported under LMR. In October 2013, during the government shutdown when most federal operations came to a standstill, meat packers continued to report LMR data to AMS, but mandatory daily and weekly reports were not published. In addition to the loss of price information for producers, the gap in LMR data affected the futures market because the CME Group uses LMR data to settle live hog contracts. CME also uses LMR-reported cattle carcass characteristics to settle live cattle futures contracts. CME has noted that LMR price data are trusted and that few other public alternatives to the LMR data exist. During the reauthorization debate, livestock stakeholders urged USDA to deem mandatory reporting an "essential" service in order to avoid the loss of livestock price information if another government shutdown, such as in October 2013, occurs due to a lapse in appropriations. Many contend that any gap in mandatory reporting is disruptive to livestock markets. Although the House-passed version ( H.R. 2051 ) contained such a provision, it was not included in the final bill. The NPPC recommended that AMS add another purchase category for swine called negotiated formula purchase . Under this purchasing arrangement, a producer negotiates the sale of swine on a lot-by-lot basis, but the price will be determined by formula at a later date. NPPC believes this represents a negotiated sale, but under AMS reporting it is classified as a swine or pork market formula purchase because there is no established price at the time of purchase. Negotiated purchases , or cash sales, are often viewed as the true measure of price discovery, but negotiated purchases as a share of total hog sales has dropped to less than 4%. According to NPPC testimony before the Subcommittee on Livestock and Foreign Agriculture of the House Agriculture Committee, the total number of hogs that would trade under this new category is not known, but possibly could increase the number of reported negotiated hog sales by 50-100%. Boosting the volume of negotiated purchases would be expected to increase price discovery. Some livestock sales occur after the afternoon reporting deadline for packers to send reports to AMS and are not reported in a daily report. Pork producers believe that sales of hogs after the afternoon deadline are usually delivered to packing plants the next day. To provide more timely hog marketing and price information, NPPC recommends that hog trades that occur late in the day be reported in the next day's morning or afternoon daily reports. The additional reporting would better reflect the daily hog market; increase trade volume, thus reducing data disclosure issues; and result in more complete reports. These swine proposals were included in P.L. 114-54 . The U.S. sheep and lamb industry is confronted with a very concentrated market that results in price-reporting challenges not necessarily experienced by the larger cattle and hog sectors. The sheep and lamb industry as a whole (production, feeding, and processing) believes that LMR is crucial for creating a transparent market, and the American Sheep Industry Association (ASI) worked with AMS from 2012-2014 to amend LMR in ways to improve lamb reporting ahead of reauthorization. Although the ASI effort did not result in rulemaking, proposals developed in earlier years are the basis for the lamb industry's proposals during current reauthorization. U.S. lamb imports account for half of the lamb consumed in the United States. Therefore, the pricing of lamb imports is crucial for U.S. lamb producers in making marketing decisions. ASI recommended that the reporting threshold for lamb imports be lowered to 1,000 metric tons from the current 2,500 metric tons to capture prices for a greater share of lamb imports. In addition, smaller or mid-size lamb processors have entered the business to capture specialty lamb markets, but because of the smaller size, these businesses are often exempt from reporting. To capture pricing data from mid-size lamb slaughters and processors, ASI recommended that the threshold for packer reporting be reduced to an average of 35,000 head slaughtered per year during the immediately preceding five years from the current 75,000 head. These two threshold changes for importers and packers were designed to pick up a larger share of the total lamb market and better reflect average prices in the market. Both proposals were included in P.L. 114-54 . The sheep and lamb industry also faces the situation where there are few participants in the processing sector. This leads to problems with non-reporting because of confidentiality requirements. Also, a substantial share of lamb processing is conducted on a "custom slaughter" basis, which is not counted as a buyer-seller transaction, and thus not reported under LMR. In addition, almost one-third of U.S. lambs are processed by one cooperative that does not report under LMR because its business structure is treated as a packer-owned operation, even though, reportedly, the cooperative is willing to report under LMR. ASI recommended that AMS be flexible with its packer definitions to allow such an operation to report under LMR. P.L. 114-54 granted USDA discretion to determine that importers and packers not meeting the threshold requirements may still be required to report. The cattle industry supported the reauthorization of LMR, but the new law does not contain any cattle-specific proposals. During the markup of the House bill, House Agriculture Committee Chairman Conaway indicated that the cattlemen and meat packers were working on proposals that could be included as amendments to the bill. Various cattle stakeholders raised some issues with mandatory reporting, but no consensus developed to amend LMR cattle provisions. The NCBA recommended that AMS have flexibility to request additional information, as needed, to identify and report appropriate industry standards as cattle marketing changes. Also, NCBA recommended that LMR include a new category for fed-cows, to be added to reporting for steers and heifers, and cows and bulls. Currently, AMS reports cover all cows, but a breakout of fed-cows could have provided additional price and marketing information beneficial for cattle producers who market fed-cows. In a letter to the Senate Agriculture Committees, the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) expressed specific concerns about new types of cattle purchases that are not captured in LMR. These include (1) negotiated basis trade-type contracts that do not appear to be reported when negotiated, (2) negotiated cash sales that have extended delivery dates, and (3) "Tops" trades, where a negotiated premium is offered on a cash trade and is then reported as a formula purchase. R-CALF also raised concern about the frequency of late-day transactions that miss the day's reporting deadline, thus possibly distorting the day's price. The National Farms Union (NFU) expressed its support for the reauthorization of mandatory reporting as an important tool for combating market concentration. In letters to the Senate and House Agriculture Committees, NFU suggested changes to LMR for cattle that would have addressed confidentiality rules, reporting on imported cattle that go into feedlots, reporting on weekly market concentration, and separate data from forward contracts from those tied to the futures market. The following sections discuss some of the main Livestock Mandatory Reporting Act (LMR) reporting requirements, as well as confidentiality rules, Agricultural Marketing Service reporting, and enforcement of LMR. The text box, included below, provides definitions for selected terms used in LMR. Selected Reporting Requirements Packers that are subject to mandatory reporting are defined as federally inspected plants that have slaughtered a minimum annual average of 125,000 head of cattle, 100,000 head of swine, 200,000 head of sows and boars or a combination thereof, and 35,000 lambs during the immediate five preceding years. If a plant has operated for fewer than five years, USDA will determine, based on capacity, if the packer must report. Packers are required to report the prices established for steers and heifers twice daily (10 a.m. and 2 p.m. central time); cows and bulls twice daily (10 a.m. central for current day, and 2 p.m. for previous-day purchases); barrows and gilts three times daily (7 a.m. central for prior-day purchases, and 10 a.m. and 2 p.m. central); sows and boars once daily (7 a.m. central for prior-day purchases); and lambs once daily (2 p.m. central). Besides the established prices, packers report premiums and discounts and the type of purchase (e.g., negotiated, formula, or forward contract). Packers are required to report, depending on the species, the quantity delivered for the day; the quantity committed to the packer; the estimated weight on a live weight basis or a dressed weight basis; and quality characteristics, such as Choice grade. In addition to daily reporting, on the first reporting day of the week, packers file a cumulative weekly report of the previous week's purchases of steers and heifers, and swine. Lamb packers are required to report the previous week's purchases on the first and second reporting day of the week, depending on the data. Steer and heifer and lamb packers are to include data on type of purchase (negotiated, formula, or forward contract), premiums and discounts, and some carcass characteristics (e.g., quality grade and yield, average dressing percentage). Swine packers are required to report the amount paid in premiums that are based on noncarcass characteristics (e.g., volume, delivery timing, hog breed). Also, packers must make available to producers a list of such premiums. In addition to livestock purchase prices, packers are required to report sales data for boxed beef, wholesale pork, and carcass and boxed lamb. Sales are reported twice daily for beef and pork; once daily for lamb. Packers are required to provide price, quantity, quality grade for beef and lamb, and type of cut. Packers report beef and pork domestic and export sales and domestic boxed lamb sales. Lamb importers who have imported a minimum average of 1,000 metric tons of lamb in the immediate five preceding years are required to report such information as weekly lamb prices, quantities imported, the type of sale (negotiated, formula, or forward contract), cuts of lamb, and delivery period. Confidentiality The LMR law requires that price reporting be confidential to protect the identity of packers and contracts and proprietary business information. In determining what data could be published, AMS initially adopted a "3/60" confidentiality guideline (commonly used throughout the federal government), i.e., at least three entities in the regional or national reporting area, and no single entity could account for more than 60% of the reported market volume. Otherwise, the data cannot be published in order to protect the identity of those reporting. AMS found that the "3/60" guideline resulted in large gaps in data reporting. For example, during April 2, 2001, and June 15, 2001, 24% of daily reports and 20% of weekly reports were not published because of confidentiality provisions. In order to address the data gaps, AMS adopted a "3/70/20" guideline in August 2001. It required that at least three entities report 50% of the time over a 60-day period; no one entity could account for more than 70% of volume over a 60-day period; and in cases where only one entity reports, the entity cannot be the only reporter more than 20% of the time over a 60-day period. These new guidelines substantially eliminated the data gaps. AMS Reporting The Livestock, Poultry, and Grain Market News Division (LPGMN) of the AMS Livestock, Poultry, and Seed Program is responsible for compiling and disseminating the information collected under LMR. In addition, LPGMN continues to operate a voluntary reporting program for livestock not covered under LMR, poultry and grain. Under LMR, LPGMN publishes 62 daily reports and 47 weekly reports. AMS publishes 29 daily reports for cattle, 20 for swine, 6 for beef, 4 for pork, and 3 for lamb. Weekly reports total 24 for cattle, 2 for swine, 11 for beef, 8 for pork, and 2 for lamb. According to AMS budget documents, mandatory reporting currently provides data for 79% of total slaughtered cattle, 94% of hogs, and 46% of sheep. For meat products, LMR covers 94% of boxed beef production, 87% of wholesale pork, and 57% of lamb meat. Small plants, which fall below required thresholds, or non-federally inspected plants account for the remaining percentage of slaughter and production. AMS market news operates on an annual appropriation of about $34 million, and the LMR program accounts for about $5 million to $6 million of that amount. Enforcement AMS compliance staff enforces LMR through audits once every six months. AMS reviews support documentation for randomly sampled lots. If non-compliance is found, AMS will ask the packer to correct the problem. If the packer does not correct the problem, AMS may issue a warning letter, and ultimately, the packer could be fined $10,000 for each violation if corrective action is not taken. AMS published quarterly compliance reports through September 2014, and then released a six month (October 2014-March 2015) compliance report.

The U.S. Department of Agriculture's (USDA's) Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). However, as the livestock industry became increasingly concentrated in the 1990s, fewer animals were sold through negotiated (cash; or "spot") purchases and more frequently sold under alternative marketing arrangements that were not publicly disclosed under voluntary reporting. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine "fair" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. In response, Congress passed the Livestock Mandatory Reporting Act of 1999 (P.L. 106-78, Title IX; LMR). The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. USDA issued a final rule in December 2000 that went into effect in April 2001. The final rule included mandatory reporting for lamb. The law has been amended to include more detail on swine and to add wholesale pork. The act has been reauthorized three times, and the last reauthorization was set to expire September 30, 2015. In September 2015, the Senate and House passed the Agriculture Reauthorizations Act of 2015 (H.R. 2051), a Senate-amended version of the House-passed Mandatory Price Reporting Act of 2015, which reauthorized mandatory price reporting until September 30, 2020. The act was signed into law (P.L. 114-54) on September 30, 2015. Reauthorization was widely supported by livestock industry stakeholders. As in past years, stakeholders proposed changes that were intended to improve mandatory reporting as issues emerged between reauthorizations. In response to livestock stakeholders, the act makes several changes to swine reporting, creating a new negotiated formula purchase category and requiring that transactions reported after the day's reporting deadline be reported in the next-day price reports. It revises the definitions of lamb importers and packers by lowering the volume thresholds for determining if an importer or packer is subject to reporting requirements. Lastly, the act requires USDA to conduct a study on LMR ahead of the next reauthorization. However, the act did not include a provision to grant emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations. This provision was widely supported by livestock industry stakeholders and had been included in the House-passed version of H.R. 2051.

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This report summarizes the potential consequences, with respect to congressional status, that may result when a sitting Member of the United States Senate is indicted for or is convicted of a felony. If a sitting United States Senator is indicted for a criminal offense that constitutes a felony, the status and service of that Member is not directly affected by any federal statute, constitutional provision, or Rule of the Senate. No rights or privileges are forfeited under the Constitution, statutory law, or the Rules of the Senate merely upon an indictment for an offense. Internal party rules in the Senate may be relevant, however, and the Senate Republican Conference Rules, for example, have required an indicted chairman or ranking Member of a Senate committee, or a member of the Senate party leadership, to temporarily step aside from his or her leadership or chairmanship position, although the Member's service in Congress would otherwise continue. It should be noted that Members of Congress do not automatically forfeit their offices even upon conviction of a crime that constitutes a felony. There is no express constitutional disability or "disqualification" from Congress for the conviction of a crime, other than under the Fourteenth Amendment for certain treasonous conduct after having taken an oath of office. Under party rules, however, Members may lose their chairmanships of committees or ranking Member status upon conviction of a felony, and this has been expressly provided under the Senate Republican Conference Rules. Conviction of certain crimes may subject Senators to internal legislative disciplinary proceedings, including resolutions of censure, as well as expulsion from the Senate upon approval of two-thirds of the Members. Expulsion of a Member from Congress does not result in the forfeiture or loss of one's federal pension, but the Member's conviction of certain crimes may lead to such forfeiture of retirement annuities, or the loss of all of the "creditable service" as a Member that one would have earned towards a federal pension. Indictment and/or conviction of a crime that is a felony does not constitutionally disqualify one from being a Member of Congress (nor from being a candidate for a future Congress), unless a Member's conviction is for certain treasonous conduct committed after taking an oath of office to support the Constitution. There are only three qualifications for congressional office and these are set out in the United States Constitution at Article I, Section 3, clause 3 for Senators (and Article I, Section 2, clause 2, for Representatives): age, citizenship, and inhabitancy in the state when elected. These constitutional qualifications are the exclusive qualifications for being a Member of Congress, and they may not be altered or added to by Congress or by any state unilaterally. Once a person meets those constitutional qualifications, that person, if elected, is constitutionally "qualified" to serve in Congress, even if under indictment or a convicted felon. No specific or formal Rule of the Senate exists concerning the status of a Senator who has been indicted with respect to chairmanships or ranking Member status on committees of the Senate. However, the political parties in the Senate may adopt internal conference and caucus rules that may affect a Senator's leadership and committee positions and assignments. For example, Senate Republican Conference Rules have provided for the temporary loss of one's position as the chairman or ranking Member of a committee, and the temporary loss of one's leadership position, if the Senator has been indicted for a felony; and if the Senator is convicted, the replacement of the chair/ranking Member on the committee. Although Members of the House of Representatives convicted of an offense that may result in two or more years' imprisonment are instructed under House Rule XXIII (10) to "refrain from participation in the business of each committee of which he is a member, and a Member should refrain from voting" on any question on the floor of the House until his or her presumption of innocence is restored (or until the individual is reelected to Congress), there is no comparable provision in the Senate Rules. Each house of Congress has the express authority under Article I, Section 5, clause 2, of the United States Constitution to punish a Member for "disorderly Behaviour" and, with the concurrence of two-thirds, to expel a Member. Although the breadth of authority and discretion within the Senate (and House) as to the timing, nature, and underlying conduct involved in an internal discipline of a Member of that body is extensive, the traditional practice in Congress, in cases where a Member of Congress has been indicted, has been to wait to impose congressional discipline, such as expulsion or censure against the Member, until the question of guilt has been at least initially resolved through the judicial system. Members of Congress, like many other individuals, have been indicted and charged with various offenses and then been subsequently exonerated in judicial proceedings. Both the Senate and the House have thus been reluctant to remove from Congress individuals who have been lawfully elected to represent their constituents based merely upon charges in an indictment. However, no impediment in law or rule exists for ongoing congressional inquiries concurrent with criminal proceedings (although such actions may complicate some evidentiary issues in subsequent judicial proceedings, and certain internal, concurrent congressional inquiries have in the past been postponed or partially deferred because of arrangements with the Department of Justice). An attempt to mandatorily suspend an indicted or convicted Member from voting or participating in congressional proceedings raises several issues. In general, elected Senators are not in the same situation as persons appointed to positions in the government with indefinite tenure, nor as private professionals, who might be suspended for a period of time merely upon suspicion or charges being levied, because Members of Congress are directly elected by, answerable to, and personally represent the people of their state or district in the Congress. The authority of either house of Congress to mandatorily suspend a Member from participation in congressional business has thus been questioned on grounds of both policy and power because such action would, in effect, disenfranchise that Member's constituency, deprive the people of their full constitutional representation in Congress, and would not allow the constituents to replace a Member, such as they could after an expulsion action. Conviction of a crime may subject a Member of the Senate to internal disciplinary action, including a resolution for censure of the Member, up to and including an expulsion from Congress upon a two-thirds vote of the Members of the Senate present and voting. The Senate has demonstrated that in cases of conviction of a Member of crimes that relate to official misconduct that the institution need not wait until all the Senator's appeals are exhausted, but that the Senate may independently investigate and adjudicate the underlying factual circumstances involved in the judicial proceedings, regardless of the potential legal or procedural issues that may be raised and resolved on appeal. No specific guidelines exist regarding actionable grounds for congressional discipline under the constitutional authority of each house to punish its own Members. Each house of Congress has significant discretion to discipline misconduct that the membership finds to be worthy of censure, reprimand, or expulsion from Congress. When the most severe sanction of expulsion has been actually employed in the Senate (and in the House of Representatives), however, the conduct has historically involved either disloyalty to the United States or the violation of a criminal law involving the abuse of one's official position, such as bribery. In the United States Senate, 15 Senators have been expelled, 14 during the Civil War period for disloyalty to the Union (one expulsion was later revoked by the Senate), and one Senator was expelled in 1797 for other disloyal conduct. Although the Senate has actually expelled relatively few Members, and none since the Civil War, other Senators, when facing a recommended expulsion for misconduct, have resigned their seat rather than face the potential expulsion action. In addition to expulsion, the Senate as an institution may take other disciplinary actions against one of its Members, including censure or fine. The Senate, like the House of Representatives, has taken a broad view of its authority to censure or otherwise discipline its Members for any conduct that the Senate finds to be reprehensible and/or to reflect discredit on the institution and which is, therefore, worthy of rebuke or condemnation. A censure by the Senate, whereby the full Senate adopts by majority vote a formal resolution of disapproval of a Member, may therefore encompass conduct that does not violate any express state or federal law, nor any specific Rule of the Senate. The Senate, in a similar manner as the House of Representatives in relation to its Members, has expressed reticence to exercise the power of expulsion (but not censure) for conduct in a prior Congress when a Senator has been elected or reelected to the Senate after the Member's conviction, when the electorate knew of the misconduct and still sent the Member to the Senate. The apparent reticence of the Senate or House to expel a Member for past misconduct after the Member has been duly elected or reelected by the qualified electors of a state, with knowledge of the Member's conduct, appears to reflect the deference traditionally paid in U.S. heritage to the popular will and election choice of the people. The authority to expel would thus be used cautiously when the institution of Congress might be seen as usurping or supplanting its own institutional judgment for the judgment of the electorate as to the character or fitness for office of an individual whom the people have chosen to represent them in Congress. Concerning a sitting Member of the Senate (or House) who is either indicted for or convicted of a felony offense, it should be noted that the United States Constitution does not provide for nor authorize the recall of any United States officials, such as United States Senators, Representatives to Congress, or the President or Vice President, and thus no Senator or Representative has ever been recalled in the history of the United States. Under the Constitution and congressional practice, Members of Congress may have their services ended prior to the normal expiration of their constitutional terms of office by their resignation, death, or by action of the house of Congress in which they sit by way of an expulsion or by a finding that a subsequent public office accepted by a Member is "incompatible" with congressional office (and that the Member has thus vacated his seat in Congress). The recall of Members of Congress was considered during the drafting of the federal Constitution, but no such provisions were included in the final version sent to the states for ratification, and the drafting and ratifying debates indicate a clear understanding and intent of the framers and ratifiers of the Constitution that no right or power to recall a Senator or Representative from Congress existed under the Constitution. As noted by an academic authority on this subject, The Constitutional Convention of 1787 considered but eventually rejected resolutions calling for this same type of recall [recall of Senators as provided in the Articles of Confederation].... In the end, the idea of placing a recall provision in the Constitution died for lack of support.... Although the Supreme Court has not needed to address the subject of recall of Members of Congress directly, other Supreme Court decisions, as well as other judicial and administrative rulings, decisions, and opinions, indicate that (1) the right to remove a Member of Congress before the expiration of his or her constitutionally established term of office resides exclusively in each house of Congress as established in the expulsion clause of the United States Constitution and (2) the length and number of the terms of office for federal officials, established and agreed upon by the states in the Constitution creating that federal government, may not be unilaterally changed by an individual state, such as through the enactment of a recall provision or other provision limiting, changing, or cutting short the term of a United States Senator or Representative. State administrative and judicial rulings have thus consistently found that there exists no right or power for an electorate in that state to "recall" a federal officer such as a United States Representative or Senator, regardless of the language of a particular state statute. No law or Rule exists providing that a Member of the Senate who is indicted for or convicted of a crime must forfeit his or her congressional salary. As discussed earlier concerning qualifications to hold the office of Member of Congress, indictment for or conviction of a felony offense is not a constitutional bar for eligibility to be elected or reelected as a Member of Congress, other than a conviction for treasonous conduct after having taken an oath of office, under the "disqualification" provision of the Fourteenth Amendment. Additionally, a congressional censure or expulsion does not act as a permanent disability to hold congressional office in the future. A person under indictment or a convicted felon, even one who has also been disciplined by Congress, may run for and, in theory, be reelected to Congress and may not be "excluded" from Congress, but must be seated, if such person meets the three constitutional qualifications for office and has been duly elected. Once a Member is seated, however, that Member may be subject to certain discipline by the Senate. Under the United States Constitution there is no impediment for the people of a state (or district in the case of a Representative) to choose an individual who is under indictment, or who is a convicted felon, to represent them in Congress. Furthermore, because the qualifications for elective federal office are established and fixed within the United States Constitution, they are the exclusive qualifications for congressional office, and may not be altered or added to by the state legislatures except by constitutional amendment. The states may not, therefore, by statute or otherwise, bar from the ballot a candidate for federal office because such person is indicted or has been convicted of a felony. The required qualifications, as well as the disqualifications, to serve in Congress were intentionally kept at a minimum by the framers of the Constitution to allow the people broad discretion to send whom they wish to represent them in Congress. That is, the people voting in a district or state, rather than the institutions of Congress, the courts, or the executive, were meant to substantially control their own decisions concerning their representation in the federal legislature. Officers and employees of the United States, including Members of Congress, do not, upon indictment for any crime, nor upon conviction of every crime that constitutes a felony, forfeit the federal pensions for which they qualify and the retirement income that they have accumulated. However, the federal pensions of Members of Congress will be affected in two general instances: upon the conviction of a crime concerning any of the national security offenses listed in the so-called "Hiss Act," and upon the conviction of any one of several felony offenses relating to public corruption, abuse of one's official position in the Congress, fraud, or campaign finance laws if the elements of the offense relate to the official duties of the Member. Under the so-called "Hiss Act," Members of Congress, in a similar manner as most other officers and employees of the federal government, forfeit all of their federal retirement annuities for which they had qualified if convicted of a federal crime which relates to disclosure of classified information, espionage, sabotage, treason, misprision of treason, rebellion or insurrection, seditious conspiracy, harboring or concealing persons, gathering or transmitting defense information, perjury in relation to those offenses, and other designated offenses relating to secrets and national security offenses against the United States. Additionally, under provisions of law first enacted in 2007, and then expanded in 2012, a Member of Congress will lose all "creditable service" as a Member for federal pension (and disability) purposes if that Member is convicted for conduct which constitutes a violation of any one of a number of federal laws concerning public corruption, fraud, and campaign finance regulation. The forfeiture provisions of this law will apply if the criminal misconduct was engaged in while the individual was a Member of Congress (or while the individual was the President, Vice President, or an elected official of a state or local government), and if every element of the offense "directly relates to the performance of the individual's official duties as a Member, the President, the Vice President, or an elected official of a State or local government." The laws within these pension forfeiture provisions include, for example, bribery and illegal gratuities; conflicts of interest; acting as an agent of a foreign principal; false claims; vote buying; unlawful solicitations of political contributions; theft or embezzlement of public funds; false statements or fraud before the federal government; wire fraud and mail fraud, including "honest services" fraud; obstruction of justice; extortion; money laundering; bribery of foreign officials; depositing proceeds from various criminal activities; obstruction of justice or intimidation or harassment of witnesses; an offense under "RICO," racketeer influenced and corrupt organizations; conspiracy to commit an offense or to defraud the United States to the extent that the conspiracy constitutes an act to commit one of the offenses listed above; conspiracy to violate the post-employment, "revolving door" laws; perjury in relation to the commission of any offense described above; or subornation of perjury in relation to the commission of any offense described above. As to the loss of one's federal pension annuity, or the loss of creditable service as a Member for the purposes of the Member's retirement annuity, the nature and the elements of the offense are controlling; and it does not matter if the individual resigns from office prior to or after indictment or conviction, or if the individual is expelled from Congress.

There are no federal statutes or Rules of the Senate that directly affect the status of a Senator who has been indicted for a crime that constitutes a felony. No rights or privileges are forfeited under the Constitution, statutory law, nor the Rules of the Senate upon an indictment. Under the Rules of the Senate, therefore, an indicted Senator may continue to participate in congressional proceedings and considerations. Under the United States Constitution, a person under indictment is not disqualified from being a Member of or a candidate for reelection to Congress. Internal party rules in the Senate may, however, provide for certain steps to be taken by an indicted Senator. For example, the Senate Republican Conference Rules require an indicted chairman or ranking Member of a Senate committee, or a member of the party leadership, to temporarily step aside from his or her leadership or chairmanship position. Members of Congress do not automatically forfeit their offices upon conviction of a crime that constitutes a felony. No express constitutional disability or "disqualification" from Congress exists for the conviction of a crime, other than under the Fourteenth Amendment for certain treasonous conduct by someone who has taken an oath of office to support the Constitution. Unlike Members of the House, Senators are not instructed by internal Senate Rules to refrain from voting in committee or on the Senate floor once they have been convicted of a crime which carries a particular punishment. Internal party rules in the Senate may affect a Senator's position in committees. Under the Senate Republican Conference Rules, for example, Senators lose their chairmanships of committees or ranking Member status upon conviction of a felony. Conviction of certain crimes may subject—and has subjected in the past—Senators to internal legislative disciplinary proceedings, including resolutions of censure, as well as an expulsion from the Senate upon approval of two-thirds of the Members. Conviction of certain crimes relating to national security offenses would result in the Member's forfeiture of his or her entire federal pension annuity under the provisions of the so-called "Hiss Act" and, under more recent provisions of law, conviction of a number of crimes by Members relating to public corruption, fraud, or campaign finance law will result in the loss of the Member's entire "creditable service" as a Member for purposes of calculating his or her federal retirement annuities if the conduct underlying the conviction related to one's official duties. This report has been updated from an earlier version, and will be updated in the future as changes to law, congressional rules, or judicial and administrative decisions may warrant.

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T here are approximately 766 million acres of forestlands in the United States, most of which are privately owned (445 million acres, or 58%) by individuals, families, Native American tribes, corporations, nongovernmental organizations, and other groups (see Figure 1 ). The federal government has numerous programs to support forest management on those private forests and also public—state and local—forests. These programs support a variety of forest management and protection goals, including activities related to planning for and responding to wildfires, as well as supporting the development of new uses and markets for wood products. These programs are primarily administered by the Forest Service (FS) in the U.S. Department of Agriculture (USDA), and often with the assistance of state partner agencies. This report describes current forestry assistance programs mostly funded and administered through the State and Private Forestry (SPF) branch of the FS. Following a brief background and overview, this report presents information on the purposes of the programs, types of activities funded, eligibility requirements, authorized program duration and funding level, and requested and enacted program appropriations. Figure 1. Forest Landownership in the Conterminous United StatesSource: CRS. Data from Jaketon H. Hewes, Brett J. Butler, and Greg C. Liknes, Forest Ownership in the Conterminous United States circa 2014 - geospatial data set, Forest Service Research Data Archive, 2017, https://doi.og/10.2737/RDS-2017-0007. Providing federal assistance for nonfederal forest landowners has been a component of USDA's programs for more than a century. Initial forestry assistance efforts began with the creation of the USDA Division of Forestry in 1881 (to complement forestry research, which began in 1876). Forestry assistance and research programs grew slowly, and in 1901 the division was upgraded to the USDA Bureau of Forestry. In 1905, the bureau merged with the Interior Department's Division of Forestry (which administered the forest reserves, later renamed national forests) and became the USDA Forest Service (FS). The FS has three primary mission areas: managing the National Forest System, conducting forestry research, and providing forestry assistance. The Senate and House Agriculture Committees have jurisdiction over forestry in general, forestry assistance, and forestry research programs. Congress authorized specific forestry assistance programs in the Clarke-McNary Act of 1924. This law guided those programs for more than half a century, until it was revised in the Cooperative Forestry Assistance Act of 1978 (CFAA). The House and Senate Agriculture Committees often examine these programs in the periodic omnibus legislation to reauthorize agriculture and food policy programs, commonly known as farm bills. The 2008 farm bill established national funding priorities (conserve working forests, protect and restore forests, and enhance public benefits from private forests); enacted a standardized process for states to assess forest resource conditions and strategize about funding needs; and established, modified, and repealed specific assistance programs, among other provisions. The 2014 farm bill repealed several programs, mostly programs whose authorizations had expired or programs that had never received appropriations. The 2014 farm bill also reauthorized and modified the requirement for statewide assessments and the Office of International Forestry. Many of the agricultural programs—including two forestry programs—authorized by the 2014 farm bill are scheduled to expire at the end of FY2018 unless Congress provides for an extension or reauthorizes them. Most forestry assistance programs are administered by the FS, but the programs are typically implemented by state partners (e.g., state forestry or natural resource agencies). In these cases, the FS provides technical and financial aid to the states, which then provides information and assistance to private landowners or specified eligible entities. However, the 2008 farm bill expanded the definition of authorized conservation practices for agricultural conservation programs generally to include forestry practices, and thus direct federal financial assistance to private forest landowners may be feasible through the conservation programs. See Table 1 for a brief summary of the FS programs addressed in this report; more information on each program is available in the " Forest Service Assistance Programs " section of this report. To be eligible to receive funds for most of the programs, each state must prepare a State Forest Action Plan, consisting of a statewide assessment of forest resource conditions, including the conditions and trends of forest resources in the state; threats to forest lands and resources, consistent with national priorities; any areas or regions of the state that are a priority; and any multistate areas that are a regional priority; and a long-term statewide forest resource strategy , including strategies for addressing the threats to forest resources identified in the assessment; and a description of the resources necessary for the state forester to address the statewide strategy. The State Forest Action Plans are to be reviewed every 5 years and revised every 10 years. All 50 states, the District of Columbia, and 8 territories are covered by a State Forest Action Plan. Each state must also publish an annual funding report and have a State Forest Stewardship Coordination (FSC) Committee. Chaired by the state forester and composed of federal, state, and local representatives (including representatives from conservation, industry, recreation, and other organizations), the FSC Committee makes recommendations on statewide priorities on specific programs as well as on the development and maintenance of the State Forest Action Plan. The forestry programs may provide technical assistance, financial assistance, or both. Technical assistance includes providing guidance documents, skills training, data, or otherwise sharing information, expertise, and advice broadly or on specific projects. Technical assistance may also include the development and transfer of technological innovations. Financial assistance is typically delivered through formula or competitive grants (with or without contributions from recipients) or cost-sharing (with varying levels of matching contributions from recipients). As an example, the Forest Health Protection program provides both types of assistance: financial assistance in the form of funding for FS to perform surveys and to control insects or diseases on state or private lands (with the consent and cooperation of the landowner) and technical assistance in the form of data, expertise, and guidance for addressing specific insect and disease infestations. Most—but not all—FS assistance programs are available nationally and have permanently authorized funding and without specified funding levels. No forestry assistance programs have mandatory spending; all require funding through the annual discretionary appropriations process, and are typically funded in the annual Interior, Environment, and Related Agencies appropriations acts. Most of the assistance programs are funded through the FS's State and Private Forestry (SPF) account, although some programs are funded or allocated from other accounts or programs. Some programs have been combined for funding purposes or for administrative reasons. Funding for forestry assistance programs has declined over the past 15 years, in both real and constant dollars (see Figure 2 ). The average annual appropriation over that time, from FY2004 through FY2018, was $362.7 million, with a peak of $420.5 million in FY2010 and a low of $328.9 million in FY2017. Funding increased in FY2018 to $355.1 million, but remains below the 15-year average. When adjusting for inflation, however, overall funding in FY2018 was 32% below FY2004 levels and 25% below FY2010 levels. In total, these forestry assistance programs made up 7% of the FS's total annual discretionary appropriation on average across those 15 years. The Administration requested $197.4 million in FY2019 and proposed to eliminate funding for seven of the programs and decreased funding for the others (see Table 2 for FY2014-FY2018 appropriations and the FY2019 budget request; more information on each program is available in the " Forest Service Assistance Programs " section of this report). Some FS programs have been repealed by previous farm bills, or have gone unfunded by Congress for several years. Table 3 lists these programs and the most recent congressional action. Some activities authorized by these unfunded or repealed programs may continue to be performed or provided by FS through other authorizations or funding sources. This report focuses on forestry assistance programs administered by FS. Other agencies, inside and outside of USDA, also administer programs that may have forest conservation or protection benefits. For example, the USDA Farm Services Agency (FSA) administers several programs, including the Emergency Forest Restoration program, which provides assistance to nonindustrial forest landowners to recover or restore forests following catastrophic events. The USDA Natural Resources Conservation Service (NRCS) administers the Healthy Forest Reserve program, which funds agreements, contracts, or easements to assist landowners with forest restoration or enhancement projects. The Department of the Interior administers a community assistance program to support collaborative community planning and projects to mitigate wildfire risk. The tabular presentation that follows provides basic information covering each of the FS forestry and fire assistance programs, including brief program description; program activities; eligibility requirements; the FS appropriations account budget line item that provides funding for the program; authorized funding levels and any funding restrictions; FY2018 funding level in the Consolidated Appropriations Act of 2018 ( P.L. 115-141 ); FY2019 funding level requested by the Administration; statutory authority, recent amendments, and U.S. Code reference; expiration date of program authority unless permanently authorized; and program's website link. Information for the following tables is drawn largely from agency budget documents and presentations, explanatory notes, and websites. Further information about these programs may be found on the FS SPF website at http://www.fs.fed.us/spf and on the "cooperative forestry" page.

The U.S. Department of Agriculture (USDA) has numerous programs to support the management of state and private forests. These programs are under the jurisdiction of the House and Senate Agriculture Committees and are often examined in the periodic legislation to reauthorize agricultural programs, commonly known as farm bills. For example, the 2014 farm bill repealed, reauthorized, or modified many of these programs. The House version of the 2018 farm bill, the Agriculture and Nutrition Act of 2018 (H.R. 2), contains a forestry title (Title VIII) that would reauthorize, modify, and establish new forestry assistance programs. Forestry-specific assistance programs (in contrast to agriculture conservation programs that include forestry activities) are primarily administered by the USDA Forest Service (FS), with permanent authorization of funding as needed. Some programs have been combined through the appropriations process or for administration purposes. These programs generally provide technical and educational assistance such as information, advice, and aid on specific projects. Other programs provide financial assistance, usually through grants (with or without matching contributions from recipients) or cost-sharing (typically through state agencies, with varying levels of contributions from recipients). Many programs provide both technical and financial assistance. Some of the assistance programs provide support for planning and implementing forestry and related land management practices (e.g., Forest Stewardship, Urban and Community Forestry). Other programs provide assistance for forest restoration projects that involve more than one jurisdiction and address regional or national priorities (e.g., Landscape Scale Restoration). Other programs provide support for protecting forestlands from wildfires, insects and diseases, and from converting forestland to nonforest uses (e.g., Community Forest and Open Space Conservation, Forest Legacy). The Forest Health program provides support for protecting both federal and nonfederal forests from continuing threats, although most of the funding goes to federal forests. Programs also exist to enhance state and rural wildfire management capabilities (e.g., State Fire Assistance and Volunteer Fire Assistance) and to promote the use of forest products (e.g., Wood Innovation). International Forestry is often included as a forestry assistance program, because it provides technical forestry help and because it is funded through the FS appropriations account for forestry assistance programs (State and Private Forestry). Most of the programs provide assistance to state partner agencies. The state agencies can use the aid on state forestlands or to assist local governments or private landowners. How the states use the resources is largely at the discretion of the states, within the authorization of each program and consistent with the national priorities for state assistance established by Congress in the 2008 farm bill. Overall funding for the Forest Service's forestry assistance programs in FY2018 was $355.1 million, an 8% increase over FY2017 funding of $328.9 million. The Trump Administration requested $197.4 million in funding for FY2019. Overall funding has declined over the past 15 years, however, in both real and constant dollars. Over that time, funding for forestry assistance programs has ranged between 5% and 9% of the total annual Forest Service discretionary appropriation.

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Transnational organized crime groups flourish in Burma, trafficking contraband that includes drugs, humans, guns, wildlife, gems, and timber. Transnational crime is highly profitable, reportedly generating roughly several billion dollars each year. The country's extra-legal economy, both black market and illicit border trade, is reportedly so large that an accurate assessment of the size and structure of the country's economy is unavailable. Contraband trafficking also remains a low-risk enterprise, as corruption among officials in Burma's ruling military junta, the State Peace and Development Council (SPDC), appears to facilitate trafficking and effectively provide the criminal underground immunity from law enforcement and judicial action. Synergistic links connect various forms of contraband trafficking; smugglers use the same routes for many forms of trafficking, following paths of least resistance, where corruption and lax law enforcement prevail. The continued presence of transnational crime in Burma and the illicit trafficking routes across Burma's borders share many features of so-called "ungoverned spaces"—regions of the world where governments have difficulty establishing control or are complicit in the corruption of the rule of law. Among the commonalities that Burma's border regions share with other ungoverned spaces is physical terrain that is difficult to control. Burma's long borders, through which much smuggled contraband passes, stretch across vast trackless hills and mountains that are poorly patrolled. In addition, continuing ethnic tensions with some ethnic armed rebel groups hamper government control in some regions of the country, which is another common feature of ungoverned spaces. Recent cease-fire agreements in other border regions have not markedly improved the situation; instead, these cease-fires have provided groups known for their activity in transnational crime with near autonomy, essentially placing these areas beyond the reach of Burmese law. Congress has long been active in U.S. policy toward Burma for a variety of reasons, including on issues related to transnational crime. Because the State Department lists Burma as a major drug-producing state, the country is barred access from U.S. foreign assistance under several long-standing legislative provisions. Congress also authorizes sanctions against countries that the State Department deems in non-compliance with the minimum standards for the elimination of trafficking in persons, which includes Burma. The 110 th Congress sought to strengthen unilateral sanctions against Burma. In response to the Burmese government's forced suppression of anti-regime protests in August and September of 2007, as well as its internationally criticized humanitarian response to destruction resulting from tropical cyclone Nargis in May 2008, Congress passed P.L. 110-286 , the Tom Lantos Block Burmese JADE Act of 2008 (signed by the President on July 29, 2008). This law imposes further sanctions on SPDC officials and prohibits the indirect import of Burmese gems, among other actions. H.Rept. 110-418 , which accompanies H.R. 3890 , also cites "Burma's rampant drug trade" and "its role as a source for international trafficking in persons and illicit goods" as additional reasons for these new sanctions. The 111 th Congress may choose to continue its interest in oversight of U.S. policy toward Burma, including the country's role in criminal activity. Secretary of State Hillary Clinton announced in February 2009 the beginning of a review of U.S.-Burma relations. In September 2009, the conclusions of this policy review were released, noting in particular the beginning of direct dialogue with Burmese authorities on international crime-related issues, including compliance with U.N. arms sanctions and counternarcotics. Already in the first session of the 111 th Congress, both the Senate and the House have held hearings in which crime issues related to Burma have been addressed. The United Wa State Army (UWSA), Shan State Army-South (SSA-S), Shan State Army-North (SSA-N), Democratic Karen Buddhist Army (DBKA), ethnic Chinese criminal groups (including the Triads), and other armed groups have criminal networks that stretch from India to Malaysia and up into China. Many of the transnational criminal elements along Burma's border are linked to past or ongoing ethnic insurgencies. While not necessarily a threat to SPDC control, they continue to constitute a transnational security threat for Burma and the region. The State Department states that the UWSA is the largest of the organized criminal groups in the region and operates freely along the China and Thailand borders, controlling much of the Shan State with a militia estimated to have 16,000 to 20,000 members. Other criminal groups, including the 14K Triad, reportedly operate in the north of the country and in major population centers. According to the Economist Intelligence Unit (EIU), these criminal organizations remain nearly immune from SPDC interference, because of widespread collusion with junta military, police, and political officials. Many analysts agree that much of this apparent collusion is part of concerted SPDC efforts to coopt ethnic groups and avoid hostilities with them. One possible consequence of this policy is that the influence of organized crime in Burma and the region could remain virtually impossible to reduce. The U.S. State Department and other observers indicate that corruption is common among the bureaucracy and military in Burma. Burmese officials, especially army and police personnel in the border areas, are widely believed to be involved in the smuggling of goods and drugs, money laundering, and corruption. Burma has no laws on record specifically related to corruption and has signed but not ratified the U.N. Convention against Corruption. The 2006 EIU country report on Burma states that "corruption and cronyism" are widespread "throughout all levels of the government, the military, the bureaucracy and business communities." Burma is reported to be the third-most corrupt country in the world according to Transparency International's 2009 Corruption Perceptions Index , after Somalia and Afghanistan. In addition, the State Department states that Burma's weak implementation of anti-money laundering controls remains at the root of the continued use by narcotics traffickers and other criminal elements of Burmese financial institutions. Burma has signed, but not ratified, the United Nations Convention against Corruption, which entered into force in December 2005. Although there is little direct evidence of top-level regime members' involvement in trafficking-related corruption, there is evidence that high-level officials and Burmese military officers have benefitted financially from the earnings of transnational crime organizations. In the case of the drug trade, reports indicate Burmese military officials at various levels have several means to gain substantial shares of narcotics trafficking earnings. Some reports indicate that the Burmese armed forces, or Tatmadaw , may be directly involved in opium poppy cultivation in Burma's Shan state. Some local Tatmadaw units and their families reportedly work the poppy fields and collect high taxes from the traffickers, as well as fees for military protection and transportation assistance. According to the State Department, Burma has not indicted any military official above the rank of colonel for drug-related corruption. The SPDC also reportedly allows and encourages traffickers to invest in an array of domestic businesses, including infrastructure and transportation enterprises, receiving start-up fees and taxes from these enterprises in the process. The traffickers usually deposit the earnings from these enterprises into banks controlled by the military, and military officers reportedly deposit much of their crime-related money in foreign bank accounts in places like Bangkok and Singapore. In 2003, the Secretary of the Treasury reported that some Burmese financial institutions were controlled by, or used to facilitate money laundering for, organized drug trafficking organizations. In the same report, the Secretary of the Treasury also stated that Burmese government officials were suspected of being involved in the counterfeiting of U.S. currency. Possible links between drug trafficking operations and official corruption have been raised recently in the context of SPDC reconstruction contracts in the aftermath of cyclone Nargis. Specifically, some reports have pointed to SPDC's reconstruction contract with Asia World Company Ltd., a firm managed by Steven Law (Tun Myint Naing), as a possible indication of continued links between drug traffickers and official corruption. Steven Law, against whom the U.S. government has maintained financial sanctions since February 2008, allegedly provides material support to the Burmese junta, receives business concessions from the junta, facilitates the movement of illicit narcotics, and launders drug profits through his firms, including Asia World Company Ltd. The most frequent destinations for much of Burmese contraband—opium, methamphetamine, illegal timber, endangered wildlife, and trafficked humans—are China and Thailand. Other destinations include India, Laos, Bangladesh, Vietnam, Indonesia, Malaysia, Brunei Darussalam, South Korea, and Cambodia. Demand for Burma's contraband reaches beyond the region, including the United States. The U.S. Drug Enforcement Administration (DEA), for example, reports that Burmese-trafficked methamphetamine pills have been confiscated within the United States. The United States is also reputed to be among the world's largest importers of illegal wildlife; no concrete data exist, however, to link such transnational ties with Burma. Ready recruits for organized crime activities can be found in both urban ghettos and impoverished rural areas. According to the Asian Development Bank, 27% of Burma's population live below the poverty line, making the country one of the poorest in Southeast Asia. Many analysts state that peasant farmers, rural hunters, and other poor often serve at the base of Burma's international crime network, growing opium poppy crops, poaching exotic and endangered species in Burma's lush forests, and serving as couriers and mules for contraband. In addition, the State Department and other observers have found that many victims of transnational crime in Burma are the poor, becoming commodities themselves as they are trafficked to be child soldiers for the junta or slaves for sexual exploitation. Burma is party to all three major United Nations international drug control treaties—the 1961 Single Convention on Narcotic Drugs, as amended; the 1971 Convention on Psychotropic Substances; and the 1988 Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Burma's official strategy to combat drugs aims to end all production and trafficking of illegal drugs by 2014, a goal that parallels the region's ambition to be drug free by 2015. Many analysts, however, consider the goal of achieving a drug-free Burma as unlikely. In September 2007, the Administration once again included Burma on the list of major drug transit or major illicit drug producing countries. Located at the heart of the "Golden Triangle" of narcotics trafficking, Burma is among the world's top producers of opium, heroin, and methamphetamine. Illicit narcotics reportedly generate between $1 billion and $2 billion annually in exports. In addition, Burma's drug trafficking activities appear to be linked to the recent spread of HIV and AIDS in the region, as drug users along Burma's trafficking routes share contaminated drug injection needles. Some analysts warn that clashes between the government of Burma, rebel groups in the border areas of Burma, and neighboring countries could be possible. For example, should the SPDC begin to combat the drug trade more vigorously, current cease-fire groups may choose to break their agreements with the SPDC in order to protect their drug trade territories. Several cease-fire groups, including the UWSA, have chosen not to heed calls by the SPDC to disarm and reportedly use illicit drug proceeds to equip and maintain their paramilitary forces. Beginning in June 2009 through at least late August 2009, the Burmese Army initiated a military campaign against several ethnic minority groups, including the Karen and the Kokang. Thai counterdrug officials report a concurrent spike in heroin and methamphetamine sales in the region. It appears that various ethnic rebels are selling off their stockpiles of drugs in order to expand their weapons arsenals and prepare for the possibility of active conflict. Further, some suggest that the continued flow of illicit drugs from Burma to Thailand may be a source of tension between the two countries—especially in the face of Thailand's renewed war on drugs. The most recent campaign to combat illegal drugs, which began in April 2009, is a reprise of a 2003 campaign. Though media reports indicate that the current Thai war on drugs appears to be more restrained than the 2003 version, which resulted in the deaths of several thousand people over a three-month period, human rights activists remain on alert. Burma is the world's second-largest producer of illicit opium, behind Afghanistan. Further, the DEA reports that Burma accounts for 80% of all heroin produced in Southeast Asia and is a source of heroin for the United States. Although poppy cultivation has declined significantly in the past decade, prices have increased significantly in recent years, reflecting ongoing demand despite production declines since a decade ago (see Table 1 ). Some suggest that future dynamics of the opiate market in Burma may be dependent on developments in other opium-producing regions, particularly Afghanistan, which replaced Burma as the primary opium producer in the world. Much of the decline in recent years has been attributed to UWSA's 2005 public commitment to stop its activity in the opium and heroin markets, after prolonged international pressure to do so. However, recent reports suggest that the UWSA's self-imposed ban may be short-lived. The UWSA has reportedly warned that alternative livelihood sources will be necessary in order to sustain its ban against opium poppy cultivation—a point with which many international observers agree. Most analysts acknowledge that opium production in certain parts of Burma is one of the few viable means for small-scale peasant farmers to compensate for structural food security shortages. A 2009 United Nations Office on Drugs and Crime (UNODC) study supports this, finding that households in former poppy-growing villages were unable to find sufficient substitutes for their lost income from opium. According to the same UNODC study, the average annual cash income of a household involved in opium poppy cultivation was approximately $700, while the annual income of a household not involved in opium poppy cultivation was approximately $750. In Burma's Shan State in 2009, known for its pockets of opium production, 28% of poppy growing households (versus 22% of non-poppy growing households) reported food insecurity due to a shortage of rice. In the meantime, reports indicate that opium poppy production is shifting to areas controlled by other cease-fire ethnic groups, and to areas apparently administered by Burma's armed forces, the Tatmadaw, who tax the farmers and traders for a portion of the farmgate value. The UWSA may also be organizing Wa poppy farmers to seasonally migrate to nearby provinces, where the UWSA did not commit to a ban, in order to continue their cultivation. In addition to producing heroin and opium, Burma is reportedly the largest producer of methamphetamine in the world and a significant producer of other synthetic drugs. Methamphetamine is produced in small, mobile labs in insurgent-controlled border areas, mainly in eastern Burma (for export mainly to Thailand) and sometimes co-located with heroin refineries. Burma's rise to prominence in the global synthetic drug trade is in part the consequence of UWSA's commitment to ban opium poppy cultivation. According to some, UWSA leadership may be intentionally replacing opium cultivation with the manufacturing and trafficking of amphetamine-type stimulants. As a result, Burma has emerged as one of the world's largest producers of methamphetamine and other amphetamine-type stimulants. The State Department states that this sharp increase in methamphetamine trafficking is "threatening to turn the Golden Triangle into an 'Ice Triangle.'" A July 2008 media report indicates that international assistance for relief from the cyclone Nargis may have been used as a cover to smuggle illegal drugs into Burma. According to the Irrawaddy , an independent Burmese newspaper, several customs officials were suspected of involvement in a scheme to smuggle ecstasy pills into Burma as part of shipments of relief aid from Burmese communities abroad. Burma is a party to the United Nations Convention against Transnational Organized Crime and its protocol on migrant smuggling and trafficking in persons. However, Burma has been designated as a "Tier 3" state in every Trafficking in Persons (TIP) Report ever published by the State Department. Tier 3 is the worst designation in the TIP Report, indicating that the country does not comply with minimum standards for combating human trafficking under the Trafficking Victims Protection Act of 2000, as amended (Division A of P.L. 106-386 , 22 U.S.C. 7101, et seq.). As the TIP reports explain, laws to criminally prohibit sex and labor trafficking, as well as military recruitment of children, exist in Burma—and the penalties prescribed by these laws for those convicted of breaking these laws are "sufficiently stringent." Nevertheless, the State Department continues to report that these laws are arbitrarily enforced by the SPDC and that cases involving high-level officials or well-connected individuals are not fully investigated. Victims are trafficked internally and regionally, and junta officials are directly involved in trafficking for forced labor and the unlawful conscription of child soldiers, according to several reports. Women and girls, especially those of ethnic minority groups and those among the thousands of refugees along Burma's borders, are reportedly trafficked for sexual exploitation. Victims are reportedly trafficked from rural villages to urban centers and commerce nodes, such as truck stops, border towns, and mining and military camps. One incident in early 2008 revealed the risks associated with migrant smuggling from Burma to Thailand, when 54 Burmese migrants were found dead in the back of a seafood truck headed to Thailand after the truck's air conditioning failed. Based on media accounts, 67 migrants survived, including at least 14 minors. In September 2009, the U.S. Department of Labor released a report and initial list of goods produced by child labor or forced labor. This is a congressionally mandated report, pursuant to the Trafficking Victims Protection Reauthorization Acts of 2005 and 2008, which required that the Department of Labor's Bureau of International Labor Affairs (DOL/ILAB) develop and publish a list of goods from countries in which ILAB had "reason to believe" were produced as a result of child or forced labor. Burma is listed among the 58 countries described in the ILAB report, with 14 separate production sectors implicated. Burma is rich in natural resources, including extensive forests, high biodiversity, and deposits of minerals and gemstones. Illegal trafficking of these resources is reportedly flowing to the same destination states and along the same trafficking routes as other forms of trafficking. Global Witness, a London-based non-governmental organization, estimates that 98% of Burma's timber exports to China, from 2001 to 2004, were illegally logged, amounting to an average of $200 million worth of illegal exports each year. Many analysts also claim that the region's illegal timber trade is characterized by complex patronage and corruption systems. Wild Asiatic black bears, clouded leopards, Asian elephants, and a plethora of reptiles, turtles, and other unusual animals reportedly are sold in various forms—whole or in parts, stuffed, ground, or, sometimes, alive—in open-air markets in lawless border towns. Growing demand in countries such as China and Thailand has increased regional prices for exotic wildlife; for example, a tiger's skin can be worth up to $20,000, according to media reports. One report suggests that valuable wildlife is used as currency in exchange for drugs and in the laundering of other contraband proceeds. Rubies, sapphires, jade, and other gems have also been used as non-cash currency equivalents for transborder smuggling. The legal sale of Burmese gems is among the country's most significant foreign currency earners—$297 million during the 2006-2007 fiscal year, according to Burma's customs department; more may be traded through illicit channels. Some observers claim that the junta is heavily involved in both the legal and illegal trade of gemstones, as the regime controls most mining operations and the sale of gems through official auctions and private sales reportedly arranged by senior military officers. Congress has also accused the Burmese regime of attempting to evade U.S. sanctions against the import of Burmese gemstones by concealing the gems' origin from potential buyers. Congress estimates that while 90% of the world's rubies originate from Burma, only 3% of those entering the United States are claimed to have originated there. AK-47s, B-40 rocket launchers, and other small arms are reportedly smuggled into Burma along the Thai-Burmese border. These weapons reportedly go to the Karen guerrillas, who continue to fight a decades-long insurgency against the Burmese junta. Another report implicates the Shan State Army in trafficking in military hardware. Although analysts say it is unlikely that the ruling junta benefits from the criminal profits of small arms trafficking, reports indicate that the government distributes such weapons to its cadre of child soldiers. Other less high-profile markets for contraband reportedly exist, including trafficking in cigarettes, cars, CDs, pornography, antiques, religious items, fertilizer, and counterfeit documents—many of which are believed to involve at least the complicity of some Burmese government officials. In April 2008, Japan's public broadcaster NHK reported that Burma has been importing multiple-launch rockets from North Korea, raising international concerns and speculation about why Burma would seek out such weapons in violation of U.N. sanctions imposed on North Korea after its nuclear test in October 2006. Some observers speculate that the Burmese military has been seeking to upgrade its artillery to improve the country's protection against potential external threats. Burma and North Korea are thought to have been involved in conventional weapons trade in violation of U.N. sanctions since spring 2007, when North Korea and Burma resumed diplomatic relations with each other. Observers further claim that "Western intelligence officials have suspected for several years that the regime has had an interest in following the model of North Korea and achieving military autarky by developing ballistic missiles and nuclear weapons." The State Department reports in 2008 that Burma is a money laundering risk because of its underdeveloped financial sector and large volume of informal trade. In 2001, the international Financial Action Task Force on Money Laundering (FATF) designated Burma as a Non-Cooperative Country or Territory (NCCT) for deficient anti-money laundering provisions and weak oversight of its banking sector. A year later in 2002, the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) issued an advisory to U.S. financial institutions to give enhanced scrutiny to any financial transaction related to Burma. In 2003, two of Burma's largest private banks—Myanmar Mayflower Bank and Asia Wealth Bank—were implicated by FATF as involved in laundering illicit narcotics proceeds and counterfeiting. The Secretary of the Treasury in 2003 listed Burma as a "major money laundering country of primary concern" and in 2004 imposed additional countermeasures. Burma has since revoked the operating licenses of the two banks implicated in 2003. However, the U.S. government and international bodies, such as FATF, continue to monitor the widespread use of informal money transfer networks, sometimes also referred to as "hundi" or "hawala." Monies sent through these informal systems are usually legitimate remittances from relatives abroad. The lack of transparency and regulation of these money transfers remain issues of concern for the United States. In other parts of the world, hawala or hawala-like techniques have been used, or are suspected of being used, to launder proceeds derived from narcotics trafficking, terrorism, alien smuggling, and other criminal activities. Burma is subject to a broad sanctions regime that addresses issues of U.S. interest, which include democracy, human rights, and international crime. Specifically in response to the extent of transnational crime occurring in Burma, the President has taken additional actions against the country under several different legislative authorities. Burma is listed as a major drug-producing state, and because of its insufficient effort to combat the narcotics trade, the country is barred access to some U.S. foreign assistance. As an uncooperative, major drug-producing state, Burma is also subject to trade sanctions. In 2005, the Department of Justice indicted eight Burmese individuals identified in 2003 by the U.S. Treasury's Office of Foreign Assets Control (OFAC) for their alleged role in drug trafficking and money laundering. On November 13, 2008, OFAC named 26 individuals and 17 companies tied to Burma's Wei Hsueh Kang and the UWSA as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (21 U.S.C. 1901-1908). Burma is characterized by the State Department's 2009 Trafficking in Persons report as a Tier 3 state engaged in the most severe forms of trafficking in persons; as such, Burma is subject to sanctions, barring the country from non-humanitarian, non-trade-related U.S. assistance and loss of U.S. support for loans from international financial institutions. As a major money laundering country—defined by Section 481(e)(7) of the Foreign Assistance Act of 1961, as amended, as one "whose financial institutions engage in currency transactions including significant amounts of proceeds from international narcotics trafficking"—Burma is subject to several "special measures" to regulate and monitor financial flows. These include Department of Treasury advisories for enhanced scrutiny over financial transactions, as well as five special measures listed under 31 U.S.C. 5318A. The United States does not apply sanctions against Burma in specific response to its activity in other illicit trades, including wildlife. The Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2007 ( H.R. 3890 ), however, would prohibit the importation of gems and hardwoods from Burma, among other restrictions. After more than a decade of applying sanctions against Burma, however, many analysts have concluded that the sanctions have done little to change the situation. The effectiveness of U.S. sanctions is limited by several factors. These include (1) unevenly applied sanctions against Burma by other countries and international organizations, including the European Union and Japan; (2) a booming natural gas production and export industry that provides the SPDC with significant revenue; (3) continued unwillingness of Burma's fellow members in the Association of Southeast Asian Nations (ASEAN) to impose economic sanctions against Burma; (4) Burma's historical isolation from the global economy; and (5) China's continued economic and military assistance to Burma. In addition, some analysts suggest that sanctions are, in part, culpable for the flourishing black markets in Burma, including trafficking in humans, gems, and drugs, because legal exports are barred. Several analysts indicate that many Burmese women who lost their jobs in the textile industry as a result of Western sanctions are among the victims of trafficking for sexual exploitation. The United States is assisting neighboring countries with stemming the flow of trafficked contraband from Burma into their territories. Although most U.S. assistance to combat transnational crime in Burma remains in suspension, the United States is working to train law enforcement and border control officials in neighboring countries through anti-crime assistance programs. Currently, the bulk of funding to Burma's neighbors remains concentrated in counter-narcotics and anti-human trafficking projects; no funding is allocated to the State Department for combating "organized and gang-related crime" in the region. Overall funding to combat trafficking has been in decline for several years; the Administration's FY2008 appropriations request for Foreign Operations in the region represents a 24.2% decrease from FY2006 actual funding. Despite Burma's recent progress in reducing opium poppy cultivation, most experts believe U.S. policies have not yielded substantial leverage in combating transnational crime emanating from Burma. In light of the most recent displays of junta violence against political demonstrators in September 2007, however, there are indications of increasing political interest in re-evaluating U.S. policy toward Burma. Among the considerations that policy makers have recently raised are (1) whether the United States should increase the amount of humanitarian aid sent to Burma; (2) what role ASEAN and other multilateral vehicles for dialogue could play in increasing political pressure on the junta regime; (3) what role the United States sees India, as the world's largest democracy and Burma's neighbor, playing in ensuring that Burma does not become a source of regional instability; and (4) how the United States can further work with China and Thailand, as the largest destinations of trafficked goods from Burma, to address transnational crime along Burma's borders.

Transnational organized crime groups in Burma (Myanmar) operate a multi-billion dollar criminal industry that stretches across Southeast Asia. Trafficked drugs, humans, wildlife, gems, timber, and other contraband flow through Burma, supporting the illicit demands of the region and beyond. Widespread collusion between traffickers and Burma's ruling military junta, the State Peace and Development Council (SPDC), allows organized crime groups to function with impunity. Transnational crime in Burma bears upon U.S. interests as it threatens regional security in Southeast Asia and bolsters a regime that fosters a culture of corruption and disrespect for the rule of law and human rights. Congress has been active in U.S. policy toward Burma for a variety of reasons, including combating Burma's transnational crime situation. At times, it has imposed sanctions on Burmese imports, suspended foreign assistance and loans, and ensured that U.S. funds remain out of the regime's reach. The 110th Congress passed P.L. 110-286, the Tom Lantos Block Burmese JADE Act of 2008 (signed by the President on July 29, 2008), which imposes further sanctions on SPDC officials and prohibits the indirect importation of Burmese gems, among other actions. On the same day, the President directed the U.S. Department of Treasury to impose financial sanctions against 10 Burmese companies, including companies involved in the gem-mining industry, pursuant to Executive Order 13464 of April 30, 2008. The second session of the 111th Congress may choose to conduct oversight of U.S. policy toward Burma, including the country's role in criminal activity. Secretary of State Hillary Clinton announced in February 2009 the beginning of a review of U.S.-Burma relations. In September 2009, the conclusions of this policy review were released, noting in particular the beginning of direct dialogue with Burmese authorities on international crime-related issues, including compliance with U.N. arms sanctions and counternarcotics. Already in the first session of the 111th Congress, both the Senate and the House have held hearings in which crime issues related to Burma have been addressed. This report analyzes the primary actors driving transnational crime in Burma, the forms of transnational crime occurring, and current U.S. policy in combating these crimes. This report will be updated as events warrant. For further analysis of U.S. policy to Burma, see CRS Report RL33479, Burma-U.S. Relations, by [author name scrubbed].

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Implementation of the Patient Protection and Affordable Care Act (Affordable Care Act, or ACA) is having a significan t impact on federal mandatory—also known as direct—spending. Most of the projected spending under the law is for expanding health insurance coverage. This includes premium tax credits and cost-sharing reduction payments for individuals and families who purchase private insurance coverage through the health insurance exchanges established under the ACA, as well as federal matching funds for states that choose to expand their Medicaid programs. The Internal Revenue Service (IRS) reports that spending on the premium tax credits and cost-sharing reductions totaled $79.2 billion for first three fiscal years (i.e., FY2014-FY2016) in which the ACA exchanges were operational. An analysis of preliminary data from the Medicaid Budget and Expenditure System (MBES) released by the Centers for Medicare and Medicaid Services (CMS) provides some insight into the initial impact of the Medicaid expansion on spending. For calendar year 2014, the 27 states that implemented the expansion reported spending a total of $36.7 billion on newly eligible adults, which under the ACA was paid for entirely with federal funds (i.e., 100% federal match). The same states spent an additional $10.5 billion on adults that were previously eligible at traditional federal match rates or subject to technical adjustments. Expenditures for these individuals were subject to a higher rate than the traditional match rate, but not 100%. In its March 2016 baseline budget projections, the Congressional Budget Office (CBO) estimates that gross spending on insurance coverage expansion under the ACA will total $1.938 trillion over the 10-year period FY2017 through FY2026. That total includes $866 billion on exchanges subsidies—premium tax credits and cost-sharing reductions—and related spending, and $1.063 trillion on Medicaid and the State Children's Health Insurance Program (CHIP). CBO projects that these costs will be offset by revenues from the ACA's taxes and fees, and by savings from the law's changes to the Medicare program that are designed to slow the rate of growth of Medicare payments to certain health care providers. The ACA also included numerous appropriations that are providing billions of dollars in mandatory funds to support new and existing grant programs and other activities. Several other provisions in the law require the Secretary of Health and Human Services (HHS) to transfer amounts from the Medicare Part A and Part B trust funds for specified purposes. This report summarizes all the mandatory appropriations and Medicare trust fund transfers in the ACA and provides details, where publicly available, on the status of obligation of these funds. The information is presented in two tables. The report also includes a brief discussion of the impact that sequestration is having on ACA mandatory spending. This report is periodically revised and updated to reflect important legislative and other developments. A companion CRS report discusses the ACA's impact on discretionary spending, which is controlled by the annual appropriations process. Discretionary spending under the ACA falls into two broad categories. First, there are the amounts provided in appropriations acts for specific grant and other programs pursuant to explicit authorizations of appropriations in the ACA. Second, there are the costs incurred by the federal agencies that are responsible for administering and enforcing the ACA's core provisions to expand insurance coverage. Table 2 summarizes all the ACA provisions that include an appropriation of funds or a transfer of amounts from the Medicare trust funds. The provisions are grouped under the following headings: (1) Private Health Insurance; (2) Medicaid and the State Children's Health Insurance Program (CHIP); (3) Medicare; (4) Fraud and Abuse; (5) Health Centers; (6) Health Workforce and the National Health Service Corps; (7) Community-Based Prevention and Wellness; (8) Maternal and Child Health; (9) Long-Term Care; (10) Comparative Effectiveness Research; (11) Biomedical Research; and (12) ACA Implementation: Administrative Expenses. Each table row provides information on a specific ACA provision, organized across four columns. The first column shows the ACA section or subsection number. The second column indicates whether the provision is freestanding (i.e., statutory authority that is not amending an existing statute) or amendatory (i.e., amends an existing statute, typically the Social Security Act). Amendatory provisions either add a new program to the statute or modify an existing one. The third column gives a brief description of the program or activity, including details of the appropriation or fund transfer. The entry also includes the name of the administering agency within HHS and, if applicable, the Catalog of Federal Domestic Assistance (CFDA) number for the grant program. The fourth column shows how much funding has been obligated to date. An agency incurs an obligation, for example, by placing an order, signing a contract, awarding a grant, purchasing a service, or taking other actions that require the government to make payments. The obligation amounts are based on information in the HHS Tracking Accountability in Government Grants System (TAGGS) unless specified otherwise. The TAGGS database is a central repository for grants awarded by all the HHS operating divisions (agencies) and several offices within the Office of the Secretary. It is updated daily with new data provided by these entities. In many instances the ACA provided annual appropriations of specified amounts for one or more fiscal years. Generally, these funds must be obligated during the fiscal year in which the funds become available for obligation. A few provisions are multiple-year appropriations , in which the amount appropriated is available for obligation for a period of time in excess of one fiscal year (e.g., for the period FY2011 through FY2014). Often the provision includes additional language stating that the funds are to remain available "until expended" or "without fiscal year limitation." Most ACA appropriations and fund transfers are temporary (i.e., time-limited). Often they end in FY2014 or FY2015, though in a handful of instances they extend until FY2019. The law included four provisions (i.e., Sections 3021(a), 3403, 10323(b), and 4002) that continue to provide annual or multiple-year appropriations in perpetuity. The ACA also included three indefinite appropriations that provide an unspecified amount of funding as indicated by the phrase "such sums as may be necessary," or SSAN. One such provision (i.e., Section 1311) appropriated SSAN and authorized the HHS Secretary to determine the specific amount necessary for the grant program. Table 3 provides additional details on each of the appropriations (and fund transfers) summarized in Table 2 . It shows the amount available for obligation in each fiscal year (or multi-year period) over the 10-year period FY2010 through FY2019. Note that the provisions are organized and grouped under the same headings used in Table 2 . The final column in Table 3 ("Total") shows for each provision the total amount of appropriations or fund transfers. Note that in several cases the total amount has yet to be determined (see table entries for Sections 1311, 3403, 6301(d) & (e), 9023(e), and 10323(a)). For three of the provisions that continue to provide funding beyond FY2019, the amount in the total column represents the cumulative amount appropriated through FY2019 (see table entries for Sections 3021(a), 4002, and 10323(b)). Unless otherwise stated, references to the Secretary in both tables refer to the HHS Secretary. A list of the federal laws, agencies, programs, and funds referred to in this report by their acronym is provided in Appendix A . As summarized in the tables, the ACA funded a broad range of new and existing programs. The law appropriated significant amounts to support the following short-term health care programs for targeted groups prior to the health insurance exchanges becoming operational in 2014: (1) $5 billion for the Pre-Existing Condition Insurance Plan (PCIP), a temporary insurance program that provided health insurance coverage for uninsured individuals with a pre-existing condition; (2) $5 billion for a temporary reinsurance program to reimburse employers for a portion of the costs of providing health benefits to early retirees aged 55-64; and (3) $6 billion for the Consumer Operated and Oriented Plan (CO-OP) program, to support temporary health insurance cooperatives. The ACA appropriated $2.4 billion for maternal and child health programs and provided an unspecified amount of funding for state grants to plan and establish health insurance exchanges. The law established the Center for Medicare and Medicaid Innovation (CMMI) within CMS and appropriated $10 billion for the FY2011-FY2019 period—and $10 billion for each subsequent 10-year period—for CMMI to test and implement innovative payment and service delivery models. It also established and funded an Independent Payment Advisory Board (IPAB) to make recommendations to Congress for achieving specific Medicare spending reductions if costs exceed a target growth rate. IPAB's recommendations are to take effect unless Congress overrides them, in which case Congress would be responsible for achieving the same level of savings. The ACA created four special funds and appropriated substantial amounts to each one: The Community Health Center Fund (CHCF) , to which the ACA appropriated a total of $11 billion in annual appropriations over the five-year period FY2011-FY2015, has helped support the federal health centers program and the National Health Service Corps (NHSC). (Note: A separate ACA appropriation provided $1.5 billion for health center construction and renovation.) Congress has since appropriated two additional years of funding for the CHCF (see below). While CHCF funding may have been intended to supplement annual discretionary appropriations for the health centers program and the NHSC, the funds have partially supplanted (i.e., replaced) discretionary health center funding and have become the sole source of funding for the NHSC program, which has not received an annual discretionary appropriation since FY2011. The Prevention and Public Health Fund (PPHF) , for which the ACA provided a permanent annual appropriation, is intended to support prevention, wellness, and other public health-related programs and activities authorized under the Public Health Service Act (PHSA). In two separate legislative actions, Congress has reduced the ACA's annual appropriation to the PPHF for each of FY2013 through FY2024 by a total of $9.75 billion. PPHF funds have been used to support several new discretionary grant programs authorized by the ACA. The funds are also supplementing, and in some cases supplanting, annual discretionary appropriations for a number of established programs, including ones that were reauthorized by the ACA. In FY2013, almost half of the PPHF funds were used to help pay for CMS's administrative costs associated with exchange operations. The Patient-Centered Outcomes Research Trust Fund (PCORTF) is supporting comparative effectiveness research with a mix of annual appropriations—some of which are offset by revenues from a fee imposed on private health plans—and transfers from the Medicare Part A and Part B trust funds through FY2019. The Health Insurance Reform Implementation Fund (HIRIF) , to which the ACA appropriated $1 billion, has helped cover the administrative costs of implementing the law. As already noted, most of the ACA appropriations are temporary. The following laws enacted since 2012 have extended funding for several programs funded by the ACA: American Taxpayer Relief Act of 2012 (ATRA); Pathway for SGR Reform Act of 2013 (PSGRRA); Protecting Access to Medicare Act of 2014 (PAMA); and Medicare Access and CHIP Reauthorization Act of 2015. Lawmakers opposed to specific ACA provisions also have succeeded in getting some ACA funding reduced or rescinded. ATRA, the Middle Class Tax Relief and Job Creation Act of 2012, the 21 st Century Cures Act, and enacted appropriations acts for each of the past six fiscal years (i.e., FY2011-FY2016) all included ACA funding reductions or rescissions. The ACA funding extensions, reductions, and rescissions are summarized in Table 2 and Table 3 . While the federal spending on insurance expansion coverage under the ACA is almost entirely exempt from annual sequestration, the ACA appropriations discussed in this report are, in general, fully sequestrable at the percentage rate applicable to nonexempt nondefense mandatory spending (see Table 1 ). Under the sequestration general rules, cuts in CHCF funding for community health centers and migrant health centers are capped at 2%. See Appendix B for more background on the annual spending reductions triggered by the Budget Control Act of 2011. Importantly, only new budget authority for nondefense programs is sequestrable in any given fiscal year. That includes advance appropriations that first become available for obligation in that year. Unobligated balances carried over from previous fiscal years are exempt from sequestration. Overall, the ACA provided more than $100 billion in mandatory appropriations and Medicare fund transfers over the 10-year period FY2010-FY2019. As enacted, the law included the following amounts: $40 billion for CHIP (FY2014 and FY2015); $15 billion for the PPHF through FY2019 (and $2 billion for each year thereafter); $11 billion for the CHCF; $10 billion for CMMI through FY2019 (and $10 billion for each 10-year period thereafter); $6 billion for the CO-OP program; $5 billion for PCIP; $5 billion for the Early Retiree Reinsurance program $4 billion (projected) for the PCORTF; $2.25 billion for the Medicaid Money Follows the Person (MFP) demonstration; and $1.5 billion for the maternal, infant, and early childhood visitation program. Only four of the ACA appropriations are permanent (i.e., CMMI, IPAB, PPHF, and environmental health screening). All the other appropriations were temporary. In a series of legislative actions (described in more detail in Table 2 and Table 3 ), Congress extended funding for several programs whose ACA appropriations were about to expire. The following programs are now funded through FY2017: health centers (CHCF funding); National Health Service Corps (CHCF funding); graduate medical education (GME) payments for teaching health centers; maternal, infant, and early childhood home visiting program; personal responsibility education program (PREP); health workforce demonstration programs; abstinence education grants; family-to-family health information centers; and outreach and assistance for low-income programs. Congress has also provided two more years of funding (FY2016-FY2017) for CHIP. Finally, Congress has partially reduced or rescinded ACA funding for IPAB, PPHF, and the CO-OP program. Appendix A. Acronyms Used in the Report The following laws, agencies, programs, and funds are referred to in this report by their acronym. Appendix B. Annual Spending Reductions Under the Budget Control Act The Budget Control Act of 2011 (BCA) amended the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) by establishing two budget enforcement mechanisms to reduce federal spending by at least $2.1 trillion over the 10-year period FY2012 through FY2021. First, the BCA established enforceable discretionary spending limits, or caps, for defense and nondefense spending for each of those years. Second, the BCA created a Joint Committee on Deficit Reduction to develop legislation to further limit federal spending. The failure of the Joint Committee to agree on deficit-reduction legislation triggered automatic annual spending reductions for each of FY2013 through FY2021. The BCA specified that a total of $109 billion must be cut each year from nonexempt budget accounts. That amount is equally divided between the categories of defense and nondefense spending. Within each category, the spending cuts are allocated proportionately to discretionary spending and nonexempt mandatory (i.e., direct) spending. Under the BCA, the spending reductions are achieved through two methods: (1) sequestration (i.e., an across-the-board cancellation of budgetary resources); and (2) lowering the BCA-imposed discretionary spending caps. The BCA requires that the mandatory spending reductions in each category—defense and nondefense—must be executed in each of FY2013 through FY2021 by a sequestration of all nonexempt accounts, subject to the BBEDCA sequestration rules. Discretionary spending in each category is also subject to sequestration, but only in FY2013. For each of the remaining fiscal years (i.e., FY2014 through FY2021), discretionary spending reductions are to be achieved by lowering the discretionary spending caps for defense and nondefense spending by the total dollar amount of the required reduction. Thus, congressional appropriators get to decide how to apportion the cuts within the lowered spending caps rather than having the cuts applied across-the-board to all nonexempt discretionary spending accounts through sequestration. The Office of Management and Budget (OMB) is responsible for calculating the percentages and amounts by which mandatory and discretionary spending are required to be reduced each year, and for applying the BBEDCA's sequestration exemptions and rules. Congress has amended the BCA several times since its enactment in 2011. The American Taxpayer Relief Act of 2012 (ATRA) revised the discretionary spending caps for FY2013 and FY2014 and reduced the overall dollar amount that needed to be sequestered from FY2013 mandatory defense and nondefense spending. The Bipartisan Budget Act of 2013 established new discretionary spending caps for FY2014 and FY2015 and eliminated the requirement for these caps to be lowered. It also extended the sequestration of mandatory spending in the defense and nondefense categories for two additional years—FY2022 and FY2023—and specified that the percentage reduction calculated for FY2021 be applied to both those years. A provision in a 2014 law on military retirement pay extended the sequestration of mandatory spending to include FY2024 and, again, specified that the percentage reduction calculated for FY2021 be applied to that additional year. The Bipartisan Budget Act of 2015 established new discretionary spending caps for FY2016 and FY2017 and eliminated the requirement for these caps to be lowered. It further extended the sequestration of mandatory spending to include FY2025, once again using the percentage reduction calculated for FY2021.

Implementation of the Patient Protection and Affordable Care Act (Affordable Care Act, or ACA) is having a significant impact on federal mandatory—also known as direct—spending. Most of the projected spending under the law is for expanding health insurance coverage. This spending includes premium tax credits and other subsidies for individuals and families that purchase private insurance coverage through the health insurance exchanges established under the ACA, as well as federal matching funds for states that have expanded their Medicaid programs. In addition, the ACA included numerous appropriations that have provided billions of dollars in mandatory funds to support new and existing grant programs and other activities. Other ACA provisions require the Secretary of Health and Human Services (HHS) to transfer amounts from the Medicare Part A and Part B trust funds for specified purposes. The law appropriated significant amounts to support short-term health care programs for targeted groups prior to the health insurance exchanges becoming operational in 2014. It also created a Center for Medicare and Medicaid Innovation (CMMI) within the Centers for Medicare and Medicaid Services (CMS) and appropriated $10 billion for the FY2011-FY2019 period—and $10 billion for each subsequent 10-year period—for CMMI to test and implement innovative payment and service delivery models. The ACA established four special funds and appropriated substantial amounts to each one. First, the Community Health Center Fund, to which the ACA appropriated a total of $11 billion over the five-year period FY2011-FY2015, has helped support the federal health centers program and the National Health Service Corps. Second, the Prevention and Public Health Fund, for which the ACA provided a permanent annual appropriation, is supporting prevention, wellness, and other programs authorized under the Public Health Service Act. Third, the Patient-Centered Outcomes Research Trust Fund is supporting comparative effectiveness research through FY2019 with a mix of annual appropriations, fees assessed on private health insurance, and Medicare trust fund transfers. Finally, the Health Insurance Reform Implementation Fund, to which the ACA appropriated $1 billion, helped pay for implementing the law. Overall, the ACA included more than $100 billion in appropriations over the 10-year period FY2010-FY2019, including $40 billion to fund the State Children's Health Insurance Program (CHIP) for FY2014 and FY2015. In subsequent legislative actions, Congress has extended funding through FY2017 for several programs whose ACA appropriations were about to expire, and reduced or rescinded ACA funding other some other activities. Federal outlays on insurance expansion coverage under the ACA, which constitutes most of the law's mandatory spending, are almost entirely exempt from sequestration. However, the mandatory appropriations in the ACA are, in general, fully sequestrable at the percentage rate applicable to nonexempt nondefense mandatory spending. Besides the mandatory appropriations discussed in this report, the ACA also is having an effect on federal discretionary spending, which is controlled by the annual appropriations acts. A companion report, CRS Report R41390, Discretionary Spending Under the Affordable Care Act (ACA), discusses the law's impact on discretionary spending.

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The increased presence of foreign students in graduate science and engineering programs and in the scientific workforce has been and continues to be of concern to some in the scientific community. Enrollment of U.S. citizens in graduate science and engineering programs has not kept pace with that of foreign students in those programs. In addition to the number of foreign students in graduate science and engineering programs, a significant number of university faculty in the scientific disciplines are foreign, and foreign doctorates are employed in large numbers by industry. Those in the scientific community, arguing for ceilings on admissions for immigrants, maintain that foreign students use U.S. graduate education programs as stepping stones to immigration through sponsorships for legal permanent residence. Approximately 56% of foreign doctorate degree earners on temporary visas remain in the United States, with many eventually becoming citizens. Data on adjustments from temporary visas to permanent status reveal that approximately 6 in 10 new permanent residents occurred in both 2007 and 2008 from adjustments of status admissions. In 2008, approximately 15.0% of those individuals awarded legal permanent resident status resulted from employment-based preferences. Few will dispute that U.S. universities and industry have chosen foreign talent to fill many positions. Foreign scientists and engineers serve the needs of industry at the doctorate level and also have been found to serve in major roles at the masters level. Not surprisingly, there are charges that U.S. workers are adversely affected by the entry of foreign scientists and engineers, who reportedly accept lower wages than U.S. citizens would accept in order to enter or remain in the United States. These arguments occur in the context of a debate on projections and potential imbalances in certain scientific and technical disciplines. The U.S. Bureau of Labor Statistics reports that between the years 2006 and 2016, employment in science and engineering fields will increase at a faster rate than other professional groups. The growth rate will result, primarily, from growth in mathematics and computer-related occupations. Much attention in the scientific community has focused on the H-1B temporary admissions program. A report of the National Science Foundation (NSF) during the late 1980s claiming a nationwide shortage of scientists and engineers may have contributed to the decision by Congress to expand the skilled-labor preference system contained in the Immigration Act of 1990. The 1990 legislation more than doubled employment-based immigration, including scientists and engineers entering under the H-1B visa category. The act raised the numerical limits or ceilings on permanent, employment-based admissions, from 54,000 to 140,000 annually. In addition, the legislation ascribed high priority to the entry of selected skilled and professional workers, and simplified admissions procedures for foreign nationals seeking to temporarily work, study, or conduct business in the United States. On October 17, 2000, the American Competitiveness in the Twenty-First Century Act of 2000 was signed into law ( P.L. 106 - 313 ), significantly changing the H-1B program and the employment-based immigration program. The legislation raised the annual number of H-1B visas to 195,000 for FY2001, FY2002, and FY2003, and returned to 65,000 in FY2004. It excluded from the new ceiling all H-1B nonimmigrants who are employed by institutions of higher education and nonprofit or governmental research organizations. The law authorized additional H-1B visas for FY1999 to offset the visas inadvertently approved for the year that exceeded the cap. In addition, the law increased the fees employers paid for each petition for nonimmigrant status—from $500 to $1,000 per petition. A portion of the fees were made available to the NSF for the development of private-public partnerships in K-12 education, the expansion of computer science, engineering, and mathematics scholarships, and the establishment of demonstration programs or projects that provide technical skills training for U.S. workers, both employed and unemployed. Signed into law on December 8, 2004, P.L. 108 - 447 , The Consolidated Appropriations Act, 2005, reauthorized H-1B funding. The fee employers pay for each petition was raised from $1,000 to $1,500 per petition. For employers with less than 25 full-time equivalent employees, the fee was set at $750 per petition. Also, the legislation created an additional 20,000 H-1B visas for FY2005, for those who had earned a masters degree or higher from a U.S. institution of higher education. The scientific community has been divided over proposals to impose stricter immigration limits on people with scientific and technical skills. Attempts to settle upon the balance between the needs for a highly skilled scientific and technical workforce, and the need to protect and ensure job opportunities, salaries, and working conditions of U.S. scientific personnel, will continue to be debated. This paper addresses these issues. The number of non-U.S. citizens enrolling in U.S. colleges and universities slowed following the September 11 th terrorist attacks. The slowing of enrollments has been attributed to, among other things, the tightening of U.S. visa policies and increased global competition for graduates in the scientific and technical disciplines from countries such as China, India, and Canada. However, a 2009 report of the Institute of International Education reveals that for the academic year 2008-2009, the number of foreign-born students (in all disciplines) increased by 8.0%, the largest recorded increase since 1980. The growth of students from China contributed significantly to the increase. In addition, new foreign student enrollment for 2008-2009 increased by approximately 16.0% from the previous academic year. The new enrollments are said to result from both recruitment efforts by U.S. institutions and recently improved visa processing for students. The international student enrollment changes are reflected differently by types of institutions, levels of study, and disciplines. There are noticeable differences by world region of origin in the flow of foreign students to the United States. India's students were 15.4% of the population for academic year 2008-2009. The other countries of origin of foreign students falling within the top ten were China (14.6%), South Korea (11.2%), Canada (4.4%), Japan (4.4%), Taiwan (4.2%), Mexico (2.2%), Turkey (2.0%), Vietnam, (1.9%), and Saudi Arabia (1.9%). The top ten fields of study for all foreign students were: business and management (20.6%), engineering (17.7%), physical and life sciences (9.2%), social sciences (8.5%), mathematics and computer sciences (8.4%), health professions (5.2%), fine and applied arts (5.2%), intensive English language (4.2%), humanities (2.9%), education (2.7%), and agriculture (1.3%). NSF data reveal that in 2006, the foreign student population earned approximately 36.2% of the doctorate degrees in the sciences and approximately 63.6% of the doctorate degrees in engineering. In 2006, foreign students on temporary resident visas earned 32.0% of the doctorates in the sciences, and 58.6% of the doctorates in engineering. (See Figure 1 .) The participation rates in 2005 were 30.8% and 58.4%, respectively. In 2006, permanent resident status students earned 4.2% of the doctorates in both the sciences and engineering, a slight change from the 2005 levels of 3.8% in the sciences and 4.4% in engineering. Trend data for science and engineering degrees for the years 1996-2005 reveal that of the non-U.S. citizen population, temporary resident status students consistently have earned the majority of the doctorate degrees. (See Table 1 and Table 2 .) Disaggregated data for the subfields of science provide a detailed picture of degree recipients by U.S. citizenship and non-U.S. citizenship status. In 2006, foreign students (temporary and permanent resident status) were awarded 47.9% of the doctorates in the physical sciences, an increase from the 46.2% awarded in 2005. In mathematics, 55.3% of the doctorates were awarded to foreign students in 2006, a slight increase from the 55.1% awarded in 2005. For the computer sciences, 61.3% were awarded to foreign students, an increase above the 2005 level of 58.8%. The earth, atmospheric, and ocean sciences and the agricultural and biological sciences awarded 35.4% and 33.6% of the degrees respectively to foreign-born students in 2006, compared to the 2005 levels of 35.7% and 32.1%. In the social sciences and psychology, 24.6% of the doctorates were awarded to foreign students in 2006, almost level with the 24.5% awarded in 2005. The NSF provides specific data on the country of origin of foreign-born science and engineering doctorate awards. Data for 2006 reveal that of the earned doctorate degree holders (non-U.S. citizens), 33.5% were from China, 11.9% were from India, 3.4% were from Taiwan, 2.8% from Canada, 3.4% from Africa, 2.8% from Turkey, 1.7% from Japan, and 1.4% from Germany. See Figure 2 for additional disaggregated data on doctorate degrees awarded to non-U.S. citizens by country of origin. Certain restrictions have been placed on foreign students with temporary resident student status who are enrolled in graduate programs in U.S. institutions. Foreign graduate students are required to be full-time students, and are prohibited, due to visa restrictions, from seeking employment. While they are prohibited also from obtaining most fellowships, traineeships or federally guaranteed loans, they are able to be employed as research assistants or teaching assistants on federally funded research projects. Foreign and U.S. science and engineering graduate students receive financial support from many resources—personal, university (primarily through teaching assistantships, research assistantships/traineeships, fellowships/dissertation grants) , foreign government, employer, and other. Many foreign students receive support from their home country, though it is generally limited to the first year of study. For the continuing years, the university usually provides support mostly in the form of research assistantships or teaching assistantships. While temporary resident foreign students are ineligible for direct federal aid, the university support provided to them through research assistantships and teaching assistantships often results from federally funded research grants awarded to their home institution. The 2007 report, Doctorate Recipients from United States Universities: Summary Report 2006 , reveals that institutions of higher education provide a significant amount of support, primarily through teaching assistantships, research assistantships/traineeships, and fellowships/dissertation grants, to foreign students on temporary and permanent resident visas. In all fields, a greater percentage of non-U.S. citizen doctoral recipients receive financial assistance from universities than do U.S. doctoral recipients. (See Table 3 for primary sources of financial support.) A disaggregation of the data by race/ethnicity reveal that 40.6% of Native Americans/Alaska Natives doctoral students relieved on their own resources to finance their graduate studies, followed by blacks at 38.8%, whites, at 30.1%, Hispanics, at 30.7%, and Asians, at 16.9%. In the physical sciences, which include mathematics, computer and information sciences, universities provided the primary support for 84.6% of temporary resident students, 73.1% for permanent residents, and 58.8% for U.S. citizens. In engineering, 84.8% of temporary resident students received primary financial support from universities, as did 63.9% of permanent resident students, and 42.8% of U.S. citizen doctoral students. Even in those disciplines where foreign students do not participate with any degree of frequency (i.e., education and the social sciences), larger percentages of foreign doctoral students on temporary and permanent resident visas obtained their primary financial assistance from universities than did comparable U.S. students. In the field of education, 43.6% of temporary resident doctoral students received their primary financial support from universities; for permanent resident students, 41.5%, and for U.S. citizens, 13.4%. In the social sciences, universities provided financial support to 54.0% of temporary resident doctoral students, 43.9% for permanent residents, and 35.7% for U.S. citizens. There are divergent views in the scientific and academic community about the effects of a measurable foreign student presence in graduate science and engineering programs. Some argue that U.S. universities benefit from a large foreign citizen enrollment by helping to meet the needs of the university and, for those students who remain in the United States, the nation's economy. Foreign students generate three distinct types of measurable costs and benefits. First, 13 percent of foreign students remain in the United States, permanently increasing the number of skilled workers in the labor force. Second, foreign students, while enrolled in schools, are an important part of the workforce at those institutions, particularly at large research universities. They help teach large undergraduate classes, provide research assistance to the faculty, and make up an important fraction of the bench workers in scientific labs. Finally, many foreign students pay tuition, and those revenues may be an important source of income for educational institutions. The noticeable participation of foreign students in graduate programs has generated critical responses by many in the minority community. Blacks, Hispanics, and Native Americans, historically underrepresented in the science and engineering fields, contend that disparity exists in the university science community with respect to foreign students. It is charged that there is not equal access for U.S. minorities to graduate education, receipt of scholarships, promotion to higher ranks, receipt of research funds, access to outstanding research collaborators, and coauthorship of papers and other outlets for scientific publications. Frank L. Morris, former professor, University of Texas, charged that colleges and universities employ exclusionary mechanisms. Rather than supporting minority graduate students, institutions provided the majority of their resources to departments that have admitted foreign students. In testimony before the Subcommittee on Immigration and Claims, Morris stated that: The generous immigration policy coupled with the much better and disproportionate and much better subsidy out of U.S. taxpayer funds of foreign doctoral student over all American minority students and especially much better than the support given to African American doctoral students.... This has created a situation that place the economic well being of the African American community in jeopardy because we have received inadequate doctoral training to prepare for or compete in an increasing information and higher order scientifically technologically driven current and future U.S. economy. Another criticism noted by some is that foreign student teaching assistants do not communicate well with American students. Language as a barrier has been a perennial problem for some foreign students. There are charges that the "accented English" of the foreign teaching assistants affects the learning process. A large number of graduate schools require foreign teaching assistants to demonstrate their proficiency in English, but problems remain. Several states have passed legislation setting English-language standards for foreign students serving as teaching assistants. Some academics and scientists do not view scientific migration as a problem, but as a net gain. These proponents believe that the international flow of knowledge and personnel has enabled the U.S. economy to remain at the cutting-edge of science and technology. A 2005 report of the National Academies states that: The participation of international graduate students and postdoctoral scholars is an important part of the research enterprise of the United States. In some fields they make up more than half the populations of graduate students and postdoctoral scholars. If their presence were substantially diminished, important research and teaching activities in academe, industry, and federal laboratories would be curtailed, particularly if universities did not give more attention to recruiting and retaining domestic students. During the 1980s, the number of immigrant scientists and engineering entering the United States remained somewhat stable (12,000), registering only slight annual increases. In 1992, there was a marked increase in the admissions of scientists and engineering, fueled primarily by the changes in the Immigration Act of 1990 that allowed significant increases in employment-based quotas of H-1B visas. By 1993, the number of scientists and engineers on permanent visas increased to 23,534. The numbers were increased further as a result of the Chinese Students Protection Act of 1992. The proportion of foreign born scientists and engineers in the U.S. labor force reached a record in 2000, revealing high levels of entry by holders of permanent and temporary visas during the 1990s. The issuance of permanent visas in the past few years has been impacted by administrative changes at the U.S. Citizenship and Immigration Services (USCIS), changes in immigration legislation, and any impact of September 11 th . Foreign scientists and engineers on temporary work visas have generated considerable discussion. As previously stated, recent legislation has increased the annual quota for the H-1B program in which foreign-born workers can obtain visas to work in an occupation for up to six years. The H-1B program, generally, is thought of as an entry for technology workers, but it is used also to hire other skilled workers. A report of the NSF notes that "An H-1B visa is sometimes used to fill a position not considered temporary, for a company may view an H-1B visa as the only way to employ workers waiting long periods for a permanent visa." Data on selected occupations for which companies have been given permission to hire H-1B visa workers are contained in Table 4 . Some argue that the influx of immigrant scientists and engineers has resulted in depressed job opportunities, lowered wages, and declining working conditions for U.S. scientific personnel. While many businesses, especially high-tech companies, have recently downsized, the federal government issued thousands of H-1B visas to foreign workers. There are those in the scientific and technical community who contend that an over-reliance on H-1B visa workers to fill high-tech positions has weakened opportunities for the U.S. workforce. Many U.S. workers argue that a number of the available positions are being filled by foreign labor hired at lower salaries. Those critical of the influx of immigrant scientists have advocated placing restrictions on the hiring of foreign skilled employees in addition to enforcing the existing laws designed to protect workers. Those in support of the H-1B program maintain that there is no "clear evidence" that foreign workers displace U.S. workers in comparable positions and that it is necessary to hire foreign workers to fill needed positions, even during periods of slow economic growth. A September 2006 report of the Government Accountability Office (GAO), H-1B Visa Program: More Oversight by Labor Can Improve Compliance with Program Requirements, states that: Labor's review of employers' H-1B applications is limited by law to identifying omissions and obvious inaccuracies, but we found it does not consistently identify all obvious inaccuracies. ...Labor's Wage and Hour Division (WHD) enforces H-1B program requirements by investigating complaints made against H-1B employers and recently began random investigations of previous program violators. From fiscal year 2000 through fiscal year 2005, complaints and violations increased but changes in the program, such as temporary increases in visa caps, may have been a factor.... However, USCIS does not have a formal mechanism to report such information to Labor, and current law precludes WHD from using this information to initiate an investigation of an employer. Justice pursues charges filed by U.S. workers alleging they were not hired or were displaced so that an H-1B worker could be hired instead, but it has not found discriminatory conduct in most cases. The maturing of the computer industry has wrought its own set of problems relative to employment of foreign scientists and engineers. There are some who contend that the salary of the foreign-born computer professionals working in the United States is lower than that of their U.S. counterparts who are the same age and educational level. Others charge that the hiring of H-1B workers "undermines the status and bargaining position of U.S. workers." The Department of Labor (DOL) has sought to enforce the existing policies on temporary employment of nonimmigrant foreign workers under H-1B visas, and to penalize those employers who are found to be in violation. Many in the scientific community maintain that in order to compete with countries that are rapidly expanding their scientific and technological capabilities, the United States needs to bring in those whose skills will benefit society and will enable us to compete in the new-technology-based global economy. Individuals supporting this position do believe that the conditions under which foreign talent enters U.S. colleges and universities and the labor force should be monitored more carefully. And there are those who contend that the underlying concern of foreign students in graduate science and engineering programs is not necessarily that there are too many foreign-born students, but that there are not enough native-born students entering the scientific and technical disciplines. A May 2010 report of the National Science Board states that: Attracting and retaining foreign-born talent remains an essential pillar of our Nation's STEM [science, technology, engineering, and mathematics] enterprise. As global demand for STEM talent surges, we cannot reliably expect that the best and brightest from abroad will remain in the United States and continue to be a sufficient source of talent. It is essential that we develop our own domestic human capital as well. Ideally, foreign talent should augment a robust domestic STEM talent pipeline, not compensate for its deficiencies. The debate on the presence of foreign students in graduate science and engineering programs and the workforce intensified following the terrorist attacks of September 11, 2001. It has been reported that foreign students in the United States are encountering "a progressively more inhospitable environment." A June 2006 report of the Association of International Educators, Restoring U.S. Competitiveness for International Students and Scholars , states that " ... [F]or the first time, the United States seems to be losing its status as the destination of choice for international students." Concerns have been expressed about certain foreign students receiving education and training in sensitive areas. There has been increased discussion about the access of foreign scientists and engineers to research and development (R&D) related to chemical and biological weapons. Also, there is discussion of the added scrutiny of foreign students from countries that sponsor terrorism. The academic community is concerned that the more stringent requirements of foreign students may have a continued impact on enrollments in colleges and universities. Others contend that a possible reduction in the immigration of foreign scientists may affect negatively on the competitiveness of U.S. industry and compromise commitments made in long-standing international cooperative agreements. The issue of tracking foreign students attending U.S. institutions has generated particular debate in the academic and scientific community following the September 11 th terrorist attacks. Prior to September 11 th , the Illegal Immigration Reform and Immigrant Responsibility Act ( P.L. 104 - 208 ) authorized the Student and Exchange Visa Program/Coordinated Interagency Partnership Regulating International Students (SEVP/CIPRIS). This electronic information reporting system for tracking foreign students and researchers was to replace the existing paper-based format. The legislation required colleges and universities to monitor and compile data on foreign students attending their respective institutions in such areas as date of enrollment/reporting, field of study, credits earned, and source of financial support for the student. The information was to be provided to the INS by the colleges and universities. However, the system was never fully implemented, primarily because institutions described it as being too costly, an "unnecessary burden on colleges and universities," and "an unreasonable barrier to foreign students." The USA Patriot Act ( P.L. 107 - 56 ) and the Enhanced Border Security and Visa Entry Reform Act ( P.L. 107 - 173 ) revised and enhanced the process for collecting and monitoring data on foreign students and researchers in U.S. institutions. In response to the legislation, the INS developed the Student and Exchange Visitor Information System (SEVIS). SEVIS, a web-based system, was designed to maintain current information on foreign students and exchange visitors in order to ensure that they arrive in the United States, register at the institution or predetermined exchange program, and properly maintain their visa status during their stay. Congress directed the then INS to have the tracking system in operation by January 30, 2003. The deadline for implementation of SEVIS was extended to February 15, 2003. However, SEVIS experienced considerable problems and created excessive delays in processing visa applications. The more rigorous screening of visa applicants was one factor contributing to the delays. The existing problems with SEVIS are described as being primarily those relating to technical matters and personnel costs. Currently, there is a proposal to implement a second-generation system, SEVIS II, that would expand the capabilities of the current tracking system and address any reported technical difficulties or security issues. On September 13, 2005, the House Subcommittee on National Security, Emerging Threats, and International Relations held a hearing to examine the procedures put in place to correct the gaps and vulnerabilities in the visa process. Attention was directed at the mechanisms that are necessary to strengthen the visa process as an antiterrorism tool while simultaneously facilitating legitimate travel by foreign students, scientists, researchers, and others in the United States. Witnesses testified that consular workloads had increased significantly, yet the visa-processing offices continued to lack strategic direction, adequate resources, and training. In addition, reliable data were not readily available, across and among departments and agencies, to determine security and visa fraud related issues and overall increased visa wait times. Witnesses stated that because visa policies and requirements are ongoing and can change quickly, clear procedures on visa issuance and monitoring operations worldwide are necessary to guarantee that visas are adjudicated in a consistent manner at each visa-issuing post. The Government Accountability Office (GAO) has released several reports detailing the efforts and the improvements that have been made in the visa processing. Other reports of the GAO assessed agencies' progress in implementing recommended changes in visa operations. An April 4, 2006 report— Border Security, Reassessment of Consular Requirements Could Help Address Visa Delays, stated that while steps have been taken to improve the visa application system, additional issues required immediate attention. The recommendations included clarifying visa policies and procedures in order to facilitate their implementation, and ensuring that consular officers have access to the needed tools to improve national security and promote legitimate travel. Comprehensive immigration reform legislation was debated and under consideration during the beginning of the 110 th Congress. Those attempts at reform failed and comprehensive reform legislation was not revisited. Comprehensive federal immigration reform has been reintroduced in the 111 th Congress. H.R. 4321 , Comprehensive Immigration Reform for America's Security and Prosperity Act, would, among other things, exempt specified categories of U.S.-educated immigrants from employment-based immigration limits. The bill would also amend H-1B visa employer application requirements by lengthening U.S. worker displacement protection and prohibiting employer position announcements that specify positions solely to, or that gives priority to, H-1B immigrants. In addition, bills have been introduced in the 111 th Congress that are directed at attracting foreign students in the scientific and technical disciplines while maintaining the interests of American scientists. H.R. 1736 , International Science and Technology Cooperation Act, would, among other things, address the various issues that impact the ability of U.S. scientists and engineers to collaborate with foreign counterparts. S. 887 , H-1B and L-1 Visa Reform Act, would amend H-1B employer requirements by limiting the number of H-1B and L-1 employees that an employer of 50 or more workers in the United States may hire. The bill would also direct the DOL to conduct annual audits of businesses with large numbers of H-1B workers. H.R. 1791 , Stopping Trained in America Ph.D.s from Leaving the Economy Act (STAPLE), would direct numerical limitations on immigrants who have been awarded a doctorate degree in the scientific disciplines from a U.S. institution and who have an offer of employment from a U.S. employer in a degree-related field. In addition, the bill would provide H-1B visa numerical limitations on immigrants who have earned a doctorate in a scientific discipline and with respect to a petitioning employer, requires that education as a condition of employment.

The increased presence of foreign students in graduate science and engineering programs and in the scientific workforce has been and continues to be of concern to some in the scientific community. Enrollment of U.S. citizens in graduate science and engineering programs has not kept pace with that of foreign students in those programs. In addition to the number of foreign students in graduate science and engineering programs, a significant number of university faculty in the scientific disciplines are foreign, and foreign doctorates are employed in large numbers by industry. Few will dispute that U.S. universities and industry have chosen foreign talent to fill many positions. Foreign scientists and engineers serve the needs of industry at the doctorate level and also have been found to serve in major roles at the masters level. However, there are charges that U.S. workers are adversely affected by the entry of foreign scientists and engineers, who reportedly accept lower wages than U.S. citizens would accept in order to enter or remain in the United States. NSF data reveal that in 2006, the foreign student population earned approximately 36.2% of the doctorate degrees in the sciences and approximately 63.6% of the doctorate degrees in engineering. In 2006, foreign students on temporary resident visas earned 32.0% of the doctorates in the sciences, and 58.6% of the doctorates in engineering. The participation rates in 2005 were 30.8% and 58.4%, respectively. In 2006, permanent resident status students earned 4.2% of the doctorates in both the sciences and in engineering, a slight change from the 2005 levels of 3.8% in the sciences and 4.4% in engineering. Many in the scientific community maintain that in order to compete with countries that are rapidly expanding their scientific and technological capabilities, the country needs to bring to the United States those whose skills will benefit society and will enable us to compete in the new-technology based global economy. The academic community is concerned that the more stringent visa requirements for foreign students may have a continued impact on enrollments in colleges and universities. There are those who believe that the underlying problem of foreign students in graduate science and engineering programs is not necessarily that there are too many foreign-born students, but that there are not enough native-born students pursuing scientific and technical disciplines. Legislation has been introduced in the 111th Congress to attract foreign students in the scientific and technical disciplines and to maintain the interests of American scientists. H.R. 4321, Comprehensive Immigration Reform for America's Security and Prosperity Act, would, among other things, amend H-1B visa employer application requirements by lengthening U.S. worker protection and prohibiting employer position announcements that specify positions solely to, or give priority to, H-1B visa holders. H.R. 1791, Stopping Trained in America Ph.D.s from Leaving the Economy Act (STAPLE), would place numerical limitations on immigrants who have been awarded a doctorate degree in the scientific disciplines from a U.S. institution and who have an offer of employment from a U.S. employer in a degree-related field.

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Funding for the U.S. Department of Energy (DOE), including the Office of Energy Efficiency and Renewable Energy (EERE), is provided in the annual Energy and Water Development (E&W) Appropriations bill. EERE supports renewable energy and end-use energy efficiency technology research, development, and implementation. The funding level Congress decides to provide for FY2018 could impact goals set by EERE and priorities identified in the Administration's FY2018 budget request. President Trump submitted his FY2018 budget request to Congress on May 23, 2017. The budget requests $28.2 billion for DOE, a decrease of nearly $3 billion, or 9.5%, from the FY2017 enacted level. Nearly half of the reduction ($1.5 billion) in the DOE budget request would come from EERE programs. The request specifies two EERE program eliminations: the Weatherization Assistance Program and the State Energy Program. The funding level Congress provides could affect continued support for these programs and other efforts within EERE including sustainable transportation, renewable energy, and energy efficiency. This report discusses the FY2018 EERE budget request and the proposed EERE funding levels and priorities in the related E&W appropriations bills. It does not discuss the opportunities, challenges, economic value, or commercial status of the various renewable energy technologies and energy efficiency initiatives selected by EERE, nor does it delve into the goals of the individual EERE programs or congressional oversight of certain EERE issues. EERE leads the DOE's effort to support research, accelerate development, and facilitate deployment of energy efficiency and renewable energy technologies. EERE is led by the Assistant Secretary for Energy Efficiency and Renewable Energy, and it is organized into four offices: Office of Transportation, Office of Renewable Power, Office of Energy Efficiency, and Office of Operations. EERE contends that it invests in what it considers to be the highest-impact activities. The office collaborates with industry, academia, national laboratories, and others to develop technology-specific road maps and then focuses funding on early stage research and development (R&D), technology validation and risk-reduction activities, and the reduction of barriers to the adoption of market-ready new technologies. EERE also manages a portfolio of research and development programs that support state and local governments, tribes, and schools. In addition, EERE oversees the National Renewable Energy Laboratory (NREL)—the only national laboratory solely dedicated to researching and developing renewable energy and energy efficiency technologies. EERE funding is provided from the annual E&W appropriations bill. During the last several years of the Obama Administration, the budget request sought to increase funding to support EERE programs and objectives. Congress provided funding at levels lower than the request. Appropriations for EERE have averaged $2.0 billion annually for the last three years in current dollars (see Table 1 ). DOE categorizes EERE funding into four major categories: sustainable transportation, energy efficiency, renewable energy, and corporate support (e.g., program administration). From FY2015 to FY2017, approximately 30% of EERE appropriations supported sustainable transportation, 35% went to energy efficiency, 23% went to renewable energy, and 12% went to corporate support. President Trump submitted his FY2018 budget request to Congress on May 23, 2017. The budget requests $28.2 billion for DOE, a decrease of nearly $3 billion, or 9.5%, from the FY2017 enacted level. Nearly half of the reduction ($1.45 billion) in the DOE budget request comes from EERE programs. The EERE request of $636 million is a nearly 70% decrease from FY2017. According to the budget request, funding for EERE would focus on "early-stage R&D, where the Federal role is critically important, and reflects an increased reliance on the private sector to fund later-stage research, development, and commercialization of energy technologies." For FY2018, the bulk of the EERE request would be split among three areas: about 29% for sustainable transportation programs, 25% for energy efficiency programs, and 21% for renewable energy programs. Under the request, funding for both the Office of Sustainable Transportation and Office of Renewable Power would decrease by 70% from FY2017 enacted levels. The Office of Energy Efficiency would see funding decrease by 79% from FY2017 enacted levels, and funding for corporate support would decrease by 18%. The budget request specifies two EERE program eliminations: the Weatherization Assistance Program and the State Energy Program, which received FY2017 appropriations of $225 million and $50.0 million, respectively. The request would reduce EERE funded full-time equivalents (FTE) by approximately 30%. Some of the goals, highlights, and major changes presented in the EERE FY2018 request, as reported by DOE, are discussed below. The Administration's request for the Office of Sustainable Transportation is $184 million for FY2018, $429 million (70.0%) less than the FY2017 enacted level of $613 million. Sustainable transportation includes vehicle technologies, bioenergy technologies, and hydrogen and fuel cell technologies. Research priorities for FY2018 in vehicle technologies include the following: Explore new battery chemistry and cell technologies to reduce the cost of electric vehicle batteries by more than 50% (the ultimate goal is $80/kWh with a near-term goal of $125/kWh by 2022), to increase range to 300 miles, and to decrease charge time to 15 minutes or less. [$36.3 million] Improve understanding of combustion processes to support industry development of next generation engines and fuels to improve passenger vehicle fuel economy by 50% from a 2009 baseline. [$22.0 million] Create modeling, simulations, and high-performance computing-enabled data analytics to contribute to the energy efficiency of automobiles, trucks, and other vehicles building upon the prior-year Transportation as a System initiative. [$12.2 million] Continue to support advanced materials research to enable lightweight, multi-material structures that could reduce light-duty vehicle weight by 25% as compared to a 2012 baseline. [$7.5 million] According to the request, activities identified as later-stage development or a lower priority would be terminated. These include but are not limited to electric drive technologies R&D, advanced electrode processing research for lithium ion batteries, SuperTruck II, advanced vehicle testing and evaluation (AVTE), work to optimize vehicle powertrains, engine enabling technologies, particulate emissions control/after-treatment, lubricant R&D, reactivity controlled compression ignition, advanced high-strength steel, safety statistics, vehicle technologies deployment (including Clean Cities coalitions and Alternative Community Partner projects), and advanced vehicle competitions. Research priorities for bioenergy technologies in the FY2018 request include the following: Develop a fundamental understanding of feedstock preprocessing and the deconstruction of polymers within biomass to improve downstream conversion efficiency and throughput. [$6 million] Develop new advanced algal strains, approaches to culture management, and methods of crop protection. [$5 million] Support R&D in synthetic biology through the Agile BioFoundry and in new catalysts through the Chemical Catalysis for Bioenergy (ChemCatBio) consortium. [$34.6 million] Collaborate with the Vehicle Technologies Program on the co-optimization of fuels and engines to develop bio-based fuels/additives to enable 15-20% fuel economy gain beyond projected results of existing R&D efforts. [$6 million] Analyze pathways and strategies to achieve $2 per gallon gasoline-equivalent (gge) and conduct sustainability research. [$5 million] The proposed reduction in funding would include the termination of later-stage bioenergy R&D activities including, but not limited to, pilot-scale and demonstration-scale projects. Priorities for FY2018 hydrogen and fuel cell technologies research include the following: Support fuel cell R&D in catalysts, membranes, performance, and durability. Conduct proof-of-concept testing and technical analysis coupled with high-performance modeling to enable development of platinum group metal-free (PGM-free) catalysts and electrodes. [$15 million] Focus on applied materials research and early-stage component and process development for hydrogen production, delivery, and storage. [$29 million] Identify key areas for prioritization by assessing R&D gaps, planning, budgeting, and identifying synergies with other energy sectors such as natural gas and nuclear. [$1 million] The FY2018 request for hydrogen and fuel cell technologies would discontinue or reduce later-stage and lower-priority research in several areas including but not limited to low-PGM catalysts, balance of plant, low-cost 700 bar composite tanks, storage balance of plant components, cryo-compressed on-board hydrogen storage R&D, measurement of program impacts and return on investment, infrastructure financing analysis, and codes and standards support. The Administration's request for the Office of Renewable Energy is $134.3 million for FY2018, $317 million (70.2%) less than the FY2017 enacted level of $451 million. Renewable energy includes solar energy, wind energy, water power, and geothermal technologies. Research priorities in the FY2018 request for solar energy include the following: Address the challenges of higher levels of grid integration and focus on tools and technologies to measure, analyze, predict, protect, and manage the impacts of solar generation on the grid. [$18 million] Support research to better understand high temperature component design for higher efficiencies. Investigate advanced diffusion-bonded heat exchangers and new concepts for collecting and harvesting light. [$8 million] Support 2030 SunShot target through research on emerging photovoltaic technologies and physics and materials science to improve microelectronics reliability, performance, and durability. [$43.7 million] The FY2018 request for solar energy would discontinue funding for the Balance of Systems Soft Cost Reduction subprogram and Innovations in Manufacturing Competitiveness subprogram. Priorities for FY2018 wind energy research include the following: Continue to support the Atmosphere to Electrons (A2e) initiative to develop modeling and simulation capabilities that enable performance optimization of wind plants. Address R&D challenges to the design and manufacture of low-specific power rotors. [$26.7 million] Continue research to improve wind energy grid integration and develop and evaluate technology solutions to inform processes to address deployment issues such as radar interference. [$3.8 million] Refocus modeling and analysis on evaluation of early-stage, transformative science and technology opportunities. [$1.2 million] The FY2018 request for wind energy would discontinue funding for later-stage R&D including the technology validation and market transformation subprogram and wind plant performance benchmarking. Research priorities for water power in FY2018 include the following: Support early-stage research in modular hydropower systems, hydropower grid reliability services, and novel hydropower turbines. [$11.7 million] Develop tools to model and evaluate control strategies for marine hydrokinetic (MHK) and test full sensor-based control algorithms in a wave tank setting. Develop instrumentation for environmental monitoring instruments for harsh marine environments. [$8.8 million] The FY2018 request for water power would discontinue funding for later-stage development and testing of MHK systems and components and research on the environmental impacts of MHK technologies. Priorities in the FY2018 request for geothermal technologies include the following: Support research in the enhanced geothermal system (EGS) in the fundamental relationships between seismicity, stress state, and permeability, and the validation and verification of thermal hydro mechanical chemical models. These concepts would be directly applied at the Frontier Observatory for Research in Geothermal Energy (FORGE) EGS field laboratory. [$5.4 million] Conclude final year of three-year hydrothermal effort at three national laboratories targeting research on microhole drilling applications, self-healing cements, and subsurface imaging. Support R&D in waterless stimulation to reduce impact of geothermal development in water-limited areas. [$6 million] Continue to support data collection and dissemination including input into the Geothermal Electricity Technology Evaluation Model (GETEM), deployment of a node on the National Geothermal Data System (NGDS) for researchers, and deployment of integrated hydrothermal datasets into the NGDS to reduce time and cost of determining geothermal potential. [$1 million] The FY2018 request for geothermal technologies would discontinue funding for later-stage R&D in the EGS topics of advanced stimulation, zonal isolation, and fracture propping tools; the hydrothermal topics of wellbore integrity, subsurface stress and induced seismicity, and new subsurface signals; and all low-temperature and co-produced resource topics. The Administration's request for the Office of Energy Efficiency is $159.5 million for FY2018, $602 million (79%) less than the FY2017 enacted level of $762 million). Energy Efficiency includes advanced manufacturing, the federal energy management program, building technologies, and the weatherization and intergovernmental programs. Priorities for FY2018 for advanced manufacturing include the following: Support advanced manufacturing R&D for energy applications in high-impact foundational technology areas. Prioritize high-performance computing for manufacturing. [$41 million] Support the manufacturing demonstration facility (MDF) and the Carbon Fiber Test Facility (CFTF). Additional support would focus on early stage applied research to address challenges in key technical areas for semiconductors and manufacturing cybersecurity. [$27.5 million] Continue to engage with the private sector to ensure that technical knowledge and results from R&D are effectively transferred to the private sector for further development or commercialization. [$13.5 million] The request does not include funds for the Critical Materials Hub, Clean Water Hub, the five Clean Energy Manufacturing Innovation Institutes in the National Network for Manufacturing Innovation (NNMI) program, or the Industrial Assessment Centers (IACs). The request notes that these hubs and institutes previously supported later-stage demonstration and deployment activities. Prior year balances would be used to wind down and terminate existing institutes. The federal energy management program would focus on the following: Continue to support federal agencies in meeting statutory energy and water management related goals and requirements and focus on reducing government operating costs. [$10 million] The request would not support the Federal Energy Efficiency Fund/AFFECT subprogram, which previously provided grants to federal agencies to meet energy management requirements. The request for building technologies would focus on the following priorities in FY2018: Support building energy R&D priorities such as cyber-physical systems for buildings-to-grid R&D and solid state cooling and non-vapor compression solutions for HVAC and refrigeration. Refocus on early-stage R&D for solid state lighting, building envelope, and building energy modeling. Continue to support fulfillment of U.S.-China Clean Energy Research Center. [$29.5 million] Refocus commercial and residential buildings integration on early-stage R&D with emphasis on connected, efficient, and secure building systems and advanced construction and retrofit design principles. [$12 million] Limit energy conservation standard compliance activities to the minimum to maintain compliance with statute. [$26 million] The request would not support late-stage R&D. This includes but is not limited to eliminations of funding for technology application R&D for solid-state lighting; cooperative research and development agreements (CRADAs) for heating, ventilation, air conditioning, and refrigeration; demonstration and deployment of transactive controls at the campus- and neighborhood-level; early adoption efforts for high impact technologies; commercial buildings funding opportunity announcements; and research evaluating linkages between energy efficiency and building financial performance metrics. Energy Star efforts that would be eliminated include Home Performance with Energy Star, test procedure development, and performance verification. The Administration's budget for FY2018 requests no funding for the Weatherization and Intergovernmental Programs that partner with state and local organizations to facilitate investments in states' energy priorities. The House Appropriations Committee reported its version of the FY2018 Energy and Water Development Appropriations bill with a manager's amendment by voice vote on July 12, 2017. The bill would provide funding for EERE of $1.1 billion—$1.0 billion below FY2017 and $449 million above the Administration request ( H.R. 3266 ). H.R. 3266 was incorporated as Division D of H.R. 3219 , the Defense, Military Construction, Veterans Affairs, Legislative Branch, and Energy and Water Development National Security Appropriations Act, 2018 (also referred to as the Make America Secure Appropriations Act, 2018). The House passed H.R. 3219 on July 27, 2017. H.R. 3219 was received in the Senate on July 31, 2017. The Senate Committee on Appropriations reported its version of the FY2018 Energy and Water Appropriations bill, S. 1609 , on July 20, 2017. S. 1609 would provide $1.9 billion for EERE—$153 million below the FY2017 level and $1.3 billion above the Administration request ( S.Rept. 115-132 ). The President signed P.L. 115-56 , Continuing Appropriations Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act, 2017 on September 8, 2017, providing appropriations at the FY2017 level through December 8, 2017. There are several EERE issues before the 115 th Congress. Concerns may include not only the level of EERE appropriations for FY2018, but also which activities EERE should support. Congress might consider whether the goals of EERE can be met with the proposed funding cuts in the Administration's request, or whether to limit the scope of federal R&D activities. The issues described in this section—listed approximately in the order they appear in the Energy and Water Development appropriations bills—were selected based on the total funding involved, the percentage increases or decreases proposed by the Administration, and their possible impact on broader public policy considerations. For H.R. 3219 , the funding levels for specific offices and programs are those specified in H.Rept. 115-230 , the report accompanying H.R. 3266 , which reported $1.104 billion in total funding for EERE. The House-passed version of H.R. 3219 would provide $1.086 billion for EERE, $18.4 million less than the committee-reported bill. It is unclear how this reduction would be implemented. For S. 1609 , the funding levels for specific offices and programs are those that are in S.Rept. 115-132 , the report accompanying the committee-passed version of the bill. The reported funding levels are consistent with the total funding for EERE that would be provided in the Senate committee bill. According to the budget request, funding for EERE would focus on "early-stage R&D," and would result in a decrease of nearly 70% for EERE programs. The two appropriation bills before Congress— H.R. 3219 and S. 1609 —address the Administration's request for EERE to focus on "early-stage R&D" in different ways. According to H.Rept. 115-230 , the report accompanying H.R. 3266 , the House appropriations bill reflects "a gradual shift towards early stage research and development activities," and includes "a limited scope of deployment activities." The appropriation recommendation in S. 1609 affirms "the importance of the development and deployment of energy efficiency and renewable energy technologies, which are critical to expanding U.S. energy security and global leadership." Both statements are supported with proposed appropriations that would fund most EERE programs at levels above the Administration's request. Both H.R. 3219 and S. 1609 would provide appropriations for FY2018 above the Administration's request of $184 million for sustainable transportation. H.R. 3219 would appropriate $268 million for sustainable transportation in FY2018, while S. 1609 would appropriate $553 million. Both appropriations reports also express continued support for the following programs within vehicle technologies that the Administration's request would terminate: SuperTruck II, the Clean Cities program, and efforts to reduce energy consumption of the commercial off-road vehicle sector. H.R. 3219 would support these and other projects within vehicle technologies at $125 million, while S. 1609 would provide approximately $278 million. H.R. 3219 and S. 1609 both recommend appropriations for FY2018 above the Administration's request of $134 million for renewable energy. H.R. 3219 would appropriate nearly $190 million, while S. 1609 would appropriate nearly $390 million. Both bills would provide support for later-stage R&D and deployment projects in contrast to the Administration's request. For solar energy, both the House bill and Senate committee bill support research in thin-film photovoltaics. H.R. 3219 would also encourage access to solar energy for low-income communities. S. 1609 would support solar workforce development training for veterans and continued research for systems integration, balance of system cost reduction, and innovations in manufacturing competitiveness. For wind energy, the House bill supports efforts to lower market barriers for distributed wind including small wind for rural homes, farms, and schools. The Senate committee bill would support demonstration projects for distributed wind and offshore wind and would support testing facilities such as the National Wind Technology Center. For the water program, H.R. 3219 would continue to support the HydroNEXT initiative and research, development, and deployment of marine energy components and systems for marine hydrokinetic technology. S. 1609 would support funding for commercial viability of pumped storage hydropower and research into mitigation of marine ecosystem impacts and continued construction of an open-water wave energy test facility. For geothermal, there were no specific comments in H.Rept. 115-230 ; S. 1609 would continue to support low-temperature co-produced resources and FORGE in FY2018. Both bills would provide appropriations for FY2018 above the Administration's request of $160 million for energy efficiency. H.R. 3219 would appropriate nearly $481 million, while S. 1609 would appropriate nearly $737 million. For advanced manufacturing, H.R. 3219 would provide funds for improvements in steel industry and transient kinetic analysis, and would also support advanced textile research. The House bill would follow the Administration's request to eliminate funding for the Critical Materials Energy Innovation Hub, the Energy Water Desalination Hub, and the Clean Energy Manufacturing Innovation Institutes; however, the bill would support phasing out operations that ensure that the most promising early stage R&D efforts of the hubs and institutes are continued through competitive awards in similar areas. In contrast, S. 1609 would provide funding for the Manufacturing Demonstration Facility, the Critical Materials Energy Innovation Hub, the Energy Water Desalination Hub, and Clean Energy Manufacturing Innovation Institutes. It would also support the Combined Heat and Power Technical Assistance Partnerships (CHP TAPs) and related activities, and Industrial Assessment Centers, among other efforts. For building technologies, H.R. 3219 would continue to support the goals of the Transformation in Cities initiative and the research, development, and market transformation of direct use of natural gas in residential applications. S. 1609 would support ongoing efforts to work with state and local agencies to incorporate the latest technical knowledge and best practices into construction requirements and to engage with industry teams to facilitate widespread deployment. For commercial buildings, the report on S. 1609 encourages support for more cost-effective integration techniques and technologies to facilitate deep retrofits. S. 1609 also would support emerging technologies efforts, including transactive controls R&D, regional demonstration of utility-led efforts advancing smart grid systems in communities, advanced solid-state lighting technology, and R&D for energy efficiency efforts for natural gas applications. S. 1609 would also provide funding for equipment and building standards. The Administration's budget for FY2018 would terminate the Weatherization and Intergovernmental Programs. The Weatherization Assistance Program (WAP) provides funding through formula grants to states, tribes, the District of Columbia, and U.S. territories to provide weatherization services that reduce energy costs for low-income households by increasing the energy efficiency of their homes. The State Energy Program (SEP) provides funding and technical assistance to states, the District of Columbia, and U.S. territories to promote the efficient use of energy and reduce the rate of growth of energy demand through the development and implementation of specific state energy programs. Both H.R. 3219 and S. 1609 do not follow the Administration's request to terminate these programs and would continue to support WAP and SEP. The House bill would continue those programs at FY2017 funding levels—$225 million for WAP and $50 million for SEP. The Senate committee bill would fund those programs at $212 million for WAP and $50 million for SEP.

The U.S. Department of Energy's (DOE's) Office of Energy Efficiency and Renewable Energy (EERE) administers renewable energy and end-use energy efficiency technology programs in research, development, and implementation. EERE works with industry, academia, national laboratories, and others to support research and development (R&D). EERE also works with state and local governments to assist in technology implementation and deployment. EERE supports nearly a dozen offices and programs including vehicle technologies, solar energy, advanced manufacturing, and weatherization and intergovernmental programs, among others. Funding for EERE is provided in the annual Energy and Water Development (E&W) Appropriations bill. At issue for the 115th Congress is the level of EERE appropriations and which activities EERE should support, including whether to continue support for specific initiatives and programs. On May 23, 2017, the Trump Administration submitted the budget proposal for FY2018. The FY2018 budget request for DOE is $28.2 billion of which about 2% is for EERE. The budget request for EERE is $636.1 million, a decrease of $1.5 billion, or nearly 70%, from the FY2017 enacted level of approximately $2.1 billion. The proposed reduction, if enacted, would affect all offices within EERE. For FY2018, the bulk of the EERE request is allocated to three areas: 25% for energy efficiency programs, 21% for renewable energy programs, and about 29% for sustainable transportation programs. The request estimates that two-thirds of the current portfolio of 2,500 multi-year projects (e.g., early-stage R&D projects) would remain active in FY2018. DOE anticipates that eliminating one-third of these projects would result in a reduction of approximately 30% in EERE-funded full-time equivalent staff. The President's request would include two specific program eliminations: the Weatherization Assistance Program and the State Energy Program, which received FY2017 appropriations of $225.0 million and $50.0 million, respectively. The President's request for EERE emphasizes early-stage R&D, limited validation testing and simulation to inform R&D, and analysis to support regulatory activities. The DOE budget justification states that funding for EERE would focus on "early-stage R&D, where the Federal role is critically important, and reflects an increased reliance on the private sector to fund later-stage research, development, and commercialization of energy technologies." There are several bills before Congress that recommend FY2018 appropriations for EERE. The bills contain EERE funding levels that are below the FY2017 enacted level, but higher than the President's budget request. The House passed H.R. 3219, the Defense, Military Construction, Veterans Affairs, Legislative Branch, and Energy and Water Development National Security Appropriations Act, 2018, on July 27, 2017. Division D of H.R. 3219—which contains the E&W appropriations—provides funding of $1.1 billion for EERE, $1.0 billion below the FY2017 enacted level and $449 million above the request. Floor amendments to H.R. 3219 reduced funding for EERE in H.R. 3219 by $18.4 million from H.R. 3266, the House Appropriations Committee version of the FY2018 E&W appropriations bill. H.R. 3266 would provide funding of $1.1 billion to EERE—$986 million below the FY2017 enacted level and $468 million above the request (H.Rept. 115-230). The Senate Committee on Appropriations reported S. 1609, the Energy and Water Development and Related Agencies Appropriations Act of 2018, on July 20, 2017. S. 1609 would appropriate $1.9 billion to EERE—$153 million below the FY2017 enacted level and $1.3 billion above the request (S.Rept. 115-132). The President signed P.L. 115-56, the Continuing Appropriations Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act, 2017 on September 8, 2017, providing FY2018 funding at the FY2017 appropriations level through December 8, 2017.

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In 2008, an unknown computer programmer or group of programmers using the pseudonym Satoshi Nakamoto created a computer platform that would allow users to make valid transfers of digital representations of value. The system, called Bitcoin , is the first known cryptocurrency . A cryptocurrency is digital money in an electronic payment system in which payments are validated by a decentralized network of system users and cryptographic protocols instead of by a centralized intermediary (such as a bank). Since 2009, cryptocurrencies have gone from little-known, niche technological curiosities to rapidly proliferating financial instruments that are the subject of intense public interest. Recently, they have been incorporated into a variety of other financial transactions and products. For example, cryptocurrencies have been sold to investors to raise funding through initial coin offerings (ICOs), and the terms of certain derivatives are now based on cryptocurrencies. Some government central banks have examined the possibility of issuing cryptocurrencies or other digital currency. Media coverage of cryptocurrencies has been widespread, and various observers have characterized cryptocurrencies as either the future of monetary and payment systems that will displace government-backed currencies or a fad with little real value. When analyzing the public policy implications posed by cryptocurrencies, it is important to keep in mind what these currencies are expressly designed and intended to be—alternative electronic payment systems. The purpose of this report is to assess how and how well cryptocurrencies perform this function, and in so doing to identify possible benefits, challenges, risks, and policy issues surrounding cryptocurrencies. The report begins by reviewing the most basic characteristics and economic functions of money, the traditional systems for creating money, and traditional systems for transferring money electronically. It then describes the features and characteristics of cryptocurrencies and examines the potential benefits they offer and the challenges they face regarding their use as money. The report also examines certain risks posed by cryptocurrencies when they are used as money and related policy issues, focusing in particular on two issues: cryptocurrencies' potential role in facilitating criminal activity and concerns about protections for consumers who use these currencies. Finally, the report analyzes cryptocurrencies' impact on monetary policy. Money exists because it serves a useful economic purpose: it facilitates the exchange of goods and services. Without it, people would have to engage in a barter economy , wherein people trade goods and services for other goods and services. In a barter system, every exchange requires a double coincidence of wants —each party must possess the exact good or be offering the exact service that the other party wants. Anytime a potato farmer wanted to buy meat or clothes or have a toothache treated, the farmer would have to find a particular rancher, tailor, or dentist who wanted potatoes at that particular time and negotiate how many potatoes a side of beef, a shirt, and a tooth removal were worth. In turn, the rancher, tailor, and dentist would have to make the same search and negotiation with each other to satisfy their wants. Wants are satisfied more efficiently if all members of a society agree they will accept money —a mutually recognized representation of value—for payment, be that ounces of gold, a government-endorsed slip of paper called a dollar, or a digital entry in an electronic ledger. How well something serves as money depends on how well it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. To function as a medium of exchange , the thing must be tradable and agreed to have value. To function as unit of account , the thing must act as a good measurement system. To function as a store of value , the thing must be able to purchase approximately the same value of goods and services at some future date as it can purchase now. Returning to the example above, could society decide potatoes are money? Conceivably, yes. A potato has intrinsic value (this report will examine value in more detail in the following section, " Traditional Money "), as it provides nourishment. However, a potato's tradability is limited: many people would find it impractical to carry around sacks of potatoes for daily transactions or to buy a car for many thousands of pounds of potatoes. A measurement system based on potatoes is also problematic. Each potato has a different size and degree of freshness, so to say something is worth "one potato" is imprecise and variable. In addition, a potato cannot be divided without changing its value. Two halves of a potato are worth less than a whole potato—the exposed flesh will soon turn brown and rot—so people would be unlikely to agree to prices in fractions of potato. The issue of freshness also limits potatoes' ability to be a store of value; a potato eventually sprouts eyes and spoils, and so must be spent quickly or it will lose value. In contrast, an ounce of gold and a dollar bill can be carried easily in a pocket and thus are tradeable. Each unit is identical and can be divided into fractions of an ounce or cents, respectively, making both gold and dollars effective units of account. Gold is an inert metal and a dollar bill, when well cared for, will not degrade substantively for years, meaning can both function as a store of value. Likewise, with the use of digital technology, electronic messages to change entries in a ledger can be sent easily by swiping a card or pushing a button and can be denominated in identical and divisible units. Those units could have a stable value, as their number stays unchanging in an account on a ledger. The question becomes how does a lump of metal, a thing called a dollar, and the numbers on a ledger come to be deemed valuable by society, as has been accomplished in traditional monetary systems. Money has been in existence throughout history. However, how that money came to have value, how it was exchanged, and what roles government and intermediaries such as banks have played have changed over time. This section examines three different monetary systems with varying degrees of government and bank involvement. Early forms of money were often things that had intrinsic value, such as precious metals (e.g., copper, silver, gold). Part of their value was derived from the fact that they could be worked into aesthetically pleasing objects. More importantly, other physical characteristics of these metals made them well suited to perform the three functions of money and so created the economic efficiency societies needed: these metals are elemental and thus an amount of the pure material is identical to a different sample of the same amount; they are malleable and thus easy divisible; and they are chemically inert and thus do not degrade. In addition, they are scarce and difficult to extract from the earth, which is vital to them having and maintaining value. Sand also could perform the functions of money and can be worked into aesthetically pleasing glass. However, if sand were money, then people would quickly gather vast quantities of it and soon even low-cost goods would be priced at huge amounts of sand. Even when forms of money had intrinsic value, governments played a role in assigning value to money. For example, government mints would make coins of precious metals with a government symbol, which validated that these particular samples were of some verified amount and purity. Fiat money takes the government role a step further, as discussed below. In contrast to money with intrinsic value, fiat m oney has no intrinsic value but instead derives its value by government decree. If a government is sufficiently powerful and credible, it can declare that some thing—a dollar, a euro, a yen, for example—shall be money. In practice, these decrees can take a number of forms, but generally they involve a mandate that the money be used for some economic activity, such as paying taxes or settling debts. Thus, if members of society want to participate in the relevant economic activities, it behooves them to accept the money as payment in their dealings. In addition to such decrees, the government generally controls the supply of the money to ensure it is sufficiently scarce to retain value yet in ample-enough supply to facilitate economic activity. Relatedly, the government generally attempts to minimize the incidence of counterfeiting by making the physical money in circulation difficult to replicate and creating a deterrence through criminal punishment. Modern monies are generally fiat money, including the U.S. dollar. The dollar is legal tender in the United States, meaning parties are obligated to accept the dollar to settle debts, and U.S. taxes can (and generally must) be paid in dollars. This status instills dollars with value, because anyone who wants to undertake these basic economic activities in the largest economy and financial system in the world must have and use this type of money. In the United States, the Board of Governors of the Federal Reserve System maintains the value of the dollar by setting monetary policy. Congress mandated that the Federal Reserve would conduct monetary policy in the Federal Reserve Reform Act of 1977 ( P.L. 95-188 ), directing it to "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Under this system, a money stock currently exceeding $14 trillion circulates in support of an economy that generates over $20 trillion worth of new production a year, and average annual inflation has not exceeded a rate of 3% since 1993. In addition, the Federal Reserve operates key electronic payment systems, including those involving interbank transfers. In this way, the Federal Reserve acts as the intermediary when banks transfer money between each other. Banks have played a role in another evolution of money: providing an alternative to the physical exchange of tangible currency between two parties. Verifying the valid exchange of physical currency is relatively easy. The payer shows the payee he or she is in fact in possession of the money, and the transfer is valid the moment the money passes into the payee's possession. This system is not without problems, though. Physically possessing money subjects it to theft, misplacement, or destruction through accident. A physical exchange of money typically requires the payer and payee be physically near each other (because both parties would have to have a high degree of trust in each other to believe any assurance that the money will be brought or sent later). From early in history, banks have offered services to accomplish valid transfers of value between parties who are not in physical proximity and do not necessarily trust each other. Customers give banks their money for, among other reasons, secure safekeeping and the ability to send payment to a payee located somewhere else (originally using paper checks or bills of exchange). Historically and today, maintaining accurate ledgers of accounts is a vital tool for providing these services. It allows people to hold money as numerical data stored in a ledger instead of as a physical thing that can be lost or stolen. In the simplest form, a payment system works by a bank recording how much money an individual has access to and, upon instruction, making appropriate additions and reductions to that amount. The mechanics of the modern payment system, in which instructions are sent and records are stored electronically, are covered in more detail in the following section, " The Electronic Exchange of Money ." What can be noted here in this basic description is that participants must trust the banks and that ledgers must be accurate and must be changed only for valid transfers. Otherwise, an individual's money could be lost or stolen if a bank records the payer's account as having an inaccurately low amount or transfers value without permission. A number of mechanisms can create trust in banks. For example, a bank has a market incentive to be accurate, because a bank that does not have a good reputation for protecting customers' money and processing transactions accurately will lose customers. In addition, governments typically subject banks to laws and regulations designed in part to ensure that banks are run well and that people's money is safe in them. As such, banks take substantial measures to ensure security and accuracy. Today, money is widely exchanged electronically, but electronic payments systems can be subject to certain difficulties related to lack of scarcity (a digital file can be copied many times over, retaining the exact information as its predecessor) and lack of trust between parties. Electronic transfers of money are subject to what observers refer to as the double spending problem. In an electronic transfer of money, a payer may wish to send a digital file directly to a payee in the hopes that the file will act as a transfer of value. However, if the payee cannot confirm that the payer has not sent the same file to multiple other payees, the transfer is problematic. Because money in such a system could be double (or any number of times) spent, the money would not retain its value. As described in the preceding section, this problem traditionally has been resolved by involving at least one centralized, trusted intermediary—such as a private bank, government central bank, or other financial institution—in electronic transfers of money. The trusted intermediaries maintain private ledgers of accounts recording how much money each participant holds. To make a payment, an electronic message (or messages) is sent to an intermediary or to and between various intermediaries, instructing each to make the necessary changes to its ledgers. The intermediary or intermediaries validate the transaction, ensure the payer has sufficient funds for the payment, deduct the appropriate amount from the payer's account, and add that amount to the payee's account. For example, in the United States, a retail consumer may initiate an electronic payment through a debit card transaction, at which time an electronic message is sent over a network instructing the purchaser's bank to send payment to the seller's bank. Those banks then make the appropriate changes to their account ledgers (possibly using the Federal Reserve's payment system) reflecting that value has been transferred from the purchaser's account to the seller's account. Significant costs and physical infrastructure underlie systems for electronic money transfers to ensure the systems' integrity, performance, and availability. For example, payment system providers operate and maintain vast electronic networks to connect retail locations with banks, and the Federal Reserve operates and maintains networks to connect banks to itself and each other. These intermediaries store and protect huge amounts of data. In general, these intermediaries are highly regulated to ensure safety, profitability, consumer protection, and financial stability. Intermediaries recoup the costs associated with these systems and earn profits by charging fees directly when the system is used (such as the fees a merchant pays to have a card reading machine and on each transaction) or by charging fees for related services (such as checking account fees). In addition, intermediaries generally are required to provide certain protections to consumers involved in electronic transactions. For example, the Electronic Fund Transfer Act ( P.L. 95-630 ) limits consumers' liability for unauthorized transfers made using their accounts. Similarly, the Fair Credit Billing Act ( P.L. 93-495 ) requires credit card companies to take certain steps to correct billing errors, including when the goods or services a consumer purchased are not delivered as agreed. Both acts also require financial institutions to make certain disclosures to consumers related to the costs and terms of using an institution's services. Notably, certain individuals may lack access to electronic payment systems. To use an electronic payment system, a consumer or merchant generally must have access to a bank account or some retail payment service, which some may find cost prohibitive or geographically inconvenient, resulting in underbanked or unbanked populations (i.e., people who have limited interaction with the traditional banking system). In addition, the consumer or merchant typically must provide the bank or other intermediary with personal information. The use of electronic payment services generates a huge amount of data about an individual's financial transactions. This information could be accessed by the bank, law enforcement (provided proper procedures are followed), or nefarious actors (provided they are capable of circumventing the intermediaries' security measures). Cryptocurrencies—such as Bitcoin, Ether, and Litecoin—provide an alternative to this traditional electronic payment system. As noted above, cryptocurrency acts as money in an electronic payment system in which a network of computers, rather than a single third-party intermediary, validates transactions. In general, these electronic payment systems use public ledgers that allow individuals to establish an account with a pseudonymous name known to the entire network—or an address corresponding to a public key—and a passcode or private key that is paired to the public key and known only to the account holder. A transaction occurs when two parties agree to transfer cryptocurrency (perhaps in payment for a good or service) from one account to another. The buying party will unlock the cryptocurrency they will use as payment with their private key, allowing the selling party to lock it with their private key. In general, to access the cryptocurrency system, users will create a "wallet" with a third-party cryptocurrency exchange or service provider. From the perspective of the individuals using the system, the mechanics are similar to authorizing payment on any website that requires an individual to enter a username and password. In addition, certain companies offer applications or interfaces that users can download onto a device to make transacting in cryptocurrencies more user-friendly. Cryptocurrency platforms often use blockchain technology to validate changes to the ledgers. Blockchain technology uses cryptographic protocols to prevent invalid alteration or manipulation of the public ledger. Specifically, before any transaction is entered into the ledger and the ledger is irreversibly changed, some member of the network must validate the transaction. In certain cryptocurrency platforms, validation requires the member to solve an extremely difficult computational decryption. Once the transaction is validated, it is entered into the ledger. These protocols secure each transaction by using digital signatures to validate the identity of the two parties involved and to validate that the entire ledger is secure so that any changes in the ledger are visible to all parties. In this system, parties that otherwise do not know each other can exchange something of value (i.e., a digital currency) not because they trust each other but because they trust the platform and its cryptographic protocols to prevent double spending and invalid changes to the ledger. Cryptocurrency platforms often incentivize users to perform the functions necessary for validation by awarding them newly created units of the currency for successful computations (often the first person to solve the problem is given the new units), although in some cases the payer or payee also is charged a fee that goes to the validating member. In general, the rate at which new units are created—and therefore the total amount of currency in the system—is limited by the platform protocols designed by the creators of the cryptocurrency. These limits create scarcity with the intention of ensuring the cryptocurrency retains value. Because users of the cryptocurrency platform must perform work to extract the scarce unit of value from the platform, much as people do with precious metals, it is said that these users mine the cryptocurrencies. Alternatively, people can acquire cryptocurrency on certain exchanges that allow individuals to purchase cryptocurrency using official government-backed currencies or other cryptocurrencies. Cryptographers and computer scientists generally agree that cryptocurrency ledgers that use blockchain technology are mathematically secure and that it would be exceedingly difficult—approaching impossible—to manipulate them. However, hackers have exploited vulnerabilities in certain exchanges and individuals' devices to steal cryptocurrency from the exchange or individual. Analyzing data about certain characteristics and the use of cryptocurrency would be helpful in measuring how well cryptocurrency functions as an alternative source of payment and thus its future prospects for functioning as money. However, conducting such an analysis currently presents challenges. The decentralized nature of cryptocurrencies makes identifying authoritative sources of industry data difficult. In addition, the recent proliferation of cryptocurrency adds additional challenges to performing industry-wide analysis. For example, as of August 27, 2018, one industry group purported to track 1,890 cryptocurrencies trading at prices that suggest an aggregate value in circulation of almost $220 billion. Because of these challenges, an exhaustive quantitative analysis of the entire cryptocurrency industry is beyond the scope of this report. Instead, the report uses Bitcoin—the first and most well-known cryptocurrency, the total value of which accounts for more than half of the industry as a whole —as an illustrative example. Examining recent trends in Bitcoin prices, value in circulation, and number of transactions may shed some light on how well cryptocurrencies in general have been performing as an alternative payment system. The rapid appreciation in cryptocurrencies' value in 2017 likely contributed to the recent increase in public interest in these currencies. At the beginning of 2017, the price of a Bitcoin on an exchange was about $993. The price surged during the year, peaking at about $19,650 in December 2017 (see Figure 1 ), an almost 1,880% increase from prices in January 2017. However, the price then dramatically declined by 65% to $6,905 in less than two months. From February through August 2018, the price of a Bitcoin remained volatile. Other major cryptocurrencies such as Ether and Litecoin have had similar price movements. As of October 7, 2018, the price of one Bitcoin was $6,570 and approximately 17.3 million Bitcoins were in circulation, making the value of all Bitcoins in existence about $113.6 billion. Although these statistics drive interest in and are central to the analysis of cryptocurrencies as investment s , they reveal little about the prevalence of cryptocurrencies' use as money . Recent volatility in the price of cryptocurrencies suggests they function poorly as a unit of account and a store of value (two of the three functions of money discussed in " The Functions of Money ," above), an issue covered in the " Potential Challenges to Widespread Adoption " section of this report. Nevertheless, the price or the exchange rate of a currency in dollars at any point in time (rather than over time) does not have a substantive influence on how well the currency serves the functions of money. The number of Bitcoin transactions, by contrast, can serve as an indicator—though a flawed one —of the prevalence of the use of Bitcoin as money. This number indicates how many times a day Bitcoins are transferred between accounts. Two industry data sources indicate that the number of Bitcoin transactions averaged about 208,000 per day globally in 2018 through August. In comparison, the Automated Clearing House—an electronic payments network operated by the Federal Reserve Bank and the private company Electronic Payments Network—processed almost 59 million transactions per day on average in 2017. Visa's payments systems processed on average more than 300 million transactions per day globally in 2017. The previous section illustrates that the use of cryptocurrencies as money in a payment system is still quite limited compared with traditional systems. However, the invention and growth in awareness of cryptocurrencies occurred only recently. Some observers assert that cryptocurrencies' potential benefits will be realized in the coming years or decades, which will lead to their widespread adoption. Skeptics, however, emphasize the obstacles facing the widespread adoption of cryptocurrencies and doubt that cryptocurrencies can overcome these challenges. This section of the report describes some of the potential benefits cryptocurrencies may provide to the public and the economic system as a whole. Later sections—" Potential Challenges to Widespread Adoption " and " Potential Risks Posed by Cryptocurrencies "—discuss certain potential challenges to widespread adoption of cryptocurrencies and some potential risks cryptocurrencies pose. As discussed in the " The Electronic Exchange of Money " section, traditional monetary and electronic payment systems involve a number of intermediaries, such as government central banks and private financial institutions. To carry out transactions, these institutions operate and maintain extensive electronic networks and other infrastructure, employ workers, and require time to finalize transactions. To meet costs and earn profits, these institutions charge various fees to users of their systems. Advocates of cryptocurrencies hope that a decentralized payment system operated through the internet will be less costly than the traditional payment systems and existing infrastructures. Cryptocurrency proponents assert that cryptocurrency may provide an especially pronounced cost advantage over traditional payment systems for international money transfers and payments. Sending money internationally generally involves further intermediation than domestic transfers, typically requiring transfers between banks and other money transmitters in different countries and possibly exchanges of one national currency for another. Proponents assert that cryptocurrencies could avoid these particular costs because cryptocurrency transactions take place over the internet—which is already global—and are not backed by government-fiat currencies. Nevertheless, it is difficult to quantify how much traditional payment systems cost and what portion of those costs is passed on to consumers. Performing such a quantitative analysis is beyond the scope of this report. What bears mentioning here is that certain costs of traditional payment systems—and, in particular, the fees intermediaries in those systems have charged consumers—have at times been high enough to raise policymakers' concern and elicit policy responses. For example, in response to retailers' assertions that Visa and MasterCard had exercised market power in setting debit card swipe fees at unfairly high levels, Congress included Section 1075 in the Dodd-Frank Consumer Protection and Wall Street Reform Act (Dodd-Frank Act; P.L. 111-203 )—sometimes called the "Durbin Amendment." Section 1075 directs the Federal Reserve to limit debit card swipe fees charged by banks with assets of more than $10 billion. In addition, studies on unbanked and underbanked populations cite the fees associated with traditional bank accounts, a portion of which may be the result of providing payment services, as a possible cause for those populations' limited interaction with the traditional banking system. Proponents of cryptocurrencies argue that an increase in the use of cryptocurrencies as an alternative payment system would reduce these costs through competition or would eliminate the need to pay them altogether. As discussed in the " Traditional Money " section, traditional payment systems require that government and financial institutions be credible and have people's trust. Even if general trust in those institutions is sufficient to make them credible in a society, certain individuals may nevertheless mistrust them. For people who do not find various institutions sufficiently trustworthy, cryptocurrencies could provide a desirable alternative. In countries with advanced economies, such as the United States, mistrust may not be as prevalent (although not wholly absent) as in other countries. Typically, developed economies are relatively stable and have relatively low inflation; often, they also have carefully regulated financial institutions and strong government institutions. Not all economies share these features. Thus, cryptocurrencies may experience more widespread adoption in countries with a higher degree of mistrust of existing systems than in countries where there is generally a high degree of trust in existing systems. A person may mistrust traditional private financial institutions for a number of reasons. An individual may be concerned that an institution will go bankrupt or otherwise lose his or her money without adequately apprising him or her of such a risk (or while actively misleading him or her about it). In addition, opening a bank account or otherwise using traditional electronic payment systems generally requires an individual to divulge to a financial institution certain basic personal information, such as name, social security number, and birthdate. Financial institutions store this information and information about the transactions linked to this identity. Under certain circumstances, they may analyze or share this information, such as with a credit-reporting agency. In some instances hackers have stolen personal information from financial institutions, causing concerns over how well these institutions can protect sensitive data. Individuals seeking a higher degree of privacy or control over their personal data than that afforded by traditional systems may choose to use cryptocurrency. Certain individuals also may mistrust a government's willingness or ability to maintain a stable value of a fiat currency. Because fiat currency does not have intrinsic value and, historically, incidents of hyperinflation in certain countries have seen government-backed currencies lose most or nearly all of their value, some individuals may judge the probability of their fiat money losing a significant portion of its value to be undesirably high in some circumstances. These individuals may place greater trust in a decentralized network using cryptographic protocols that limit the creation of new money than in government institutions. The appropriate policy approach to cryptocurrencies likely depends, in part, on how prevalent these currencies become. For cryptocurrencies to deliver the potential benefits mentioned above, people must use them as money to some substantive degree. After all, as money, cryptocurrencies would do little good if few people and businesses accept them as payment. For this reason, currencies are subject to network effects , wherein their value and usefulness depends in part on how many people are willing to use them. Currently, cryptocurrencies face certain challenges to widespread adoption, some of which are discussed below. Recall that how well cryptocurrency serves as money depends on how well it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. Several characteristics of cryptocurrency undermine its ability to serve these three interrelated functions in the United States and elsewhere. Currently, a relatively small number of businesses or individuals use or accept cryptocurrency for payment. As discussed in the " The Price and Usage of Cryptocurrency " section, there were 208,000 transactions involving Bitcoin per day globally (out of the billions of transactions that take place) in 2018 through August, and a portion of those transactions involved people buying Bitcoins for the purposes of holding them as an investment rather than as payment for goods and services. Cryptocurrency may be used as a medium of exchange less frequently than traditional money for several reasons. Unlike the dollar and most other government-backed currencies, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts. Consumers and businesses also may be hesitant to place their trust in a decentralized computer network of pseudonymous participants that they may not completely understand. Relatedly, consumers and businesses may have sufficient trust in and be generally satisfied with existing payment systems. As previously mentioned, the recent high volatility in the price of many cryptocurrencies undermines their ability to serve as a unit of account and a store of value. Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers. In regard to serving as a store of value, Bitcoin lost almost 53% of its value in the first half of 2018, which equates to a 346% annualized rate of inflation. In comparison, the annualized inflation of prices in the U.S. dollar was 2.1% over the same period. Whether cryptocurrency systems are scalable —meaning their capacity can be increased in a cost-effective way without loss of functionality—is uncertain. At present, the technologies and systems underlying cryptocurrencies do not appear capable of processing the number of transactions that would be required of a widely adopted, global payment system. As discussed in the " The Price and Usage of Cryptocurrency " section, the platform of the largest (by a wide margin) cryptocurrency, Bitcoin, processes a small fraction of the overall financial transactions parties engage in per day. The overwhelming majority of such transactions are processed through established payment systems. As well, Bitcoin's processing speed is still comparatively slow relative to the nearly instant transaction speed many electronic payment methods, such as credit and debit cards, achieve. For example, blocks of transactions are published to the Bitcoin ledger every 10 minutes, but because a limited number of transactions can be added in a block, it may take over an hour before an individual transaction is posted. Part of the reason for the relatively slow processing speed of certain cryptocurrency transactions is the large computational resources involved with mining—or validating—transactions. When prices for cryptocurrencies were increasing rapidly, many miners were incentivized to participate in validating transactions, seeking to win the rights to publish the next block and collect any reward or fees attached to that block. This incentive led to an increasing number of miners and to additional investment in faster computers by new and existing miners. The combination of more miners and more energy required to power their computers led to ballooning electricity requirements. However, as the prices of cryptocurrencies have deflated, validating cryptocurrency transactions has become a less rewarding investment for miners; consequently, fewer individuals participate in mining operations. The energy consumption required to run and cool the computers involved in cryptocurrency mining is substantial. Some estimates indicate the daily energy needs of the Bitcoin network are comparable to the needs of a small country, such as Ireland. In addition to raising questions about whether cryptocurrencies ultimately will be more efficient than existing payment systems, such high energy consumption could result in high negative e xternalities —wherein the price of a market transaction, such as purchasing electricity, may not fully reflect all societal costs, such as pollution from electricity production. In general, when a buyer of a good or a service provided remotely sends a cryptocurrency to another account, that transaction is irreversible and made to a pseudonymous identity. Although a cryptocurrency platform validates that the currency has been transferred, the platform generally does not validate that a good or service has been delivered. Unless a transfer is done face-to-face, it will involve some degree of trust between one party and the other or a trusted intermediary. For example, imagine a buyer agrees to purchase a collectible item from a seller located across the country for one Bitcoin. If the buyer transfers the Bitcoin before she has received the item, she takes on the risk that the seller will never ship the item to her; if that happened, the buyer would have little, if any, recourse. Conversely, if the seller ships the item before the buyer has transferred the Bitcoin, he assumes the risk that the buyer never will transfer the Bitcoin. These risks could act as a disincentive to parties considering using cryptocurrencies in certain transactions and thus could hinder cryptocurrencies' ability to act as a medium of exchange. As mentioned in the " Banks: Transferring Value Through Intermediaries " section, sending cash to someone in another location presents a similar problem, which historically has been solved by using a trusted intermediary. In response to this problem, several companies offer cryptocurrency escrow services. Typically, the escrow company holds the buyer's cryptocurrency until delivery is confirmed. Only then will the escrow company pass the cryptocurrency onto the seller. Although an escrow service may enable parties who otherwise do not trust each other to exchange cryptocurrency for goods and services, the use of such services reintroduces the need for a trusted third-party intermediary in cryptocurrency transactions. As with the use of intermediaries in traditional electronic transactions discussed above, both a buyer and a seller in a cryptocurrency transaction would have to trust that the escrow company will not abscond with their cryptocurrency and is adequately protected against hacking. For cryptocurrencies to gain widespread acceptance as payment systems and displace existing traditional intermediaries, new procedures and intermediaries such as those described in this section may first need to achieve a sufficient level of trustworthiness and efficiency among the public. If cryptocurrencies ultimately require their own system of intermediaries to function as money, questions may arise about whether this requirement defeats their original purpose. Policymakers developed most financial laws and regulations before the invention and subsequent growth of cryptocurrencies, which raises questions about whether existing laws and regulations appropriately and efficiently address the risks posed by cryptocurrency. Some of the more commonly cited risks include the potential that cryptocurrencies will be used to facilitate criminal activity and the lack of consumer protections applicable to parties buying or using cryptocurrency. Each of these risks is discussed below. Criminals and terrorists are more likely to conduct business in cash and to hold cash as an asset than to use financial intermediaries such as banks, in part because cash is anonymous and allows them to avoid establishing relationships with and records at financial institutions that may be subject to anti-money laundering reporting and compliance requirements. Some observers are concerned that the pseudonymous and decentralized nature of cryptocurrency transactions may similarly provide a means for criminals to hide their financial dealings from authorities. For example, Bitcoin was the currency used on the internet-based, illegal drug marketplace called Silk Road. This marketplace and Bitcoin escrow service facilitated more than 100,000 illegal drug sales from approximately January 2011 to October 2013, at which time the government shut down the website and arrested the individuals running the site. Criminal use of cryptocurrency does not necessarily mean the technology is a net negative for society, because the benefits it provides could exceed the societal costs of the additional crime facilitated by cryptocurrency. In addition, law enforcement has existing authorities and abilities to mitigate the use of cryptocurrencies for the purposes of evading law enforcement. Recall that cryptocurrency platforms generally function as an immutable, public ledger of accounts and transactions. Thus, every transaction ever made by a member of the network is relatively easy to observe, and this characteristic can be helpful to law enforcement in tracking criminal finances. Although the accounts may be identified with a pseudonym on the cryptocurrency platform, law enforcement can exercise methods involving analysis of transaction patterns to link those pseudonyms to real-life identities. For example, it may be possible to link a cryptocurrency public key with a cryptocurrency exchange customer. Certain cryptocurrencies may provide users with greater anonymity than others, but use of these technologies currently is comparatively rare. In addition to law enforcement's abilities to investigate crime, the government has authorities to subject cryptocurrency exchanges to regulation related to reporting suspicious activity. The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has issued guidance explaining how its regulations apply to the use of virtual currencies —a term that refers to a broader class of electronic money that includes cryptocurrencies. FinCEN has indicated that an exchanger ("a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency") and an administrator ("a person engaged as a business in issuing [putting into circulation] a virtual currency, and who has the authority to redeem [to withdraw from circulation] such virtual currency") generally qualify as money services businesses (MSBs) subject to federal regulation. Among other things, MSBs generally must register with and report suspicious transactions to FinCEN, and they must maintain anti-money laundering compliance programs. State law and regulation generally impose a variety of registration anti-money laundering requirements on money services businesses. The specific requirements generally vary across different states; a state-by-state analysis is beyond the scope of this report. Bills focused on investigating the criminal use of cryptocurrencies and improving government agencies' ability to address the problem have seen action in the 115 th Congress. These bills include the following: H.R. 2433 passed the House on September 12, 2017, and would direct the Department of Homeland Security, in coordination with appropriate federal agencies, to develop an assessment of the threat of individuals using cryptocurrencies to carry out acts of terrorism. H.R. 5036 passed the House on September 28, 2018, and would (1) establish the Independent Financial Technology Task Force to research and develop proposals regarding the use of digital currencies in terrorism and illicit activity, (2) direct the Treasury to pay a reward to anyone who provides information that leads to a conviction of an individual involved with terrorist use of digital currencies, and (3) establish the FinTech Leadership in Innovation Program to fund the development of tools and programs to detect terrorist and illicit use of digital currencies. H.R. 6069 passed the House on June 25, 2018, and would direct the Government Accountability Office to produce a study on the use of virtual currencies and online marketplaces to facilitate sex and drug trafficking. H.R. 6411 passed the House on September 12, 2018, and would amend FinCEN's duties and powers to explicitly include "emerging technologies or value that substitutes for currency" as an area in which FinCEN can coordinate with foreign financial intelligence in anti-money laundering efforts. The Internal Revenue Service (IRS) has issued guidance stating that it will treat virtual currencies as property (as opposed to currency ), meaning users owe taxes on any realized gains whenever they dispose of virtual currency, including when they use it to purchase goods and services. In a court filing seeking to obtain information on customers of Coinbase—the largest U.S. cryptocurrency exchange—the IRS identified approximately 800 to 900 returns per year from 2013 to 2015 that included capital gains that likely came from cryptocurrencies. In addition, recent anecdotal reporting—based in part on individuals' tax return filings from one filing service—suggests that few 2017 tax filings included reported capital gains from cryptocurrencies. Nevertheless, considering the level of activity in the cryptocurrency markets, one analysis estimated the U.S. tax liability on cryptocurrency gains was $25 billion in 2017. The lack of clarity surrounding whether and to what degree people are appropriately declaring gains from cryptocurrency on their tax returns has raised concerns that the technology could facilitate tax evasion. As with money laundering, individuals could use the opportunity to hide and move money in a pseudonymous, decentralized platform (and thus avoid generating records at traditional financial institutions) as a mechanism for hiding income from tax authorities. Data that would aid in analyzing whether this is occurring are scarce at this time, because the IRS has only recently begun actively collecting customer information from cryptocurrency exchanges. Although it is outside the scope of this report, another potential reason a person or entity may want to move money or assets while avoiding engagement with traditional financial institutions could be to evade financial sanctions. For example, the Venezuelan government has launched a digital currency with the stated intention of using it to evade U.S. sanctions. The governments of Iran and Russia have expressed interest in doing so, as well. For more information on the potential use of cryptocurrencies to evade financial sanctions, see CRS In Focus IF10825, Digital Currencies: Sanctions Evasion Risks , by Rebecca M. Nelson and Liana W. Rosen. Although there is no overarching regulation or regulatory framework specifically aimed at providing consumer protections in cryptocurrencies markets, numerous consumer protection laws and regulatory authorities at both the federal and state levels are applicable to cryptocurrencies. Whether these regulations adequately protect consumers and whether existing regulation is unnecessarily burdensome are topics subject to debate. This section will examine some of these consumer protections and present arguments related to these debated issues. A related concern has to do with whether investors in certain cryptocurrency instruments such as initial coin offerings —wherein companies developing an application or platform issue cryptocurrencies or other digital or virtual currency that are or will be used on the application or platform—or cryptocurrency derivatives contracts are adequately informed of risk and protected from scams. However, this secondary use of cryptocurrency as investment vehicles is different from the use of cryptocurrencies as money, and it is beyond the scope of this report. For examinations of these issues, see CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy Issues , by Eva Su; and CRS Report R45301, Securities Regulation and Initial Coin Offerings: A Legal Primer , by Jay B. Sykes. No federal consumer protection law specifically targets cryptocurrencies. However, the way cryptocurrencies are sold, exchanged, or marketed can subject cryptocurrency exchanges or other cryptocurrency-related businesses to generally applicable consumer protection laws. For example, Section 5(a) of the Federal Trade Commission Act (P.L. 63-203) declares "unfair or deceptive acts or practices in or affecting commerce" unlawful and empowers the Federal Trade Commission (FTC) to prevent people and most companies from engaging in such acts and practices. In recent years, the FTC has brought a number of enforcement actions against cryptocurrency promoters and mining operations due to potential violations of Section 5(a). In addition, Title X of the Dodd-Frank Act grants the Consumer Financial Protection Bureau (CFPB) certain rulemaking, supervisory, and enforcement authorities to implement and enforce certain federal consumer financial laws that protect consumers from "unfair, deceptive, or abusive acts and practices." These authorities apply to a broad range of financial industries and products, and they arguably could apply to cryptocurrency exchanges as well. Although the CFPB has not actively exercised regulatory authorities in regard to the cryptocurrency industry to date, the agency is accepting cryptocurrency-related complaints and previously has indicated it would enforce consumer financial laws in appropriate cases. Both the FTC and the CFPB have made available informational material, such as consumer advisories, to educate consumers about potential risks associated with transacting in cryptocurrencies. In addition, all states have laws against deceptive acts and practices, and state regulators have enforcement authorities that could be exercised against cryptocurrency-related businesses. Additional consumer protections generally are applied to cryptocurrency exchanges at the state level through money transmission laws and licensing requirements. Money transmitters, including cryptocurrency exchanges, must obtain applicable state licenses and are subject to state regulatory regimes applicable to the money transmitter industry in each state in which they operate. For example, money transmitters generally must maintain some amount of low-risk investments and surety bonds—which are akin to an insurance policy that pays customers who do not receive their money—as safeguards for customers in the event they do not receive money that was to be sent to them. Certain observers assert that consumers may be especially susceptible to being deceived or misinformed when dealing in cryptocurrencies. Cryptocurrency is a relatively new type of asset, and consumers may not be familiar with how cryptocurrencies work and how they derive their value. This unfamiliarity may mean a consumer could be unknowingly charged excessive fees when using or exchanging cryptocurrencies; deceived about cryptocurrencies' true value; or unaware of the possibility or likelihood of loss of value, electronic theft, or loss of access to cryptocurrency due to losing or forgetting associated public or private keys. In addition, a feature of cryptocurrency transfers is irreversibility, which could leave consumers without recourse in certain cryptocurrency transactions. Although certain federal laws and regulations intended to protect consumers (such as those described in " Applicable Regulation ," above) do apply to certain cryptocurrency transactions, others may not. Some of those laws and regulations that do not currently apply are specifically designed to protect consumers engaged in the electronic transfer of money, require certain disclosures about the terms of financial transactions, and require transfers to be reversed under certain circumstances. For example, the Electronic Fund Transfer Act of 1978 (EFTA; P.L. 95-630 ) requires traditional financial institutions engaging in electronic fund transfers to make certain disclosures about fees, correct errors when identified by the consumer, and limit consumer liability in the event of unauthorized transfers. In general, EFTA protections appear not to apply to cryptocurrency transactions, because these transactions do not involve a financial institution as defined in the EFTA. The application of state laws and consumer protections to cryptocurrency transactions is not uniform, and the stringency of regulation can vary across states. This variation could create a situation in which consumers in states with relatively lax regulation are inadequately protected. If Congress decides current consumer protections are inadequate, policy options could include extending the application of certain electronic fund transfer protections to consumers using cryptocurrency exchanges and service providers and granting federal agencies additional authorities to regulate those businesses. Proponents of cryptocurrencies have asserted that the application of a state-by-state consumer protection regulatory regime to cryptocurrency exchanges is unnecessarily onerous. They note that certain state regulations applicable to these exchanges are designed to address risks presented by traditional money transmission transactions (i.e., allowing fiat money to be submitted at one location and picked up at another location). For example, the previously mentioned requirements to maintain low-risk investments and surety bonds are intended to ensure customers will receive transmitted money. Cryptocurrency proponents argue that the services provided and the risks presented by cryptocurrency exchanges are substantively different from those of traditional money transmitters and that the requirements placed on those businesses—particularly requirements to hold minimum amounts of assets to back cryptocurrencies they hold on behalf of customers—are ill-suited to the cryptocurrency exchange industry. Supporters of cryptocurrencies further argue that if the United States does not reduce the regulatory burdens involved in cryptocurrency exchanges, the country will be at a disadvantage relative to others in regard to the development of cryptocurrency systems and platforms. If Congress decides the current regulatory framework is unnecessarily burdensome, some argue that one policy option would be to enact federal law applicable to cryptocurrency exchanges (or virtual currency exchanges more broadly) that preempts state-level requirements. As discussed in the " Government Authority: Fiat Money " section, in the United States, the Federal Reserve has the authority to conduct monetary policy with the goals of achieving price stability and low unemployment. The central banks of other countries generally have similar authorities and goals. Some central bankers and other experts and observers have speculated that the widespread adoption of cryptocurrencies could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, and some have suggested that these institutions should issue their own digital, fiat currencies. The mechanisms through which central banks implement monetary policy can be technical, but at the most fundamental level these banks conduct monetary policy by regulating how much money is in circulation in an economy. Currently, the vast majority of money circulating in most economies is government-issued fiat money, and so governments (particularly credible governments in countries with relatively strong, stable economies) have effective control over how much is in circulation. However, if one or more additional currencies that the government did not control (such as cryptocurrencies) were also prevalent and viable payment options, their prevalence could have a number of implications. The widespread adoption of such payment options would limit central banks' ability to control inflation, as they do now, because actors in the economy would be buying, selling, lending, and settling in cryptocurrency. Central banks would have to make larger adjustments to the fiat currency to have the same effect as previous adjustments, or they would have to start buying and selling the cryptocurrencies themselves in an effort to affect the availability of these currencies in the economy. Because cryptocurrency circulates on a global network, the actions of one country that buys and sells cryptocurrency to control its availability could have a destabilizing effect on other economies that also widely use that cryptocurrency; in this way, one country's approach to cryptocurrency could undermine price stability or exacerbate recessions or overheating in another country. For example, as economic conditions in one country changed, that country would respond by attempting to alter its monetary conditions, including the amount of cryptocurrency in circulation. However, the prescribed change for that economy would not necessarily be appropriate in a country that was experiencing different economic conditions. The supply of cryptocurrency in this second country nevertheless could be affected by the first country's actions. Another challenge in an economy with multiple currencies—as would be the case in an economy with a fiat currency and cryptocurrencies—is that the existence of multiple currencies adds difficulty to buyers and sellers making exchanges; all buyers and sellers must be aware of and continually monitor the value of different currencies relative to each other. As an example, such a system existed in the United States for periods before the Civil War when banks issued their own private currencies. The inefficiency and costs of tracking the exchange rates and multiple prices in multiple currencies eventually led to calls for and the establishment of a uniform currency. To date, governments (Venezuela excepted) generally have not been directly involved in the creation of cryptocurrencies; one of the central goals in developing the technology was to eliminate the need for government involvement in money creation and payment systems. However, cryptocurrency's decentralized nature is at the root of certain risks and challenges related to its lack of widespread adoption by the public and its use by criminals. These risks and challenges have led some observers to suggest that perhaps central banks could use the technologies underlying cryptocurrencies to issue their own central bank digital currencies (CBDCs) to realize certain hoped-for efficiencies in the payment system in a way that would be "safe, robust, and convenient." Much of the discussion related to CBDCs is speculative at this point. The extent to which a central bank could or would want to create a blockchain-enabled payment system likely would be weighed against the consideration that these government institutions already have trusted digital payment systems in place. Because of such considerations, the exact form that CBDCs would take is not clear; such currencies could vary across a number of features and characteristics. For example, it is not clear that cryptography would be necessary to validate transactions when a trusted intermediary such as a central bank could reliably validate them. Nevertheless, some central banks are examining the idea of CBDCs and the possible benefits and issues they may present. The possibility of CBDCs' introduction raises a number of questions about their potential benefits, challenges, and impacts on the effectiveness of monetary policy. Numerous observers assert that CBDCs could provide certain benefits. For example, some proponents extend the arguments related to cryptocurrencies providing efficiency gains over traditional legacy systems to CBCDs; they contend that central banks could use the technologies underlying cryptocurrencies to deploy a faster, less costly government-supported payment system. Observers have speculated that a CBDC could take the form of a central bank allowing individuals to hold accounts directly at the central bank. Advocates argue that a CBDC created in this way could increase systemic stability by imposing additional discipline on commercial banks. Because consumers would have the alternative of safe deposits made directly with the central bank, commercial banks would likely have to offer interest rates and security at a level necessary to attract deposits above any deposit insurance limit. One of the main arguments against CBDCs made by critics, including various central bank officials, is that there is no "compelling demonstrated need" for such a currency, as central banks and private banks already operate trusted electronic payment systems that generally offer fast, easy, and inexpensive transfers of value. These opponents argue that a CBDC in the form of individual direct accounts at the central bank would reduce bank lending or inappropriately expand central banks' role in lending. A portion of consumers likely would shift their deposits away from private banks toward central bank digital money, which would be a safe, government-backed liquid asset. Deprived of this funding, private banks likely would have to reduce their lending, leaving central banks to decide whether or how they should support lending markets to avoid a reduction in credit availability. In addition, skeptics of CBDCs object to the assertion that these currencies would increase systemic stability, arguing that CBDCs would create a less stable system because they would facilitate runs on private banks. These critics argue that at the first signs of distress at an individual institution or the bank industry, depositors would transfer their funds to this alternative liquid, government-backed asset. Observers also disagree over whether CBDCs would have a desirable effect on central banks' ability to carry out monetary policy. Proponents argue that, if individuals held a CBDC on which the central bank set interest rates, the central bank could directly transmit a policy rate to the macroeconomy, rather than achieving transmission through the rates the central bank charged banks and the indirect influence of rates in particular markets. In addition, if holding cash (which in effect has a 0% interest rate) were not an option for consumers, central banks potentially would be less constrained by the zero lower bound . The zero lower bound is the idea that the ability of individuals and businesses to hold cash and thus avoid negative interest rates limits central banks' ability to transmit negative interest rates to the economy. Critics argue that taking on such a direct and influential role in private financial markets is an inappropriately expansive role for a central bank. They assert that if CBDCs were to displace cash and private bank deposits, central banks would have to increase asset holdings, support lending markets, and otherwise provide a number of credit intermediation activities that private institutions currently perform in response to market conditions. The future role and value of cryptocurrencies remain highly uncertain, due mainly to unanswered questions about these currencies' ability to effectively and efficiently serve the functions of money and displace existing money and payment systems. Proponents of the technology assert cryptocurrencies will become a widely used payment method and provide increased economic efficiency, privacy, and independence from centralized institutions and authorities. Skeptics—citing technological challenges and obstacles to widespread adoption—assert cryptocurrencies do not effectively perform the functions of money and will not be a valuable, widely used form of money in the future. As technological advancements and economic conditions play out, policymakers likely will be faced with various issues related to cryptocurrency, including concerns about its alleged facilitation of crime, the adequacy of consumer protections for those engaged in cryptocurrency transactions, the level of appropriate regulation of the industry, and cryptocurrency's potential effect on monetary policy.

Cryptocurrencies are digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary, such as a bank. Instead, users of the system validate payments using certain protocols. Since the 2008 invention of the first cryptocurrency, Bitcoin, cryptocurrencies have proliferated. In recent years, they experienced a rapid increase and subsequent decrease in value. One estimate found that, as of August 2018, there were nearly 1,900 different cryptocurrencies worth about $220 billion. Given this rapid growth and volatility, cryptocurrencies have drawn the attention of the public and policymakers. A particularly notable feature of cryptocurrencies is their potential to act as an alternative form of money. Historically, money has either had intrinsic value or derived value from government decree. Using money electronically generally has involved using the private ledgers and systems of at least one trusted intermediary. Cryptocurrencies, by contrast, generally employ user agreement, a network of users, and cryptographic protocols to achieve valid transfers of value. Cryptocurrency users typically use a pseudonymous address to identify each other and a passcode or private key to make changes to a public ledger in order to transfer value between accounts. Other computers in the network validate these transfers. Through this use of blockchain technology, cryptocurrency systems protect their public ledgers of accounts against manipulation, so that users can only send cryptocurrency to which they have access, thus allowing users to make valid transfers without a centralized, trusted intermediary. Money serves three interrelated economic functions: it is a medium of exchange, a unit of account, and a store of value. How well cryptocurrencies can serve those functions relative to existing money and payment systems likely will play a large part in determining cryptocurrencies' future value and importance. Proponents of the technology argue cryptocurrency can effectively serve those functions and will be widely adopted. They contend that a decentralized system using cryptocurrencies ultimately will be more efficient and secure than existing monetary and payment systems. Skeptics doubt that cryptocurrencies can effectively act as money and achieve widespread use. They note various obstacles to extensive adoption of cryptocurrencies, including economic (e.g., existing trust in traditional systems and volatile cryptocurrency value), technological (e.g., scalability), and usability obstacles (e.g., access to equipment necessary to participate). In addition, skeptics assert that cryptocurrencies are currently overvalued and under-regulated. The invention and proliferation of cryptocurrencies present numerous risks and related policy issues. Cryptocurrencies, because they are pseudonymous and decentralized, could facilitate money laundering and other crimes, raising the issue of whether existing regulations appropriately guard against this possibility. Many consumers may lack familiarity with cryptocurrencies and how they work and derive value. In addition, although cryptocurrency ledgers appear safe from manipulation, individuals and exchanges have been hacked or targeted in scams involving cryptocurrencies. Accordingly, critics of cryptocurrencies have raised concerns that existing laws and regulations do not adequately protect consumers dealing in cryptocurrencies. At the same time, proponents of cryptocurrencies warn against over-regulating what they argue is a technology that will yield large benefits. Finally, if cryptocurrency becomes a widely used form of money, it could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, leading some observers to argue that central banks should develop their own digital currencies (as opposed to a cryptocurrency); others oppose this idea. The 115th Congress has shown significant interest in these and other issues relating to cryptocurrencies. For example, the House passed several bills (H.R. 2433, H.R. 5036, and H.R. 6069, and H.R. 6411) aimed at better understanding or regulating cryptocurrencies. The 116th Congress—and beyond—may continue to consider the numerous policy issues raised by the increasing use of cryptocurrencies.

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Chapter 11 of the U.S. Bankruptcy Code is used by financially troubled business debtors that want to reorganize their financial affairs so that they may remain in business rather than liquidate. Although a trustee is appointed in chapter 7 liquidations, in a business reorganization under chapter 11, the debtor generally remains in possession and no trustee is appointed, thus allowing those most familiar with the business to continue managing it. The Bankruptcy Code generally provides debtors the opportunity to either assume or reject executory contracts in existence at the time the bankruptcy petition is filed. One sort of executory contract, collective bargaining agreements (CBAs), is treated somewhat differently. Although rejection of any executory contract is subject to the approval of the court, for most contracts, the business judgment rule applies and courts generally approve rejections that the debtor deems to be in its business interest. Rejection of CBAs must meet a higher standard. Section 1113 of the Bankruptcy Code provides the procedures that must be followed to reject a CBA. Recently introduced legislation would modify several sections of the Bankruptcy Code, including § 1113. H.R. 3652 and its companion bill, S. 2092 , were introduced by Representative Conyers and Senator Kennedy and are entitled the "Protecting Employees and Retirees in Business Bankruptcies Act of 2007." In this report, the two bills will be referred to as either H.R. 3652 or "the bill." This report's analysis of the bill will be limited to the modifications it proposes for § 1113 of the Bankruptcy Code. These modifications are found in § 8 of the bill. In its findings section, the bill asserts that despite recently enacted provisions to limit executive compensation, executive pay enhancements flourish in business bankruptcies at the expense of workers and retirees. According to the bill, workers and retirees are being disproportionately burdened in business bankruptcies. These workers and retirees have no way to diversify the risk of an employer's bankruptcy and are least able to absorb the losses imposed. H.R. 3652 urges "[c]omprehensive reform ... to remedy these fundamental inequities in the bankruptcy process and to recognize the unique firm-specific investment by employees and retirees in their employers' business through their labor." In 1984, the Bankruptcy Code was amended to add 11 U.S.C. § 1113, which outlines the requirements that must be met before a court can approve rejection of a collective bargaining agreement (CBA) by a debtor company using chapter 11 to reorganize. The section applies only to chapter 11 bankruptcies. Although there are no committee reports to explain the reason for adding 11 U.S.C. § 1113, its addition followed the U.S. Supreme Court's holding in National Labor Relations Board v. Bildisco and Bildisco . It is generally believed that Congress added the section in response to Bildisco . Bildisco was decided in February 1984, resolving a split between the circuits regarding the standard for rejection of a CBA. The Court held that rejection required that the agreement be burdensome to the debtor company and that rejection was favored after balancing the equities of the specific case. The Court also held that the debtor in possession did not automatically assume the CBA post-petition and would not violate § 8(a)(5) of the National Labor Relations Act (NLRA) if it unilaterally changed the terms of a CBA prior to the bankruptcy court's approval of rejection of that agreement. By adding § 1113, Congress provided both a procedure and a standard for rejection of CBAs and clarified that they could not be rejected under 11 U.S.C. § 365 as are other executory contracts. Furthermore, unilateral changes to the CBA were addressed and generally prohibited. H.R. 3652 proposes a number of changes to existing subsections of 11 U.S.C. § 1113 as well as adding six new subsections. As written, the bill would entirely replace the text of the first three subsections; however, the actual change to the text of the first subsection is minimal. At first glance, the bill appears to make dramatic changes in the Bankruptcy Code, but in some cases, the bill's language may be clarifying the Code rather than substantively changing it. In other cases, the language in the bill may be intended to either legislate resolution of some point of law that has been disputed in the courts or legislatively overrule existing case law. However, since there are no committee reports as yet, CRS cannot discern with certainty the sponsors' intent in proposing the changes. The proposed changes will be discussed in order, subsection by subsection, with accompanying discussion about the current state of the law, including ambiguities in the current code, various courts' interpretations, and scholarly writings about 11 U.S.C. § 1113. All headings referencing a subsection of 11 U.S.C. § 1113 refer to the subsections as proposed by this bill. Although the language of H.R. 3652 indicates that subsection (a) is deleted entirely, there is only one difference between the current text and the proposed text—that is the removal of the words "assume or." As currently written, 11 U.S.C. § 1113(a) states that a debtor "may assume or reject a collective bargaining agreement only in accordance with the provisions of this section." However, that is the only time that assumption of CBAs is referred to in the entire section. Courts generally have found that 11 U.S.C. § 365 governs the assumption of CBAs, but removing "assume" from the language of 11 U.S.C. § 1113(a), would seem to make it clear from the statute that nothing in 11 U.S.C. § 1113 applies to assumptions of CBAs. Note, however, although it would remove "assume" from this subsection, the bill would add a later subsection stating that assumptions of CBAs are in accordance with 11 U.S.C. § 365, which addresses executory contracts generally. H.R. 3652 would limit the modifications to the existing CBA that can be proposed by the debtor. The current law provides general guidance about the type of proposal that should be made: a proposal should provide the modifications in benefits and protections that are necessary for reorganization and assure fair treatment to "all creditors, the debtor, and all of the affected parties." In contrast, the bill would limit proposals to those that would (1) limit the effect of the labor group's financial concessions to no more than two years after the effective date of the plan; (2) be the minimum savings the debtor needs to successfully reorganize; and (3) not put too great a burden on the labor group, either in amount or nature of the concession, in comparison to burdens placed on other groups, "including management personnel." Current law puts no time limit on the duration of the effects a debtor's proposed modifications to a CBA may have on the relevant affected labor group. Although an authorized representative always has the option of rejecting a debtor's proposal, a court will not necessarily find that the debtor's proposal was not fair and equitable to all affected parties even if its effects on the labor group are long-lasting. If the court finds the proposal fair and equitable, it may grant rejection of the CBA. H.R. 3652 would prohibit court approval of rejection unless the debtor's proposals for modification were in compliance with the proposed limitations. Therefore, limiting the debtor to proposals affecting the labor group for no more than two years would assure labor groups that they would not be confronted with situations in which a CBA's rejection was approved by the court after the labor group had rejected a debtor's proposal for lengthy concessions. If such lengthy concessions were proposed, the court would not be allowed to approve rejection because the debtor's proposal would not be in compliance with the requirements of (proposed) 11 U.S.C. § 1113(b)(1)(A). However, limiting the duration of modifications to a CBA may limit the debtor's ability to successfully reorganize. Modifications that can, in just two years, provide sufficient economic relief for the company's survival may necessarily require economic concessions from employees that are too burdensome to be acceptable because the effect on paychecks is too great. Conversely, modifications that last no more than two years but also have a smaller effect on paychecks may not provide sufficient economic relief to allow the debtor company to survive, effectively forcing the company into liquidation. The bill's second requirement for debtors' proposals is that they must "be no more than the minimal savings necessary to permit the debtor to exit bankruptcy such that confirmation of such plan is not likely to be followed by the liquidation of the debtor." It is questionable whether this will do anything to clarify existing law, under which there have been conflicts over the meaning of "necessary" in the current requirement that the debtor make a proposal that "provides for those necessary modifications in the employees benefits and protections that are necessary to permit . . . reorganization." Some courts have held that necessary means the minimum needed to avoid immediate liquidation; other courts have found that "necessary" is a more lenient standard than "essential," and have looked at whether the modifications will ensure the debtor's ability to survive reorganization. By including the phrase "such that confirmation of the plan is not likely to be followed by the liquidation of the debtor," it seems that the bill is intended to use the more lenient standard. However, the use of "no more than the minimal savings" could cause a court to use a stricter standard. If the bill's language were strictly interpreted to mean that the debtor may propose no more than the absolute minimum savings, the debtor might be in a virtually untenable position. One court, in construing the current law's requirement that modifications be "necessary" to allow reorganization, noted that in the context of this statute "necessary" must be read as a term of lesser degree than "essential." To find otherwise, would be to render the subsequent requirement of good faith negotiation, which the statute requires must take place after the making of the original proposal and prior to the date of the hearing, meaningless, since the debtor would thereby be subject to a finding that any substantial lessening of the demands made in the original proposal proves that the original proposal's modifications were not "necessary." If the proposed requirement that proposed modifications would produce no more than the minimal savings required were taken literally, debtors would be similarly constrained. The third limitation on proposals looks only at the burdens that are placed on the groups with whom the debtor is expected to have continuing relationships, rather than looking at whether all are being treated "fairly and equitably" as required by current law. The proposed change would also specify management personnel as one of the groups to be considered in determining whether the labor group is being overly burdened. Throughout the history of 11 U.S.C. § 1113, courts have considered management personnel when considering whether a debtor's proposal treated all parties fairly and equitably. However, they have looked at the whole picture rather than simply comparing burdens. For example, a proposal to reduce wages for union employees was considered fair and equitable even though some management employees received an increase in pay. The court's rationale was that it was fair to increase the pay of supervisors who had been earning less than those they were supervising. The language for proposed 11 U.S.C. § 1113(b)(1)(C) could be construed to require those cuts in wages and benefits for employees must be matched by similar cuts for management employees. Whether that similarity would be construed to require dollar-for-dollar parity or percentage-based parity is unknown. Current law requires three conditions be met before a court can grant a motion to reject a CBA: (1) The debtor must meet the requirements of 11 U.S.C. § 1113(b)(1) by (a) presenting a proposal that both treats all parties equitably and proposes changes necessary for reorganization, and (b) providing the representative with information needed to evaluate the proposal; (2) The representative must have refused to accept the debtor's proposal without good cause; and (3) "[T]he balance of equities [must] clearly favor[] rejection." H.R. 3652 's proposed subsection (c) would have three main prongs as does the current subsection, but most of its similarity ends there. Current law has three fairly simple subparagraphs, each of which involves some discretionary judgment regarding facts and circumstances. The subparagraphs in proposed subsection (c) are complex and one provides a presumption that would bar rejection of a CBA if not effectively rebutted. Current practices among companies in bankruptcy may have triggered a perceived need for this provision. It appears that other provisions of this subsection may be in part a response to recent court decisions, but may be responding to Bildisco as well. Impasse . One of the changes in the process required for a court to approve rejection of a CBA is a new requirement that the parties have reached an impasse. The Bildisco Court specifically stated that approving a debtor's request for rejection should not require the courts to determine that negotiations had reached an impasse. Although 11 U.S.C. § 1113 was introduced in response to concern over the Bildisco decision, neither the word "impasse" nor the concept appears in the current section 1113. In proposed 11 U.S.C. § 1113(c)(1) the word appears twice and it appears a third time as a concept. CRS is uncertain if including "impasse" in H.R. 3652 is an attempt to resolve a long-standing issue or a response to current court decisions involving the airline industry. As noted below, courts have recently enjoined strikes that were threatened in response to rejection of CBAs. The Railroad Labor Act (RLA), unlike the National Labor Relations Act (NLRA), requires parties to "exert every reasonable effort to make ... [an] agreement." According to recent court decisions, labor groups governed by the RLA continue to be bound by this obligation even after a court has approved rejection of a CBA under 11 U.S.C. § 1113. These courts interpreted the RLA as requiring labor groups to continue collective bargaining until there is no possibility that the parties can agree. At that point, most would agree that the parties have reached an impasse. If the changes to § 1113(c)(1) are adopted, courts may need to determine if impasse is reached at some earlier point. CRS is uncertain how courts would construe the requirement that the parties be at "impasse." Since the proposed bill includes the phrase "further negotiations are not likely to produce a mutually satisfactory agreement," courts may use a "more likely than not" standard. If, however, the courts construed "impasse" as equivalent to the recent court interpretations of the RLA standard, requiring an impasse as a prerequisite to rejection could effectively eliminate most rejections—possibly through attrition since bargaining may well continue for a considerable period of time before a court would consider the parties at an impasse. If the company were to delay filing for bankruptcy and try to negotiate modifications to the CBA, parties who had not been able to reach a mutually satisfactory agreement might be considered to be at impasse when the bankruptcy case commences. However, whether the bargaining takes place before or after the bankruptcy filing, if it takes place over an extended period of time, a company might be forced to liquidate rather than reorganize. Those opposing this provision are likely to argue this would defeat the purpose of chapter 11 and, by not preserving jobs, would not protect workers. Those in favor of this provision are likely to argue that it encourages the parties to negotiate modifications each can accept, allowing the company to then continue with its workforce in place under a revised CBA. 11 U.S.C. § 1113(c)(1)(A) . In addition to finding that the parties are at an impasse, this subparagraph requires that, before approving a request for rejection, the court find that the debtor has fulfilled the requirements regarding proposing modifications. This is similar to current law, which also requires the debtor to have fulfilled the requirements of current subsection (b)(1), except that the requirements that must be met are different. The proposed change mirrors current law in requiring that the debtor provide appropriate information to the representative and bargain in good faith. 11 U.S.C. § 1113(c)(1)(B) . Under the bill, before approving rejection, the court must also "consider[] alternative proposals by the authorized representative and determine[] that such proposals do not meet the requirements of subparagraphs (A) and (B) of subsection (b)(1)." There is some ambiguity in this wording. Is the court to evaluate the representative's proposals as possible alternatives to the current CBA that the court might be able to impose on both the debtor and the labor group in lieu of outright rejection? On the other hand, could it mean that the court is simply to look at the representatives' proposals to determine whether they all meet the requirements of the subparagraphs? If they do, is the court then powerless to change the status quo of the CBA? There is nothing in the bill that explicitly gives the court the discretion to evaluate the representative's counterproposals and substitute one for the existing CBA. However, nothing in the current 11 U.S.C. § 1113(c) gives courts the power to impose the debtor's last proposal on both the debtor and the labor group after the court has approved rejection, yet courts have exercised that power. Inconsistencies between courts in applying the current law appear to be part of the impetus behind H.R. 3652 . Allowing the courts more discretion might increase those inconsistencies and lead to more "forum shopping" in bankruptcy filings. Courts might construe proposed subsection (c)(1) as simply providing prerequisites that must be met before a CBA can be rejected. In this case, proposed subparagraphs (A) and (B) might act as a constraint on negotiations by the representative. Since liquidation of the company normally would involve loss of jobs, it may be in the labor group's interest to make concessions if the debtor cannot reorganize without those concessions. However, as noted earlier, at times the burden on employees would be too great if the required economic relief provided to the employer were concentrated in a period of two years. To lessen the immediate impact on employees' paychecks, a representative might want to spread the effect of the financial concessions over three years rather than two. However, a representative might be reluctant to offer such a proposal if making it would open the door for court-approval of rejection. This might create a built-in conflict between the labor group's interest in avoiding rejection of the CBA and its interest in preserving jobs by making sufficient concessions to the debtor to assure successful reorganization. Current law does not require the court to look at the representative's counterproposals, but only at whether the representative had good cause for rejecting the debtor's proposals. Under current law, rejection has generally been the "stick" that was applied when representatives could not come to an agreement with debtors and did not have good cause for refusing to agree. The effect was to encourage negotiations, which is what section 1113 was intended to do. It is unclear whether the proposed provisions would encourage both parties to negotiate. It is possible that the provisions could create an imbalance in the two parties' motivation to negotiate, but at this point, we do not know which party might be more motivated by the proposed provisions. 11 U.S.C. § 1113(c)(1)(C) . This simply reiterates the impasse requirement by specifying that the court may only approve rejection if it finds that "further negotiations are not likely to produce a mutually satisfactory agreement." As noted earlier, courts may construe this as requiring less certainty as to the futility of further negotiations than exists under the RLA's requirement for continued bargaining. Under current law, the bankruptcy courts do not evaluate the prospects for an eventual agreement between the parties. 11 U.S.C. § 1113(c)(1)(D) . This provision requires the court to consider how the labor group would be affected by the debtor's proposal, but it seems to presume that the labor group will strike if the CBA is rejected. It requires the court to consider the effect of such a strike, including the debtor company's ability to "retain an experienced and qualified workforce." Reorganization in bankruptcy is based on the concept that it is better for all concerned if a company can continue in business rather than liquidate. If the result of rejection of a CBA is a strike that would effectively put the company out of business, the court may decide not to allow a rejection. If, however, the debtor company is not in a position to remain in business under the terms of the existing CBA, the company may be forced to liquidate rather than reorganize. This alternative might leave all creditors, including the labor group, in worse shape than they would have been had the company reorganized. This subsection provides parameters for the court's consideration of whether the debtor's proposed modifications meet the requirements of subsection (b). The court must consider the impact on all subsidiaries and affiliates of the debtor company, including foreign subsidiaries and affiliates, but what this means in practice is unclear. The court is also required to examine the history of financial concessions made by the labor group. If any have been made within twenty-four months prior to the filing of the bankruptcy petition, the court's evaluation of the debtor's proposed modifications must aggregate the effect of the earlier concession with the effect of the currently proposed modifications. This aggregation is unlikely to affect whether the proposed modifications meet the requirements of proposed 11 U.S.C. 1113(b)(1)(A)-(B), but is likely to affect evaluation of the burden imposed on the labor group as compared to other groups. Under current law, in considering whether to approve rejection, the court has discretion in concluding that the required conditions have been met. While H.R. 3652 does not remove all of the court's discretion, in one area the bill appears to significantly restrict the court's discretion. H.R. 3652 would establish a presumption that the debtor has overly burdened the labor group in comparison to the burdens on other groups, including management, if it "has implemented a program of incentive pay, bonuses, or other financial returns for insiders or senior management personnel during the bankruptcy, or . . . within 180 days" before the case began. Unless that presumption can be effectively rebutted, the debtor will have failed to meet the requirements for rejection. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) restricted "key employee retention plans" (KERPS), which provided retention bonuses and severance pay to management employees who were retained to manage the business through its reorganization. Since BAPCPA became effective, there has been a move toward paying managers incentive payments, which were not restricted. Though some of these incentive pay schemes have been rejected by the courts as actually being retention bonuses that did not meet BAPCPA's requirements, others have been upheld as incentive bonuses and, therefore, not subject to the restrictions imposed by the post-BAPCPA Bankruptcy Code restrictions. In 2006, both the Senate and the House introduced bills that would have limited the use of incentive bonuses in the same way that BAPCPA had limited retention pay. Though the bills were not passed by the 109 th Congress, their provisions are included in H.R. 3652 . This bill would extend BAPCPA restrictions on retention pay to incentive and performance bonuses as well as "bonus[es] of any kind, or other financial returns designed to replace or enhance incentive, stock, or other compensation in effect" before the bankruptcy petition was filed. These restrictions are bolstered by the bill's proposed amendment to 11 U.S.C. § 1113(c)(3). This proposed amendment could make it difficult for the court to approve rejection of a CBA if there were any sort of incentive pay, even if the court had approved the incentive pay after finding that it was necessary to retain a person whose services were essential for the business to continue, and met the other restrictions of 11 U.S.C. § 503(c)(1). Arguably, this could put a court in the position of having little flexibility to make decisions that could result in the debtor company's successful reorganization—if it allowed incentive pay to retain someone essential to the business, it could be unable to approve rejection of a CBA if the debtor could not rebut the presumption that the labor group was being burdened more than management. If it did not allow incentive payments, the company might lose an employee who was seen as necessary for survival. Either alternative might cause the debtor to liquidate rather than reorganize. However, it could also be argued that this provision would encourage debtors to carefully consider whether incentive pay was necessary and, if necessary, limit it so that an effective argument could be made that the incentive did not create a situation in which the labor group was disproportionately burdened by the modifications in a CBA. Under current law, the court is required to schedule a hearing within fourteen days after the debtor files an application for rejection. All interested parties currently have the right to attend the hearing and be heard and must receive notice at least ten days before the hearing. The court must rule on the application within thirty days unless otherwise agreed to by the debtor and representative. If the court does not rule within the required time, the debtor may unilaterally modify or terminate the CBA pending the court's ruling. H.R. 3652 would extend the period required for notice to at least twenty-one days. The bill deletes, rather than modifies, the provision for holding the hearing within fourteen days of the filing date. The deletion may have been unintentional—the intent may have been to set the same time frame for notice as for hearing. On the other hand, the deletion may have been intended to avoid requiring an early hearing on an application for rejection, permitting additional time for continuing negotiation between the debtor and the authorized representative. The bill would restrict the parties who could appear and be heard, limiting them to only the debtor and the authorized representative. This may have the effect of streamlining the hearing process by eliminating consideration of other parties' concerns. Under both current and proposed law, the creditors would have an opportunity to approve or reject the reorganization plan, which would incorporate the results of the rejection hearing. Under the bill's proposals, there would be no time frame within which the court would be required to rule and no provision allowing the debtor to unilaterally modify a CBA while a ruling was pending. This appears to encourage continuing negotiations between the debtor and the authorized representative without a statutory deadline. The bill proposes no changes to this section—while parties continue to negotiate changes to a CBA, courts would continue to be allowed to approve interim modifications to a CBA "if essential to the continuation of the debtor's business, or in order to avoid irreparable damage to the estate." However, the addition of subsection (g) as proposed in the bill, allowing labor groups to strike or engage in other methods of "self-help" in response to court-ordered modifications under this subsection, may tend to reduce either the extent to which courts are willing to approve interim modifications or the potential benefit to the debtor of an interim modification. If so, it could lead to liquidations rather than reorganizations when interim modifications are essential for the company to remain in business. H.R. 3652 would not change the current language, but would add a provision regarding allowed administrative claims. Under the bill's proposal, all payments required under 11 U.S.C. § 1113 on or before the date of confirmation of the reorganization plan would be considered allowed administrative claims. That would mean that the plan would be required to provide for full payment of the claims. Currently there is no statute addressing whether court-approved rejection of a CBA gives rise to a claim for damages and courts have been divided on the subject. The bill would add a subsection that would define rejection of a CBA as a breach and would address the effect of rejection of a CBA, in terms of both money damages and "self-help"—the right of affected employees to strike. This is one of the subsections where the use of a particular word may have import that is not immediately obvious. In general, rejection of executory contracts has been treated as a breach. However, recently, in Northwest Airlines Corporation v. Association of Flight Attendants , rejection of a CBA was characterized not as a breach but as an abrogation. As the court viewed it, an abrogation has a different legal effect than does a breach. While a breach would have a remedy, an abrogation under 11 U.S.C. § 1113 terminates the provisions of the CBA and allows substitution of court-approved provisions. It is possible that the word breach is used in this proposed subsection merely to identify the rationale for the prescribed remedy. On the other hand, it is possible that the word was used to legislate an effect of rejection that is different than that determined by the Northwest Airlines court. In evaluating which is more likely to be the case, one should consider that the court specifically contrasted the effect of rejection under 11 U.S.C. § 365 with that under 11 U.S.C. § 1113, stating, "Contract rejection under § 1113, unlike contract rejection under § 365, permits more than non-performance." According to the court, the purpose of 11 U.S.C. § 1113 is "to permit CBA rejection in favor of alternate terms without fear of liability after a final negotiation before, and authorization from, a bankruptcy court." This seems to imply that the Northwest Airlines court's position is not only that rejection is an abrogation rather than a breach, but also that there are no damages to be recovered from rejection of a CBA under 11 U.S.C.§ 1113. Under the bill, court-approved rejection would be a breach of contract with the same effect as rejection of any other executory contract under 11 U.S.C. § 365(g), but would exclude those damages from the limitations of 11 U.S.C. § 502(b)(7). Under 11 U.S.C. § 365(g), rejection of a contract is treated as a breach of contract immediately before the date the bankruptcy petition was filed. Section 502(b)(7) limits damages for termination of an employment contract to one year's compensation, without acceleration, plus any unpaid compensation. Although H.R. 3652 specifically excludes damages for rejected CBAs from the damage limitation of 11 U.S.C. § 501(b)(7), the explicit exclusion may not be necessary since courts have held that the subsection does not apply to CBAs. Section 365(g) of the Bankruptcy Code sets the date of the breach as just before the filing of the petition, which would make such claims pre-petition claims. Pre-petition claims are generally unsecured, nonpriority claims. However, this bill proposes to define administrative expenses, which are priority claims, as including all payments required under 11 U.S.C. § 1113 that must be paid on or before the date the reorganization plan is confirmed. Proposed subsection (g) does not actually mandate payment of the breach damages before the confirmation date, so it is unclear whether those damages are intended to be treated as an administrative expense and, therefore, a priority claim rather than as a pre-petition, nonpriority claim. If given the status of an administrative claim, it is difficult to foresee a situation in which a company could benefit from rejection of a CBA since it would appear likely that any financial gain garnered by rejecting the CBA would be lost through the breach damages for rejections. If those damages are treated as are other breach damages for rejection of executory contracts, they would be unsecured, nonpriority, pre-petition claims, and the reorganization plan could provide for partial rather than full payment of them, thereby allowing some economic benefit to the company in bankruptcy. Self-help by a labor group may consist of a strike or a threat of strike even though a strike could be an economic blow that a distressed company might arguably be unable to recover from. When a CBA is rejected in chapter 11 reorganization under the current provisions of 11 U.S.C. § 1113(c), labor groups' right to strike seems to depend upon whether the group is covered by the RLA or the NLRA. Groups covered by the NLRA may strike even if the rejected CBA contained a "no strike" clause. Since the CBA no longer exists after rejection, the "no strike" clause has no continuing effect. Airline transportation workers, however, are covered by the RLA, which requires that the parties exert every reasonable effort to negotiate agreements even after a court-approved rejection. Therefore, several recent cases involving the airlines have resulted in injunctions prohibiting the unions from striking. Modifications to CBAs under current 11 U.S.C. § 1113(d)(2) or (e) do not make the CBA ineffective in its entirety. Therefore, although a "no strike" clause would become ineffective after rejection of a CBA, it would remain in effect under current law when there are interim modifications to a CBA. H.R. 3652 would change the law so that all labor groups, even those controlled by the RLA would have the right to strike when a CBA was rejected. The right to strike would also exist if interim modifications were approved by a court—apparently without reference to whether the CBA included a "no strike" clause. Since a strike might be a fatal economic blow to a distressed company and since interim modifications are approved by the court only when they are either "essential to the debtor's business []or . . . to avoid irreparable harm to the estate," codifying the right to strike after court-approved interim modifications might jeopardize both the debtor company's existence and its creditors' claims. The proposed subsection would, by its language, also preempt all other federal and state laws regarding labor groups' right to engage in self-help. Under current law, there is no provision for future modifications of a CBA if the debtor's financial condition improves. In negotiations over CBAs, representatives may ask for "snap-back" provisions that would provide for future modifications, but the absence of such a provision would not necessarily lead to a court's determination that the representative had good cause for rejecting the debtor's proposal. H.R. 3652 would add a subsection to assure that, based on changed circumstances, representatives could request modifications after CBAs were either rejected or modified. The bill would require the court to grant the request if the change would result in the new provisions being no more than the minimum savings needed for the debtor to reorganize successfully. Assurance of the possibility of future favorable modifications might make representatives more inclined to cooperate with debtors' proposals for modifications. However, under current law, while "snap-back" provisions have been available for modifications, they have not been required as part of either a negotiated modification or a court-approved rejection. Currently there is no provision for arbitration rather than a court hearing to rule on a motion for rejection of a CBA. H.R. 3652 would add a subsection to allow arbitration in lieu of a court hearing if requested by the authorized representative, so long as the court finds that arbitration would help the parties reach an agreement that was mutually satisfying. This could reduce the demand for courts' resources; however, only the authorized representative can make the request. The debtor cannot make the request, and the court cannot order arbitration without a request. Using arbitration to resolve a debtor's request to reject a CBA may open greater possibilities for finding a middle ground between complete rejection of a CBA and assumption of the existing CBA. It may also, however, increase the time required to resolve the issue. Under current law, unless otherwise agreed to by the debtor and representative, the court is required to hold hearings on requests for approval of rejection within no more than twenty-one days and to rule on the application no later than thirty days after the beginning of the hearing. As noted earlier, the proposed changes to § 1113 eliminate both of these deadlines. The bill does not directly address which party will pay for arbitration. It appears, however, that if all of the bill's provisions were to become law, the debtor would probably pay for the arbitration as an administrative expense since subsection (j) provides for reimbursing the representative for reasonable costs and fees incurred. Although current law includes provisions for allowing priority claims as administrative expenses for various expenses incurred in reorganization, there is no provision for reimbursing the authorized representative for fees and costs incurred in complying with the requirements of 11 U.S.C. § 1113. The bill would add subsection (j) to make these costs reimbursable upon request and notice and hearing. Under the bill's proposed changes, they would be considered administrative expenses. As administrative expenses, they would be priority claims whose payment in full must be provided for in the plan for reorganization. This provision could result in shorter negotiations or more flexible proposals by the debtor, who would need to balance the cost of continued negotiations with the economic benefit that might be gained through those negotiations. However, it could also lead to more liquidations if administrative expenses increased to the point that they could not be accommodated in a reorganization plan. When a debtor's reorganization plan involves either selling all or part of the business or ceasing some or all of the business, the bill would require the debtor and authorized representative to meet to determine the effects on the labor group. Any accrued obligations that were not assumed as part of a sale transaction would be treated as administrative expenses. Under current law, all post-petition obligations that are required by the CBA are considered administrative expenses. Additionally, where a CBA has been assumed, accrued pre-petition obligations under the CBA may also be administrative expenses. Although the bill would remove the word "assume" from 11 U.S.C. § 1113(a), it would add a subsection that would clearly state that assumption of CBAs are treated as are other executory contracts and assumed under 11 U.S.C. § 365. In its findings, the bill states that Congress finds that chapter 11 was enacted "to protect jobs and enhance enterprise value for all stakeholders," but is, instead, being used to "caus[e] the burdens of bankruptcy to fall disproportionately and overwhelmingly on employees and retirees." Revising the process for rejection of CBAs is one of the ways this bill proposes to rectify the inequities it asserts. For many companies in bankruptcy, expense for employees is the largest expense in the budget, and some modification of that expense may be essential to their successful reorganization. Section 1113, as it currently exists, has provided labor groups with protection from debtor companies' unfettered rejections of CBAs, but has also provided a method for debtor companies to reject CBAs when they could not reach a compromise with the authorized representatives of the labor groups. The proposed revisions to section 1113 would constrain both debtor companies and the courts when debtors file under chapter 11. The bill clearly contemplates allowing labor groups to have a greater, possibly definitive, role in determining the feasibility of reorganization. Labor groups, but not debtors, would be allowed to request arbitration rather than a court hearing to determine approval of a debtor's request to reject a CBA. In certain circumstances, the bill would allow labor groups to obtain future relief due to changed circumstances without having to bargain with the company. The bill would also extend the right to strike to all labor groups whenever a CBA was modified or rejected without their consent. Finally, the bill provides labor groups with a defined remedy for rejection of a CBA, though courts might differ in their interpretation of that remedy. Companies in financial distress may argue that the bill's proposed changes to chapter 11 are insufficiently flexible to allow successful reorganization. If that is their conclusion, they might try to resolve their financial difficulties outside of bankruptcy or choose to liquidate rather than reorganize.

Introduced in the 110 th Congress, the Protecting Employees and Retirees in Business Bankruptcies Act of 2007 ( H.R. 3652 ) proposes a number of changes to the U.S. Bankruptcy Code. According to the sponsors, the changes are needed to remedy inequities in the bankruptcy process and to recognize that employees and retirees have a unique investment in their companies through their labor. The bill contains many proposals for changing the Bankruptcy Code. This report focuses on the amendments and additions to 11 U.S.C. § 1113, which provides the procedures that are to be followed if a debtor in possession wants to reject a collective bargaining agreement (CBA). The changes proposed for § 1113 may be intended to promote negotiation between the debtor and the authorized representatives of labor groups that have existing CBAs with the debtor company. They also appear to constrain court involvement in the process. This could lead to more agreed-upon modifications and fewer rejections of CBAs. Alternatively, it could prolong the negotiation process and put burdens on the debtor that would make liquidation more feasible than reorganization. The bill prescribes the parameters of offers that may be made by the debtor in negotiations as well as the requirements that must be met before a court can approve rejection. It attempts to curtail what the sponsors have referred to as "excesses of executive pay" by making rejection of a CBA difficult if executives are to receive incentive pay and by requiring consideration of past concessions by the labor group in determining whether the labor group is being disproportionately burdened by proposed modifications to a CBA. H.R. 3652 appears to propose changes to § 1113 that would resolve some differences between courts in interpreting the requirements for modification or rejection of a CBA. It also clearly states that rejection of a CBA is a breach of contract, even when approved by the court, and clarifies the damages that are available. The bill provides an absolute right of all employees to strike if their CBA is modified or rejected. This contrasts with recent court decisions involving unions representing employees of financially distressed airlines in which the employees were enjoined from striking.

govreport

This report is part of a suite of reports tha t discuss appropriations for the Department of Homeland Security (DHS) for FY2016. It specifically discusses appropriations for the components of DHS included in the first title of the homeland security appropriations bill—the Office of the Secretary and Executive Management, the Office of the Under Secretary for Management, the DHS headquarters consolidation project, the Office of the Chief Financial Officer, the Office of the Chief Information Officer, Analysis and Operations, and the Office of Inspector General for the department. Collectively, Congress has labeled these components in recent years as "Departmental Management and Operations." The report provides an overview of the Administration's FY2016 request for Departmental Management and Operations, the appropriations proposed by Congress in response, and those enacted thus far. Rather than limiting the scope of its review to the first title, the report includes information on provisions throughout the proposed bills and reports that directly affect these functions. The suite of CRS reports on homeland security appropriations tracks legislative action and congressional issues related to DHS appropriations, with particular attention paid to discretionary funding amounts. The reports do not provide in-depth analysis of specific issues related to mandatory funding—such as retirement pay—nor do they systematically follow other legislation related to the authorization or amending of DHS programs, activities, or fee revenues. Discussion of appropriations legislation involves a variety of specialized budgetary concepts. The appendix to CRS Report R44053, Department of Homeland Security Appropriations: FY2016 , explains several of these concepts, including budget authority, obligations, outlays, discretionary and mandatory spending, offsetting collections, allocations, and adjustments to the discretionary spending caps under the Budget Control Act ( P.L. 112-25 ). A more complete discussion of those terms and the appropriations process in general can be found in CRS Report R42388, The Congressional Appropriations Process: An Introduction , by [author name scrubbed], and the Government Accountability Office's A Glossary of Terms Used in the Federal Budget Process . Except in summary discussions and when discussing total amounts for the bill as a whole, all amounts contained in the suite of CRS reports on homeland security appropriations represent budget authority and are rounded to the nearest million. However, for precision in percentages and totals, all calculations were performed using unrounded data. Data used in this report for FY2015 amounts are derived from the Department of Homeland Security Appropriations Act, 2015 ( P.L. 114-4 ) and the explanatory statement that accompanied H.R. 240 as printed in the Congressional Record of January 13, 2015, pp. H275-H322. Contextual information on the FY2016 request is generally from the Budget of the United States Government, Fiscal Year 2016 , the FY2016 DHS congressional budget justifications, and the FY2016 DHS Budget in Brief . However, most data used in CRS analyses in reports on DHS appropriations are drawn from congressional documentation to ensure consistent scoring whenever possible. Information on the FY2016 budget request and Senate-reported recommended funding levels is from S. 1619 and S.Rept. 114-68 . Information on the House-reported recommended funding levels is from H.R. 3128 and H.Rept. 114-215 . Information on FY2016 enacted appropriations is derived from P.L. 114-113 , the Omnibus Appropriations Act, 2016—Division F of which is the Homeland Security Appropriations Act, 2016—and the accompanying explanatory statement published in Books II and III of the Congressional Record for December 17, 2015. Generally, the homeland security appropriations bill includes all annual appropriations provided for DHS, allocating resources to every departmental component. Discretionary appropriations provide roughly two-thirds to three-fourths of the annual funding for DHS operations, depending how one accounts for disaster relief spending and funding for overseas contingency operations. The remainder of the budget is a mix of fee revenues, trust funds, and mandatory spending. Appropriations measures for DHS typically have been organized into five titles. The first four are thematic groupings of components: Departmental Management and Operations; Security, Enforcement, and Investigations; Protection, Preparedness, Response, and Recovery; and Research and Development, Training, and Services. A fifth title contains general provisions, the impact of which may reach across the entire department, impact multiple components, or focus on a single activity. The following pie chart presents a visual comparison of the share of annual appropriations requested for the components of each title, highlighting the title containing the components discussed in this report in purple. Departmental Management and Operations components made up about 3% of the discretionary appropriations requested for DHS for FY2016. As noted above, Title I of the DHS appropriations bill provides funding for the department's management activities, Analysis and Operations (A&O) account, and the Office of the Inspector General (OIG). Funding is also included in Title V, General Provisions, for some of these components. The Administration requested $1,396 million in total budgetary resources for these accounts in FY2016, an increase of $255 million (22.3%) above the FY2015 enacted level. The Senate-reported bill would have provided $1,346 million, a decrease of $73 million (5.2%) from the request and $182 million (16.0%) above FY2015. The House-reported bill would have provided $1,217 million, a decrease of $178 million (12.8%) from the request, but $76 million (6.7%) above FY2015. On December 18, 2015, the President signed into law P.L. 114-113 , the Consolidated Appropriations Act, 2016, Division F of which was the Department of Homeland Security Appropriations Act, 2016. The act included $1,546 million for Title I components in FY2016, $405 million (35.5%) more than was provided for FY2015, and $150 million (10.7%) more than was requested. Table 1 presents the enacted funding level for the individual components funded under Departmental Management and Operations for FY2015, as well as the amounts requested for these accounts for FY2016 by the Administration, recommended by the Senate and House appropriations committees, and provided by the enacted annual appropriation for FY2016. The table includes information on funding under Title I as well as other provisions in the bill. The departmental management accounts cover the general administrative expenses of DHS. They include the Office of the Secretary and Executive Management (OSEM), which is comprised of the Immediate Office of the Secretary and 11 entities that report directly to the Secretary; the Under Secretary for Management (USM) and its components—the offices of the Chief Readiness Support Officer (formerly, the Office of the Chief Administrative Officer [OCAO]), Chief Human Capital Officer (OCHCO), Chief Procurement Officer (OCPO), and Chief Security Officer (OCSO); the Office of the Chief Financial Officer (OCFO); and the Office of the Chief Information Officer (OCIO). The Administration has usually requested funding for the consolidation of its headquarters here as well, although this report treats that project separately, and does not include it in the totals in this section. The Administration requested $702 million for departmental management, plus $43 million for a crosscutting financial systems consolidation effort in a general provision. This total included $134 million ($1 million, or 0.7% above the FY2015 level) for OSEM and $193 million for USM ($5 million, or 2.6% above the FY2015 level). The Administration requested $97 million for OCFO, including the $43 million noted above, for an overall increase of $12 million (12.4%) above the FY2015 level. Most of the increase was for the financial systems consolidation, which had been funded at $34 million in FY2015. The Administration requested $321 million for OCIO as well ($32 million, or 11.3% above the FY2015 level). S. 1619 , as reported by the Senate Committee on Appropriations, included $675 million for departmental management in Title I and $36 million for the crosscutting financial systems consolidation effort in the general provisions. The proposed funding level was $18 million (2.6%) more than FY2015, and $33 million (4.4%) less than requested by the Administration. H.R. 3128 , as reported by the House Committee on Appropriations, included $690 million for departmental management in Title I, and $53 million for the crosscutting financial systems consolidation effort in the general provisions. The proposed funding level was $49 million (7.1%) more than FY2015 and $1 million (0.2%) less than requested by the Administration. The law provided total funding of $701 million for Departmental Management in Title I, and $203 million in three general provisions, not including the funding for DHS headquarters consolidation at St. Elizabeths. This was a decrease of $2 million or 0.3% from the President's request of $702 million under Title I, but an increase of $160 million in funding provided through general provisions, including $150 million to address emergent threats and support cybersecurity efforts. See Table 2 for additional detail. The Administration requested $134 million for OSEM and 597 full-time employee equivalents (FTEs). H.R. 3128 , as reported, included $132 million for OSEM, $2 million (1.5%) less than requested. S. 1619 , as reported, included $133 million, $1 million (0.7%) less than requested. Title I of P.L. 114-113 provided $137 million for OSEM, $3.2 million (2.4%) more than requested. As in the Senate-reported bill, $13 million of OSEM funding was withheld from obligation until both the comprehensive plan to implement the biometric entry and exit data system and the report on visa overstay data by country are submitted, as required, within 30 days after the act's enactment, to the House Committees on Appropriations, the Judiciary, and Homeland Security and the Senate Committees on Appropriations, the Judiciary, and Homeland Security and Governmental Affairs. The explanatory statement specified that the visa overstay report must include (1) overstays from all nonimmigrant visa categories under the immigration laws, by each class and sub-class; and (2) numbers and rates of overstays for each class and sub-class of nonimmigrant categories per country. The House committee recommended the requested $5 million for the Joint Requirements Council (JRC). The committee report directed the department to keep the committee informed on the Council's efforts to examine and reform joint operations within DHS and to clearly display in its budget execution and justification materials efficiencies and savings achieved from JRC operations. The explanatory statement directed the JRC to provide quarterly briefings beginning no later than January 30, 2016, on its results with regard to improving and leveraging joint requirements across components. The House report stated the committee's expectation that DHS would track the number of times that unmanned aircraft systems are used along the border, in a maritime environment, or in support of state, local, and tribal law enforcement entities, to monitor compliance with laws and standards on privacy and civil liberties. The report also stated that committee's expectations that the department would submit, by the required deadlines, reports that (1) assess the feasibility, cost, and benefits of implementing a universal complaint system across the department, to ensure that complaints are promptly addressed, and (2) provide an update on the corrective action plan to address low employee morale and the poor climate for workplace innovation. The explanatory statement directed the department to expeditiously brief the House and Senate Appropriations Committees on the report (which is overdue) on a universal complaint system. The House committee report directed the Office of Policy to provide a detailed description of all DHS countering violent extremism (CVE) programs and initiatives, including associated personnel and funding levels, within 60 days after the act's enactment as a means to ensure that the United States "is positioned to counter homegrown violent extremism and prevent domestic radicalization." A new general provision at Section 543 in P.L. 114-113 provided $50 million "for emergent threats from violent extremism and from complex coordinated terrorist attacks." The funds may be transferred by the Secretary between appropriations upon 15 days advance notice to the House and Senate Appropriations Committees. The explanatory statement specified that the funds be allocated as $10 million for a CVE initiative to assist states and local communities to "prepare for, prevent, and respond to emergent threats from violent extremism"; up to $39 million for an initiative to assist states and local governments to "prepare for, prevent, and respond to complex, coordinated terrorist attacks with the potential for mass casualties and infrastructure damage"; and at least $1 million to expand or enhance the Joint Counterterrorism Awareness Workshop Series. The funds will be provided on a competitive basis directly to states, local governments, tribal governments, nonprofit organizations, or institutions of higher education. The explanatory statement provided information on activities that would be eligible for funding. According to the explanatory statement, the Office of Partnership and Engagement received $13 million, including an increase of $3.1 million for the Office of Community Partnerships. It directed the office to describe in detail its CVE programs and initiatives within 60 days after the act's enactment. The House committee report also directed the Office of Policy to (1) continue developing border security metrics that are focused on reducing illegal import and entry and include measuring inflow rates, apprehension rates, and consequences for the department's jurisdiction over the Southwest Border and (2) brief the committee on such within 30 days after the act's enactment. The report directed the department to ensure that the office fully participates in interagency discussions on visa policy matters. The explanatory statement directed the office to coordinate with components to finalize the metrics, including those specified in the House report and survey and historical data, which can be assessed against operational and strategic requirements for improved security at the border. According to the statement, the metrics will inform decisions on resource allocations and management of the mission. Within the Office of Policy, the House committee report directed the Office of Immigration Statistics (1) to develop and implement a plan to collect, analyze, and report appropriate data on immigration enforcement activities, including data on the use of prosecutorial discretion; (2) to include steps in the plan to ensure complete and accurate data on such activities from encounter to final disposition; and (3) to brief the committee on the plan within 60 days after the act's enactment. The explanatory statement included the directive and further specified that data, including those collected by the Executive Office for Immigration Review at the Department of Justice and the Office of Refugee Resettlement at the Department of Health and Human Services, on the department's effectiveness in enforcing immigration laws be considered and prioritized. According to the statement, the plan should result in outcome-based metrics on immigration enforcement that are consistent and able to be released to the public on a regular basis. Both the House and Senate reports addressed the issue of increased trafficking in wildlife. The House report directed the Secretary to report, within 120 days after the act's enactment, on (1) the department's activities to address wildlife trafficking (rhinoceros horns and elephant ivory from Africa) and the illegal natural resources trade (illegally harvested timber); (2) its continued membership on the Presidential Task Force on Wildlife Trafficking; (3) efforts to improve coordination with the U.S. Fish and Wildlife Service (USFWS) Office of Law Enforcement; (4) steps taken to implement the National Strategy on Wildlife Trafficking; and (5) aligning resources to activities and initiatives that address wildlife trafficking and natural resources trade. The Senate report continued the requirement for a report on wildlife trafficking activities and recommended that CBP and the USFWS "improve cooperation and coordination among the agencies to better address" this matter. The explanatory statement directed the Secretary to update the report on activities related to wildlife trafficking and illegal natural resources trade within 120 days after the act's enactment. The Administration requested $193 million for the USM and 822 FTEs. S. 1619 , as reported, included $184 million for the USM, $9 million (4.5%) less than requested. H.R. 3128 , as reported, included $194 million for the USM, less than $1 million (0.2%) more than requested. Title I of Division F of P.L. 114-113 provided $197 million for the USM, $3.6 million (1.9%) more than requested. Of the total, the Human Resources Information Technology program received almost $8 million. The House- and Senate-reported bills, and the law, again required the Under Secretary to include a Comprehensive Acquisition Status Report (CASR) in the FY2017 budget proposal and thereafter, within 45 days after the completion of each quarter. The House Appropriations Committee report directed that an unclassified version of the CASR be posted on the department's public website with all programs displayed by appropriation and PPA (Program/Project Activities), and that the Chief Acquisition Officer and each Component Acquisition Executive (CAE) provide briefings on all acquisition projects at levels 1, 2, and 3, within 30 days after the CASR is submitted. The explanatory statement specified that the briefings are to be provided on Level 1, Level 2, and special interest projects. The House report stated that "The Committee is deeply troubled by the fact that DHS operational components remain unable to communicate with each other a decade after the 9/11 Commission highlighted the problem and after expending $430 million to address the problem." Therefore, the committee directed the USM to provide a briefing to the committee on the "plan to achieve and maintain interoperable communications" among DHS components within 90 days after the act's enactment. The report listed eight required information and data points for the contents of the plan. The USM was directed to develop written guidance to manage the IT enterprise architecture by April 1, 2016, that "institutionalizes a consumption-based IT business model across DHS based on the acquisition of IT services rather than IT assets when appropriate and cost-effective; and defines and distinguishes IT sustainment costs versus new development and investment." The explanatory statement directed the USM to brief the House and Senate Committees on Appropriations on a plan and timeline "to remedy the operational communications shortfalls [long known by the department] with existing communications capabilities" within 90 days after the act's enactment. It also specified that the briefing must specifically address how the department will manage requirements and procurements for joint communications to ensure that interoperability across components is sustained. Within USM subcomponents, the committees, and the explanatory statement, recommended the following appropriations: Office of the Chief Security Officer —Responding to a request for $67 million, the Senate report recommended $65 million, while the House report recommended $68 million, in part driven by increased funding of $2 million for Continuous Evaluation, "a technique used to investigate an individual's continued eligibility to access classified information or to hold a sensitive position." The explanatory statement recommended $69 million, including the increase of $2 million for Continuous Evaluation. Office of the Chief Procurement Officer (OCPO) —Responding to a request for $59 million, the Senate report recommended $59 million, while the House report recommended $61 million, driven in part by increased funding of $2 million for critical personnel needed by Program Accountability and Risk Management (PARM) to oversee major acquisition programs. The committee also recommended the requested funding to comply with the DATA Act, which requires that procurements have unique identification numbers. The explanatory statement recommended almost $61 million, including the increase of $2 million for PARM personnel. Office of the Chief Human Capital Officer (OCHCO) —Responding to a request for $34 million, of which $24 million was for salaries and expenses (S&E), the Senate report recommended less than $27 million, of which $19 million was for S&E. The House report recommended $31 million, of which almost $22 million was for S&E. One key difference was the treatment of the Administration's CyberSkills initiative: The Senate report noted that the $5 million in requested funding for the CyberSkills initiative was included in the recommended appropriations for the OCIO and NPPD, while the House report indicated the project was not funded. The Senate-reported bill provided less than $8 million for Human Resources Information Technology, almost $2 million less than the budget request and House-reported bill. The explanatory statement recommended $32 million, of which $24 million was for S&E. Of the total, $2.5 million funded the CyberSkills initiative, $2.5 million funded management and improvement of the hiring processes in components, and up to $350,000 funded the DHS Leader Development Program. Office of the Chief Readiness Support Officer —Responding to a request for $30 million, the Senate- and House-reported bills included $30 million, to be allocated as $27 million for salaries and expenses and almost $3 million for repairs to the Nebraska Avenue Complex. Noting substantial progress by the department in developing a common flying hour program, the House report directed the office to continue to provide quarterly updates on the program and to expand the Field Efficiencies Pilot Program to at least 10 additional cities by the end of FY2016, to further savings realized through cost avoidance. The explanatory statement recommended almost $32 million, to be allocated as $27 million for S&E and more than $4 million for repairs to the Nebraska Avenue Complex. As noted above, the Administration requested $97 million for the OCFO and 228 FTEs. Title I included $54 million for the OCFO and Title V included an additional $43 million for financial systems modernization efforts. The FY2016 request represented an $11 million, or 12.8%, increase above the $86 million provided to the CFO in FY2015. S. 1619 , as reported, included $53 million for the OCFO under Title I, and $36 million under Title V, for a total OCFO investment of $89 million, $8 million (8.2%) less than requested. The Senate Appropriations Committee report explained that the recommendation for funding Financial Systems Modernization at a level that was almost $7 million below the President's request was "due to program delays that have occurred since the budget request was formulated." H.R. 3128 , as reported, included $56 million for OCFO under Title I, and $53 million under Title V for the Financial Systems Modernization Program, for a total OCFO investment of $109 million, $12 million (12.4%) above the amount requested. Division F of P.L. 114-113 provided $56 million for OCFO in Title I and $53 million in Title V, for a total OCFO investment of $109 million, almost $13 million (13%) more than requested. Of the Title I funding, the explanatory statement recommended that $3 million "be used to improve financial management processes and cost estimation capabilities." According to the statement, the Title V funding will enable the Secretary to allocate resources according to the program execution plan for modernization. The House- and Senate-reported bills, and the law, provided that the Secretary must submit the Future Years Homeland Security Program (FYHSP) at the same time as the President's budget is submitted. The Senate Appropriations Committee report again specified that the FYHSP show funding by appropriation account and subordinate program, project, or activity and be accessible to the public. Both bills, and Division F of P.L. 114-113 , continued a general provision at Section 513 requiring budget and staffing reports to be submitted to the House and Senate Appropriations Committees within 30 days after the close of each month, with specifications for information to be included. The House Appropriations Committee report included an additional content requirement that the staffing levels for each account be based on the most recent pay period. To facilitate oversight of the department's financial management activities, the House committee report directed the OCFO to develop a regulation on financial management to: 1. establish financial management policies; 2. ensure compliance with applicable accounting policy, standards, and principals; 3. establish, review, and enforce internal control policies, standards, and compliance guidelines for financial management; 4. ensure that complete, reliable, consistent, timely, and accurate information on disbursements is available in financial management systems; and 5. provide oversight of financial management activities and operations including developing budget requests and preparing for audits. The House committee report recommended funding of $3 million for subject matter experts and support staff to assist with developing the regulation and implementation of a common appropriations structure for the department. Expressing persistent concerns about the transition to a federal shared service provider for financial management services, the House committee report directed GAO "to assess the risks of utilizing the Department of Interior's Business Center (IBC), whether the IBC is capable of expanding its services to additional Federal agencies, and [compare] the services and capabilities of Federal and commercial shared service providers." The OCFO was directed to update the estimate of lifecycle costs to include all contract awards and projected overall costs "for every component of the department that plans to migrate to a Federal shared service provider." Noting that the budget justification materials are "woefully inadequate" and "undermine" analysis and oversight of the budget request by the committees, the explanatory statement directed that the department's budget submission for FY2017, and thereafter, include tables that compare prior year actual, current year estimates, and projected year appropriations and obligations for all PPAs, subprograms, and FTE. It reminded the department that any significant new activity that has not been previously justified or funded requires a request for reprogramming or transfer of appropriations. The Administration requested $321 million for the OCIO and 382 FTEs. S. 1619 , as reported, included $304 million for the OCIO, $17 million (5.3%) less than requested. H.R. 3128 , as reported, included $308 million for the OCIO, $13 million (4.0%) less than requested. Both the Senate- and House-reported bills provided that, within the total amount appropriated, almost $105 million would fund OCIO salaries and expenses (S&E) (slightly less than requested). The House Appropriations Committee recommended $4 million more than the Senate Appropriations Committee for information technology services, while both committees recommended the requested level for infrastructure and security activities and the Homeland Secure Data Network. Title I of Division F of P.L. 114-113 provided $310 million for OCIO, almost $11 million (3.3%) less than requested. Within the OCIO account, S&E received $110 million and development and acquisition of information technology equipment, software services, and related activities for the department received $200 million. The explanatory statement directed that the information technology funds be used to support requested initiatives, including the DHS Data Framework, Single Sign-On, security, the Federal Risk and Authorization Management Program, the Trusted Tester Program, and the Infrastructure Transformation Program. In addition to the Title I resources for OCIO, Title V of Division F of P.L. 114-113 included a new general provision which provided $100 million dollars for cybersecurity to safeguard and enhance the department's systems and capabilities. According to the explanatory statement, the "funding is in addition to base funding made available to the CIO and the components, and is intended to help the Department more quickly address known vulnerabilities and technology gaps through enhancements to the DHS network and perimeter security, better access controls, stronger authentication, equipment upgrades, data loss and theft prevention, and incident response and assessments." Stating that "DHS must lead government agencies in protecting its own data and systems," the explanatory statement directed the CIO to "utilize a risk-based approach, using threat intelligence, to optimize the Department's cybersecurity investments and operations." In addition, it directed the CIO to brief the committees on the department's cybersecurity spending, the obligation plan for the cybersecurity funds, and the metrics by which improvements in the DHS cybersecurity posture will be measured, within 45 days after the act's enactment. The Senate report mandated that the OCIO support the Chief Human Capital Officer on the Cyberskills Support Initiative. Noting that P.L. 114-4 did not include the requirement provided in the FY2015 Senate-reported bill that the CIO submit a multiyear investment plan for 2015 through 2018, the Senate report stated the expectation that the same level of information be provided in the annual budget justification. The OCIO was directed to provide semi-annual briefings on the execution of major initiatives and investment areas. The Senate report also expressed the expectation that the Digital Services Team members, requested in the budget, will be used to address challenges in immigration data reporting as the top priority and that DHS will make great progress on such reporting by December 2015. The House Appropriations Committee did not recommend funding for this program. The explanatory statement recommended that up to $10 million of the S&E funds be used for Digital Services, in lieu of the House and Senate report language. With regard to the department's data center consolidation efforts, the Senate Appropriations Committee report stated the committee's expectation that DHS support the National Aeronautics and Space Administration in its use of the Data Center 1 facility and directed the department to continue periodic briefings on the execution of remaining data center migration funds, future plans for the data center, and the open market strategy for cloud services. To monitor progress in achieving the objectives of the DHS Information Technology Strategic Plan, the House report directed the OCIO to provide a briefing and quarterly updates on the enterprise architecture that supports the plan. Included in the briefing are to be details on savings achieved through data center consolidation and reducing commodity IT spending at the component level. Stating the importance of "[p]reventing the compromise or unauthorized disclosure of sensitive digital content or other personally identifiable information," the House report directed the OCIO to continue working to prevent data loss at the enterprise level by using technology at the department's Trusted Internet Connection. Table 2 outlines the funding levels for existing management functions. Several issues related to departmental management and administration were discussed by the House and Senate Appropriations Committees in considering the FY2016 Department of Homeland Security Appropriations bill. Among the issues were those related to acquisition matters, and the implementation of a common appropriations structure. These issues were, in part, related to the department's Unity of Effort initiative. Brief discussions of each of these issues follow. Noting that the USM is developing timelines and metrics for the procurement process, the Senate Appropriations Committee report directed DHS to provide a briefing within 120 days after the act's enactment "on its efforts to ensure an effective, efficient, and transparent procurement process" with metrics that are "consistent and repeatable" for the purposes of reporting on such. The House Appropriations Committee report stated that the "USM acts as the Department's Chief Acquisition Officer and Chief Performance Improvement Officer" and that the committee included several directives in the report "to build on the momentum of the Unity of Effort initiative." The report directed the USM to develop written guidance by April 1, 2016, to (1) clarify the roles and responsibilities of the Office of Program Accountability and Risk Management (PARM) and the Office of the Chief Information Officer (OCIO) for overseeing program management of major IT acquisition programs; (2) require components to provide cost estimates for operations and maintenance for sustaining programs; (3) establish responsibility at the component level for tracking the adherence of sustainment programs to existing cost estimates; and (4) require components to enter data into the next generation Period Reporting System (nPRS) on a quarterly basis, and hold CAEs accountable for validating the information. Executive Director of PARM to provide an update on data for major acquisition programs by component, by each month of the prior fiscal year, and assessing its accuracy, completeness, and timeliness by April 15, 2016. USM to review the current structure of the OCPO, consider whether the name of the office accurately reflects its function, and determine whether PARM should report to a different supervisor. The explanatory statement directed the Executive Director of PARM to provide quarterly briefings to the House and Senate Appropriations Committees on major acquisition programs, by component, beginning no later than April 15, 2016. Both Senate and House Appropriations Committee reports addressed potential reform of the structure of the appropriations accounts in the DHS budget. The House Appropriations Committee outlined the current state of affairs thusly: A key element of the Secretary's Unity of Effort initiative is to strengthen DHS budget processes. Integral to the effort is an appropriations framework that supports and standardizes budgeting and programming across the homeland security enterprise. With over 70 different appropriations and over 100 PPAs, DHS has functioned for over a decade with significant budget disparities and inconsistencies in component's [sic] appropriations accounts and PPAs. Without question, the current budget structure is a contributing factor to the failure to recognize how poorly components have been underexecuting personnel costs. More frustrating is that neither DHS nor the components can provide details on how the funds were spent. From the perspective of leaders making judgments about programs, the lack of uniformity and transparency makes it impossible to compare costs. Pursuant to Committee direction, DHS presented a notional common appropriations structure shortly after the President's fiscal year 2016 budget was submitted. The structure included four standard types of appropriations (Operations and Support; Procurement, Construction, and Improvements; Research and Development; and Federal Assistance) and specific periods of availability for each. The Senate Appropriations Committee report expressed the committee's belief that "following funds from planning through execution is critical to departmental oversight of the components as well as establishing a capability to make tradeoffs in resource allocation and budget development decisions." The committee directed the department to work closely with it and stated that a proposal that reduced transparency or congressional oversight and controls, or "create[d] a distraction through the time and opportunity costs associated with such a change," would not be accepted. The House Appropriations Committee took their stance more explicitly, noting in their report: This structure makes sense. It enables cost comparisons between components and simplifies the transition from legacy financial management systems to modernized systems. Implementing this methodology is a strategic imperative and must move forward with haste. To that end, a general provision is included in title V of the bill mandating that the fiscal year 2017 budget request be presented to the Congress in this format and be fully implemented upon the enactment of full year appropriations for fiscal year 2017. In addition to mandating the implementation of the common appropriations structure, the House committee directed DHS to "begin developing a standard template for the budget justification material based" on that structure and incorporate the template into the FY2018 budget request. The template would provide that the justification for each appropriation would "start from a zero base and build to the requested level." Furthermore, beginning with the FY2017 budget request, and for each fiscal year thereafter, the justification materials must "include tables that compare prior year actual, estimates of current year, and the projected budget year appropriations and obligations, for all PPAs, programs, subprograms, and FTE." Noting the language in the House report about the need for a common appropriations account structure, the explanatory statement mentioned that the law included a modified version of the provision that the House bill proposed. The new general provision authorized the Secretary to include with the budget justification an account structure under which each appropriation under each agency heading either remains the same as FY2016 or falls within the four categories of appropriations outlined in the notional common structure previously outlined by DHS. The general provision establishes a timeline, procedures and requirements for the Secretary to be able to transfer and reprogram funds into the new structure, including a number of materials to be submitted by the CFO by April 1, 2016, including technical assistance on new legislative language in the account structure; tables comparing FY2015, FY2016, and FY2017 funding in the account structure; comparisons across components that the account structure facilitates; a revised interim financial management policy manual that has been requested from the CFO; an outline of changes in the financial management policy manual necessary for the account structure; proposed changes to requirements for transfers and reprogramming, including technical assistance on legislative language; CFO certification that the department's financial systems can report in the new account structure; and a plan to provide training on and to implement the account structure. As of February 2015, the Department of Homeland Security's headquarters footprint occupied space in approximately 50 separate locations in the greater Washington, DC, area. This is largely a legacy of how the department was assembled in a short period of time from 22 separate federal agencies that were themselves spread across the National Capital region. The fragmentation of headquarters is cited by the department as a major contributor to inefficiencies, including time lost shuttling staff between headquarters elements; additional security, real estate, and administrative costs; and reduced cohesion among the components that make up the department. To unify the department's headquarters functions, the department and General Services Administration (GSA) approved a multi-year $3.4 billion master plan to create a new DHS headquarters on the grounds of St. Elizabeths in Anacostia. According to GSA, this would be the largest federal office construction since the Pentagon was built during World War II. Originally, $1.4 billion of this project was to be funded through the DHS budget, and $2 billion through the GSA. Phase 1A of the project—a new Coast Guard headquarters facility—has been completed with the funding already provided by Congress and is now in use. Not all DHS functions in the greater Washington, DC, area are slated to move to the new facility. The Administration has sought funding several times in recent years for consolidation of some of those other offices to fewer locations to save money on lease costs. As part of the Administration's budget request, DHS and GSA requested $204 million and $380 million, respectively, as the FY2016 tranche of design and construction funding to support a new "enhanced plan" for DHS headquarters consolidation. This new plan represents a revision of the original project, reducing its cost and size through efficiencies, faster completion, altering the mix of component headquarters that would move to the campus, and consolidating FEMA's headquarters to the West Campus rather than the East Campus of St. Elizabeths. The $3.4 billion projected cost for the original 4.5 million gross square-foot plan of record had grown to $4.5 billion: The revised project would provide 3.6 billion gross square feet of office space, at a cost of $3.7 billion. The revised project would also house an additional 3,000 headquarters personnel compared to the original plan, bringing the total to 17,000—more than half of the total DHS headquarters personnel in the National Capital Region. Requested GSA funding would support continued work on perimeter security, completing road access improvements (including a new highway interchange), rehabilitating buildings to hold elements of the Office of the Secretary and the Under Secretary, and continuing design and historic preservation activities. Requested DHS funding would support construction, as well as reconfiguration of part of the USCG headquarters to accommodate 40% more personnel, including other DHS headquarters functions. The request for DHS also included roughly $11 million for operational support costs for the existing facility and construction site, bringing the total request for headquarters consolidation to almost $216 million. Section 537 of Senate-reported S. 1619 includes $212 million for DHS headquarters and mission support consolidation, $4 million (1.9%) below the amount requested through DHS, and $164 million (336.8%) above the FY2015 enacted level. The section also includes a requirement that the department provide an expenditure plan within 90 days of enactment, while the committee report also requires quarterly briefing for the committee on headquarters and mission support consolidation activities. The Senate committee report also specifically mentions the project in its overview of issues affecting the department, noting: The bill includes funds to continue progress on the Department's headquarters consolidation at the St. Elizabeths campus. In the National Capital Region, 32,000 headquarters employees of the Department and its components operate from 50 locations, most of them leased with many of those leases now expiring. While cost concerns have been raised in the past regarding the St. Elizabeths project, the Department now has a more affordable enhanced plan and the timing of these lease expirations strengthens the case. The benefits of consolidation are coupled with cost avoidance and cost savings. While the proposed fiscal year 2016 effort to bring remaining secretarial offices and the Management Directorate to St. Elizabeths makes sense, the Committee will take a fresh look each year to ensure that the investment continues to be worthwhile. Section 535 of House-reported H.R. 3128 includes $44 million for DHS headquarters consolidation, $172 million (79.6%) below the request for DHS, and $5 million (9.7%) below the FY2015 enacted level. The House report notes: The Committee appreciates changes to the DHS Consolidation Plan that have reduced requirements and costs.... Importantly, the new plan would save DHS $1,200,000,000 over 30 years compared to the costs of continuing to rely on multiple rented facilities across the Washington, DC region over the same time period. Given the constraints of the current budget environment, however, the recommendation provides only that portion of the request related to existing operations at the consolidated headquarters location, which is included in title V of the bill. Unlike in the Senate-reported bill, there is no expenditure plan or briefing requirement. Section 539 of Division F of P.L. 114-113 included almost $216 million for the DHS headquarters consolidation, which includes over $3 million for security services. This is less than 0.1% less than requested for the overall project. The department is required to submit an expenditure plan for these funds no later than 90 days after the enactment of the act. The $557 million in combined funding provided in FY2016 through DHS and GSA in FY2016 for this project represents the largest tranche of funding provided for DHS headquarters consolidation since 2009, and the largest combined amount provided to date through annual appropriations legislation for DHS headquarters consolidation. The Analysis and Operations account includes resources for both the Office of Intelligence and Analysis (I&A) and the Office of Operations Coordination. I&A is responsible for managing the DHS intelligence enterprise and for collecting, analyzing, and sharing intelligence information for and among all components of DHS, and with the state, local, tribal, and private sector homeland security partners. Because I&A is a member of the intelligence community, its budget comes in part from the classified National Intelligence Program. The Office of Operations Coordination develops and coordinates departmental and interagency operations plans. It also manages the National Operations Center, the primary 24/7 national-level hub for domestic incident management, operations coordination, and situational awareness, fusing law enforcement, national intelligence, emergency response, and private sector information. The Administration requested $269 million for the Analysis and Operations account (see Table 1 ). Senate-reported S. 1619 recommended that the Analysis and Operations account receive $263 million, $6 million (2.1%) below the amount requested by the Administration. The committee required a briefing from DHS's Chief Intelligence Officer on the I&A expenditure plan for FY2016 no later than 60 days after the date of S. 1619 's enactment. DHS was also directed to continue its semiannual briefings to the committee on state and local fusion centers. As part of the first FY2016 briefing related to fusion centers, the committee expected DHS to assess the feasibility of establishing a state-level "center of excellence" featuring a focus on threats to cybersecurity and critical infrastructure in the United States. The center would focus on enhancing multi-agency, multi-discipline public private partnerships to improve threat information sharing and collaboration among federal, state, and private sector critical infrastructure entities. The assessment shall consider authorities and costs for such a center incurred by partner agencies. House-reported H.R. 3128 recommended $265 million for Analysis and Operations, $4 million (1.6%) below the amount requested by the Administration and $1 million more than Senate-reported S. 1619 . The committee directed DHS to make available $300,000 for enhancing the Criminal Intelligence Enterprise, a national initiative designed to identify, prioritize, and catalog the criminal and terrorist threat groups that present the greatest concern to each major city and county. Division F of P.L. 114-113 (the Homeland Security Appropriations Act, 2016) provided $265 million in appropriations for Analysis and Operations, $4 million below the amount requested by the Administration, $2 million more than Senate-reported S. 1619 , and the same as House-reported H.R. 3128 . The DHS Office of the Inspector General (OIG) is intended to be an independent, objective body that conducts audits and investigations of the department's activities to prevent waste, fraud, and abuse. The OIG is required by law to keep Congress informed about problems within the department's programs and operations and reviews and makes recommendations regarding existing and proposed legislation and regulations related to the department. The OIG is required to report to Congress and to the Secretary of DHS. The Administration requested a $142 million appropriation for the OIG, $24 million (20.0%) more than was appropriated in FY2015. The Administration also requested a $24 million transfer from the Disaster Relief Fund (DRF) specifically for oversight of disaster relief activities. Transfers from the DRF are a long-standing means of supporting the DHS OIG's annual budget for oversight of disaster relief, first occurring in FY2004, the first annual appropriations act for the department. The OIG noted in their budget justifications that their initial request submitted to the Office of Management and Budget (OMB) was larger than what the President ultimately requested—almost $2 million more in appropriations and almost $18 million more by transfer from the DRF for oversight of disaster relief. The President's request for the OIG was reduced from the funding level of the OIG's original proposal as a part of the budget formulation process. The OIG went on to note: We made our request after benchmarking our staffing against comparable Offices of Inspector General and assessing our ability to address high risk areas in DHS. This process revealed that we have been historically underfunded and unable to address the risk [sic], particularly in the area of DHS integration and acquisition management. Senate-reported S. 1619 included a $134 million appropriation for the OIG, almost $8 million (5.5%) below the amount requested, and $16 million (13.4%) above the amount appropriated in FY2015. The Senate-reported bill included the requested transfer from the DRF for disaster relief oversight activities. House-reported H.R. 3128 included a $141 million appropriation for the OIG, $1 million (0.8%) below the amount requested, and almost $23 million ($19.0%) above the amount appropriated in FY2015. Like the Senate-reported bill, the House-reported bill included the requested transfer from the DRF for disaster relief oversight activities. The omnibus included a $137 million appropriation for the OIG, almost $5 million (3.4%) below the amount requested, and almost $19 million ($18.9%) above the amount appropriated in FY2015. Like both the House- and Senate-reported bills, the omnibus included the requested transfer from the DRF for disaster relief oversight activities. Issues surrounding the DHS OIG are generally issues that impact the broader oversight community, or are issues that are shared throughout the broader community of inspectors general. A much fuller analysis is available in the discussion of statutory Offices of Inspectors General in CRS Report R43814, Federal Inspectors General: History, Characteristics, and Recent Congressional Actions , by [author name scrubbed] and [author name scrubbed], and CRS Report RL30240, Congressional Oversight Manual , by [author name scrubbed] et al.

This report is part of a suite of reports that discuss appropriations for the Department of Homeland Security (DHS) for FY2016. It specifically discusses appropriations for the components of DHS included in the first title of the homeland security appropriations bill—the Office of the Secretary and Executive Management, the Office of the Under Secretary for Management, the DHS headquarters consolidation project, the Office of the Chief Financial Officer, the Office of the Chief Information Officer, Analysis and Operations, and the Office of Inspector General for the department. Collectively, Congress has labeled these components in recent years as "Departmental Management and Operations." The report provides an overview of the Administration's FY2016 request for Departmental Management and Operations, the appropriations proposed by Congress in response, and those enacted thus far. Rather than limiting the scope of its review to the first title, the report includes information on provisions throughout the proposed bills and reports that directly affect these functions. Departmental Management and Operations is the smallest of the four titles that carry the bulk of the funding in the bill. The Administration requested $1,396 million in total budgetary resources for these components in FY2016, $255 million more than was provided for FY2015. Although only 3.4% of the Administration's $41.4 billion request for the department, the proposed additional funding was 17.8% of the total net increase requested. While the Administration proposed increasing the budget of every component of Departmental Management and Operations, the largest increase, both in dollars ($167 million) and by percentage terms (441%), was to fund a revised plan for consolidation of DHS headquarters offices in the National Capital Region. Senate-reported S. 1619 would have provided $1,346 million, a decrease of $50 million (3.6%) from the request and $205 million (18.0%) above FY2015. House-reported H.R. 3128 would have provided $1,217 million, a $179 million (12.8%) decrease from the request and $76 million (6.7%) above FY2015. On December 18, 2015, the President signed into law P.L. 114-113, the Consolidated Appropriations Act, 2016, Division F of which was the Department of Homeland Security Appropriations Act, 2016. The act included $1,546 million for these components in FY2016, $405 million more than was provided for FY2015, and $150 million more than was requested. Additional information on the broader subject of FY2016 funding for the department can be found in CRS Report R44053, Department of Homeland Security Appropriations: FY2016, as well as links to analytical overviews and details regarding appropriations for other components. This report will be updated if supplemental appropriations are provided for any of these components for FY2016.

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Total private nonfarm employment fell from a peak of 111.6 million in February 2001 to a trough of 108.4 million in July 2003. It then expanded through 2007, reducing the unemployment rate to a relatively low level, although not as low as was reached at the end of the previous expansion. Since the beginning of 2008, employment has fallen again and the unemployment rate has risen. Job loss—declines in employment—is one of the most important macroeconomic problems facing policymakers, both in terms of its economic cost and the social toll it takes on our society. But what is often missing from the policy debate is a distinction between net job loss and gross job loss. Gross job loss is the total number of jobs eliminated by all contracting firms in a given period, whereas net job loss is the result of greater gross job loss than gross job gains in a given period. In expansions, the labor market is characterized by net job creation amidst gross job loss. This is required to maintain steady employment rates with a growing population. It is only during recessions that the overall labor market experiences persistent net job loss. Economists view net job loss as a detrimental phenomenon and most recommend that policy be used to mitigate it. However, they view gross job loss, as long as it is offset by gross job gains, as a healthy and normal part of a functioning market economy, although it may have social costs. A quarterly data series from the U.S. Bureau of Labor Statistics (BLS), shown in Figure 1 , provides data that help to put the distinction between gross and net job loss into perspective. These data are measured from the firm's perspective—changes in the size of the firm's workforce—not the employee's perspective. For this reason, the data, in a sense, undercount the amount of change in the workforce because they do not account for movements of individual workers to and from any given firm if the firm remains the same size (e.g., a worker quits and is quickly replaced by a new hire). The gross job loss figures, from the employee's perspective, could be involuntary (layoff, firing) or voluntary (quitting, retirement). In the third quarter of 2007, gross job loss and gains equaled 7.5 million and 7.2 million per quarter, respectively, each about 5% of total employment. As can be seen in Figure 1 , gross job loss and job gains are each, on average, around 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. The rate of job gains increased steadily from the beginning of the series in 1992 until the end of 1999; at the same time, job losses increased steadily from 1992 to 2001. Some, but not all, of the long run increase in gross job gains and losses can be attributed to a growing labor force. The rest of the increase indicates that the U.S. labor force is becoming more mobile over time, but the data do not indicate whether this is the worker's or the firm's decision, or both. Most of the gross job flows occur at existing firms, and are not due to new firms opening or old firms closing. Clearly, gross job loss is not incompatible with a healthy labor market: during an expansion in which the unemployment rate was lower than it had been in three decades, gross job losses steadily increased as the expansion progressed. And even during the 2001 recession and subsequent "jobless recovery," gross job gains continued to average about 8 million per quarter; but gross job gains in this period were more than offset by gross job losses. In the current expansion, job gains and losses have been modestly lower than in the second half of the 1990s. Although gross job gains stayed relatively constant, net employment began to rise again because gross job losses fell. There is not yet data available on whether net job loss in 2008 has been driven primarily by gross job gains or losses. It is often claimed that small businesses are the engine of job creation in the U.S. economy. To an extent, this is a misconception based on the confusion between net and gross job flows. Firms with 99 employees or fewer, which account for 38.1% of total private employment, accounted for 61.1% of gross job gains between 1992:3 and 2005:1. But while these firms had a disproportionate share of gross job gains, they also had a disproportionate share of gross job loss, 62.1% of the total. On net, they accounted for 46.3% of net job gains over that time period—modestly more than their share of total employment, but significantly less than gross flows would indicate. (Recent employment trends followed a similar pattern.) Interestingly, in the 2001 recession and jobless recovery, very large firms accounted for a disproportionate share of net job loss. Overall, these data provide a picture, during expansions, of a highly dynamic U.S. labor market in which labor rapidly shifts from firm to firm to its most efficient use. This vitality is the essence of economic growth and rising living standards for society as a whole in a market economy. It is caused both by output shifting from some firms to more efficient ones within an industry and by shifts in spending from one industry to another, due to factors such as changing consumer tastes, technology, or comparative advantage. Of course, there will always be winners and losers in a market economy. Although significant gross job loss is consistent with net job creation (because it is offset by gross job gains) for the nation as a whole, gross job loss can translate into net job loss at the local level even when national employment is rising because the losses and gains may not occur in the same geographic area. Furthermore, while steady net employment gains are unambiguously good for society as a whole, the data do not necessarily indicate that the same individuals who lose jobs also gain jobs. The data also do not indicate whether the job loss is voluntary or involuntary, nor how many of the individuals who involuntarily changed jobs were forced to take new jobs that were less desirable or paid less. A separate (and noncomparable) data series on worker displacement from BLS can help to answer these questions. BLS classifies workers as displaced if they lost their job because their plant closed down or moved, their positions or shifts were abolished, or there was insufficient work. From 2003 to 2005, 3.8 million workers with tenure of three years or more were displaced (another 4.3 million short-tenured workers were displaced during that period). Although the two data series cannot be compared directly, gross job loss equaled 90 million over that three-year period. Displacement is significantly higher during recessions; for example, from 2001 to 2003, 5.3 million long-tenured workers were displaced. Of the displaced workers, about 70% were reemployed, 13% were unemployed, and 17% had left the labor force at the beginning of 2004. Of those reemployed full-time, about 51% were now earning more than they had at the displaced job, and 29% were now earning significantly lower wages (at least 20% lower). Workers 55 years of age and older had lower reemployment rates than younger workers. Displaced workers fared better during expansions. For example, in 2001-2003, 20% of displaced workers were unemployed, and 33% of those re-employed had significantly lower wages. Some gross job loss takes the form of mass layoffs, during both expansions and recessions. In another (non-comparable) survey from BLS, 0.9 million workers lost their jobs from extended mass layoffs in the four quarters ending 2008:1. This figure undercounts workers affected by mass layoffs because it does not include mass layoffs of less than 50 workers or layoffs that lasted less than 30 days. Mass layoffs tend to be cyclical: workers separated by mass layoffs rose from 1.2 million in 2000 to 1.5 million in 2002. Since unemployment totaled 8.4 million in 2002, mass layoffs are an important but not primary cause of unemployment. BLS has not kept a continuous data series long enough to determine if there has been a long-term upward trend in mass layoffs beyond the cyclical trend. Several economic phenomena have been identified in popular discussion as purportedly causing job loss. Although all of these phenomena cause gross job loss, most have a much smaller effect on net job loss than popularly perceived. The exception is the business cycle: in each instance, recessions have been the cause of persistent net job loss in the post-war period. When trade expands, greater imports cause gross job loss, as products that were previously produced in the United States are now produced by workers in other countries, rendering those U.S. workers redundant. However, economic theory states that expansions in trade have no effect on net employment. As foreign countries increasingly exchange their goods for U.S. exports, more workers are needed in U.S. export industries. In addition, because trade is based on comparative advantage, trade increases the purchasing power of U.S. incomes in the aggregate. Thus, trade allows the U.S. economy as a whole to produce and consume more domestic goods, requiring more workers to produce them. It is possible that there could be some transitional loss in net employment if workers cannot easily be reallocated into other sectors of the economy, causing net employment to temporarily be greater than zero. For example, workers who have lost their jobs in the import-competing industries may not have the skills needed by export industries. But this transitional effect would disappear once markets had adjusted. U.S. history offers persuasive evidence that trade liberalization has no effect on net employment, as can be seen in Figure 3 . During the post-war period, U.S. trade has become progressively liberalized, with eight rounds of world trade liberalization negotiated between 1947 and 1993 through the General Agreements on Tariffs and Trade (GATT, later became World Trade Organization), as well as the Canadian Free Trade Agreement in 1989 and North American Free Trade Agreement (NAFTA) in 1994. Imports have increased steadily as a percentage of GDP throughout the post-war period, from about 4% of GDP in the 1940s to about 14% of GDP in recent years. If trade caused net job loss, employment would have declined and unemployment risen throughout the post-war period. The opposite is the case: employment has steadily increased during the post-war period, and the unemployment rate has mirrored the business cycle, not trade patterns. Indeed, trade liberalization does not appear to have strong effects on even transitional unemployment. For example, NAFTA was implemented when aggregate employment was rising and unemployment was falling. GATT Rounds 1, 3, 4, 6, 7, and 8 were completed when unemployment was low, and unemployment, though high, fell subsequent to GATT Rounds 2 and 5. The most recent example the United States has with significantly increasing trade restrictions was the Smoot-Hawley tariffs, which did not stem the loss of employment during the Great Depression. Although regression analysis, which allows other factors to be held constant, is beyond the scope of this report, informal quantitative evidence on the relationships portrayed in Figure 3 can be gleaned using correlation analysis. The results are presented in Table 1 , which shows that between 1946 and 2007, changes in employment are highly correlated with changes in imports. Thus, the historical experience is the opposite of the typically claimed relationship: when imports increased, employment typically also increased. Although this is not evidence that higher imports cause higher employment—the two variables are correlated because both usually increase—it is evidence that higher imports do not cause lower employment. The table also demonstrates that the implementation of trade liberalization agreements has virtually no relationship historically to changes in net employment in the same or following year (in case there is a lagged effect), as economic theory would suggest. In sum, the results suggest that trade either has no negative effect on employment, or the effect is swamped by other factors. Survey data from mass layoffs does not identify trade as a major source of gross job loss either. For example, only 2,900 of the 301,400 workers laid off in the first quarter of 2008 reported import competition to be the cause of the layoff. A recent study found that trade had a limited effect on net job loss in the recent recession and jobless recovery. It found that the industries with the greatest job loss during that period included both those affected (business services, manufacturing) and unaffected (leisure and hospitality, transportation, construction, and communications) by trade and outsourcing. It then measured the number of American workers that would be needed to produce U.S. imports compared to the number of workers that are needed to produce U.S. exports, and found that the difference amounted to only 2.4% of total employment in 2003. This estimate should not be interpreted as how much employment would rise in the absence of trade since workers affected by trade may be re-employed producing non-tradable goods. Some policymakers are particularly concerned that trade is responsible for the continuing decline in manufacturing employment in recent years. Even after employment began increasing in the rest of the economy in 2003, manufacturing employment has continued to fall, from 17.6 million in 1998 to 13.9 million in 2007. Yet trade cannot be the primary cause of this decline because manufacturing output has grown by 22% in real terms over those years. By identity, employment can fall as output rises only if productivity is rising faster than output. So the decline in manufacturing employment must be primarily attributable to rapid technological change and efficiency gains, not trade. Some who concede that trade has no effect on net employment when higher imports are matched by higher exports argue that trade nevertheless reduces net employment when higher imports are matched instead by a larger trade deficit. They reason that higher imports cause gross job loss, but are not offset by gross job gains in the export sector if they lead to a trade deficit. While this is true, trade deficits do lead to gross job gains in other ways. When the United States runs a trade deficit, it exchanges foreign imports for U.S. assets. This puts downward pressure on U.S. interest rates, stimulating spending on physical investment (plant and equipment). Lower interest rates also stimulate spending on housing and interest-sensitive goods, such as automobiles and appliances. As a result, the trade deficit causes gross job gains in the sectors that produce plant, equipment, housing, and interest-sensitive goods, all else equal. These gross job gains may not occur instantaneously—so there could be transitional net job loss—but when they do occur, they will offset the gross job loss caused by higher imports so that the trade deficit causes no net job loss. As can be seen in Figure 3 , the historical experience confirms this conclusion: the large increase in the trade deficit in the 1980s and 1990s took place at a time of rising employment and falling unemployment. While the trade deficit rose during the 2001 recession and jobless recovery, it continued to rise from 2003 to 2007 as unemployment fell. This suggests that some other factor, such as strong aggregate demand growth, tends to simultaneously push the trade deficit up and unemployment down. In 2008 (to date), unemployment rose despite a decline in the trade deficit. Table 1 demonstrates that there was almost no correlation between changes in the trade balance and changes in employment. The term offshore outsourcing or offshoring is frequently used in several different ways. It can refer to U.S. multinational firms shifting production from the United States to an overseas subsidiary, U.S. firms importing intermediate goods from foreign companies, importing services, or U.S. firms making overseas investments. Economists view the first three phenomena similarly to trade (the latter phenomenon will be discussed separately in the next section). When U.S. firms outsource production to foreign firms, gross job loss occurs because goods and services that were being produced by U.S. workers are now being produced by workers in other nations. When outsourcing occurs, those foreign firms must be paid using U.S. dollars. The foreign firms, in turn, can use those dollars in three ways. First, they can buy U.S. exports, resulting in gross job gains in the export sector. Second, they can buy U.S. assets (increase the trade deficit), resulting in gross job gains in the interest-sensitive sectors that produce plant, equipment, housing, and interest-sensitive goods, as explained in the previous section. Third, they can sell their U.S. dollars for another currency, causing the dollar to depreciate; as a result, the output of U.S. exporting firms and U.S. import-competing firms would increase as U.S. goods become more price competitive internationally. Thus, in all three scenarios, gross job loss is offset by gross job gains so that there is no net job loss, although there may be for a transitional period. Quality data on outsourcing is scarce because the term has only recently been coined, there is not yet any consensus as to how it should be defined, and the concept cannot easily be measured accurately. It is popularly used to mean net job loss, but conceptually the term applies only to gross job loss. A net measure of outsourcing's effects would be hard to calculate because it would be difficult for BLS to measure gross job gains caused by foreign firms outsourcing to the United States, and impossible to trace the rise in employment caused by the spending on U.S. goods of foreign firms that U.S. firms have engaged in outsourcing. Changes in imports of services suggests that outsourcing, by that definition, is a minor phenomenon relative to total gross job loss. The one official data source on outsourcing comes from the BLS mass layoffs series, and this only includes one type of outsourcing, U.S. firms relocating work abroad. In the first quarter of 2008, only 1,200 employees out of 301,400 were subject to extended mass layoff because of relocation abroad. The argument is sometimes made that when U.S. firms decide to undertake direct investment abroad, it reduces U.S. employment. According to the argument, if the U.S. firm had not, say, built the new factory abroad that employs foreign workers, it would have built a factory in the United States that employed U.S. workers. As a result, net employment is lower than it would have been. Economic theory states that capital investment determines the wages of employees, not the level of employment. That is because capital investment increases the productivity of existing workers, and in a competitive market wages are determined by productivity. If the level of employment was based on the amount of capital available per worker, then the United States would not have been able to achieve full employment in the past since capital per worker has increased steadily over time. Yet throughout its history, the United States has achieved full employment most of the time. Even if U.S. investment abroad did lead to net job loss, the data do not suggest that this explanation is possible since the United States is a net recipient of foreign capital, and has been for the past few decades. In other words, any jobs hypothetically lost by U.S. investment abroad have been more than offset by the jobs created by greater foreign investment in the United States. Although U.S. direct investment abroad exceeds foreign direct investment in the United States, overall foreign investment in the U.S. (direct, portfolio, and official) is greater than U.S. investment abroad. Ultimately, foreign investment has the same effect on the economy regardless of the form it takes. Net foreign investment in the United States is, by identity, equal to the U.S. current account deficit (trade deficit plus net transfers and net investment income). That is because capital cannot flow into the country on net (net borrowing cannot occur) unless the United States imports more than it exports. Any time U.S. investment abroad increases, all else equal, the trade deficit must fall. Thus, explanations of net job loss attributed to the trade deficit and explanations of net job loss attributed to U.S. investment abroad are mutually exclusive— both stories cannot be correct . This can be proven by considering the foreign exchange market. If U.S. direct investment in the euro area increased, dollars must be exchanged for euros. This causes the dollar to depreciate against the euro, causing U.S. exports to the euro area to rise and euro imports to the United States to fall. As a result, the trade deficit narrows. Declines in aggregate employment are often blamed on restructuring in the economy. For example, the decline in employment from 2001 to 2003 is often attributed to the collapse of the "dot-com" industry. According to this argument, resources had been overinvested in the dot-com industry in the late 1990s. When this situation was rectified in the late 1990s, workers in that industry were no longer needed, causing overall employment to decline. The reallocation of resources in the economy is probably the primary reason that gross job loss occurs. Changes in tastes, technology, and comparative advantage continually cause labor and capital to be shifted from one industry to another in a market economy. As this report has demonstrated, sizeable reallocations of labor across industries has been a constant in the United States for as long as data has been collected. But in most years, the economy has not had any problem offsetting gross job loss with a greater number of gross job gains. Thus, economic restructuring typically is not accompanied by net job loss overall, even though it often results in net job loss at the local level. It is possible that if restructuring were unusually large at any given time, perhaps like the dot-com collapse, the economy could be unable to absorb that many workers in new jobs fast enough to prevent net job loss. Unfortunately, there is no way to systematically identify which restructuring events are large enough and separate their effects on net job loss from other economic phenomena occurring simultaneously. For example, the net job loss associated with the 2001 recession could be caused by nothing more than an unrelated decline in aggregate spending, as is typical of other historical recessions. In the absence of this decline in aggregate spending, it is possible that the dot-com collapse would not have had any effect on aggregate employment. Even if restructuring does not cause net job loss, there is debate as to whether recessions have the beneficial effect of hastening restructuring. Some argue that when times are tough, firms are forced to innovate to survive and during booms weak firms are propped up by prosperity. If correct, this points to an economic benefit from recessions, in contrast to the mainstream economic view that recessions are economically wasteful because they cause productive labor and capital to lay idle. But it is difficult to evaluate this argument quantitatively. Unlike the other factors described above, economic downturns are the only factor that causes both gross and net job loss according to economic theory. This theory is borne out by historical experience, as illustrated in Table 2 , which show the high correlation between contemporaneous GDP growth and employment growth. (In fact, falling employment is part of the official definition of a recession.) Economic downturns are characterized by insufficient aggregate spending to support existing labor and capital resources. As a result, capital goes idle and workers are laid off until spending revives. The government can boost aggregate spending back to "full employment" through expansionary fiscal policy (a larger government budget deficit) or monetary policy (lower short term interest rates by the Federal Reserve). Net job loss caused by economic downturns is temporary because insufficient aggregate spending is only a temporary phenomenon—in the long run, markets adjust to bring spending back into line with potential production. Since 1947, net job loss lasting more than one quarter has only occurred during or immediately following a recession. There have only been two recoveries in which net job loss has continued for more than one quarter after the recession had ended, the recoveries beginning in 1991 and 2001. In the long run, the effects of business cycle changes on net job creation cancel out—net job loss in downturns is offset by net job gains in booms. Thus, in the long run net job creation is determined by the characteristics of the labor market. Over time, a growing population leads to rising employment, or net job creation. In 1950, the U.S. population equaled 151.3 million and nonfarm employment equaled 45.3 million; in 2000, the U.S. population equaled 281.4 million and employment equaled 131.8 million. (The fraction of the population employed in 2000 was so much higher than in 1950 primarily because of the entrance of women into the labor force.) What proportion of the population is employed—both the labor force participation rate and what economists refer to as the "natural rate" of unemployment or NAIRU (non-accelerating inflation rate of unemployment)—is determined in the long run by demography (e.g., younger workers have higher unemployment rates), social norms (e.g., the large scale entrance of wives into the working force), and policy (e.g., welfare reform). In the long run, the rate of net job creation will equal the rate needed to keep the economy at the natural rate of unemployment. Sometimes the rate of employment growth will change because the natural rate is changing. For example, from the 1970s until the early 1990s, the average unemployment rate was higher than in the 1950s or 1960s for reasons that cannot be explained by the business cycle alone. Changes in demography, social norms, and policy, as well as the coinciding productivity slowdown, all played a role in the increase, but there is little consensus among economists on the relative importance of each factor. Because changes in the natural rate are gradual, an increase in the natural rate is more likely to be associated with a slower rate of net job creation than net job loss, all else equal. At other times, the employment growth rate will change in order for the actual unemployment rate to return to the NAIRU. Since unemployment rates in the most recent expansion never fell to 1990s levels, part of the labor market sluggishness from 2001 to 2003 may have been caused by a return to the natural rate after unemployment was held below it in the late 1990s. Most economists agree that net job loss is an undesirable phenomenon, and recommend that public policy be used to offset it. Policymakers can use expansionary monetary policy (lower short term interest rates by the Federal Reserve) or expansionary fiscal policy (an increase in the budget deficit) to stimulate aggregate spending and offset net job loss. If used properly and prudently, these policy tools can theoretically minimize net job loss. Unfortunately because of policy lags in recognition, implementation, and effectiveness, fiscal and monetary policy will probably never be conducted effectively enough to eliminate recessionary periods of net job loss. Direct job creation programs have been used by the government in past recessions to stem net job loss, but from an economic perspective, these policies have a similar effect to any expansionary fiscal policy, and they also are prone to implementation lags. Policies that impede gross job loss (e.g., regulatory restrictions on dismissal or layoffs) may seem to be a desirable way to limit net job loss at first blush. However, such policies could have the unintended effect of making firms reluctant to take on new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new workers proved to be only temporary. As a result, gross job gains could decline; if gross job gains declined by more than gross job loss declined, net job creation would decline. This suggests that attempts to limit gross job loss could be counterproductive. Because gross job flows are, on the whole, caused by the reallocation of resources to their most efficient use, policies to impede gross job loss would also likely have adverse consequences for growth and efficiency. Helping job losers make the transition into a new employment situation is a less costly alternative, and one that is compatible with an efficient, dynamic labor market. International comparison confirms this view. The Organization of Economic Cooperation and Development (OECD) ranked countries on a scale of zero to six based on regulatory restrictions on dismissal from regular employment, temporary employment, and mass layoffs. As seen in Table 2 , countries with little protection such as Switzerland, Japan, Australia, New Zealand, and the United States had low unemployment rates, between 3.6% and 5.3% in 2007. Countries with greater protection had a mixed experience: some small countries like Austria, the Netherlands, and Norway kept unemployment low, but the four large countries with the most protection (Germany, France, Italy, and Spain) had relatively high unemployment rates. The unemployment rate in the United States was lower at the trough of the recession than the lowest level many of these countries attained at the peak of their business cycles. If policies to forestall gross job loss are deemed to have too high an efficiency cost, what role can policy play? Two perspectives can be used to answer that question. One perspective would view the labor reallocation issue as a purely social problem. That is, allowing gross job loss to occur with no impediment from the government may be an economically desirable outcome as long as it is cancelled out by job creation, but the situation creates social problems that government may wish to tackle on non-economic grounds. These social problems include poverty, psychological problems, crime, alcoholism and substance abuse, the undermining of families and communities, and so on that reportedly increase when gross job loss occurs. Economic analysis provides little guidance on the best role for the government to play in tackling these non-economic problems. Alternatively, an economic perspective would ask if any market failure is associated with gross job loss, and what role the government can play in potentially rectifying that market failure. Although it can be argued that gross job loss poses no market failure in and of itself, a persuasive argument can be made that there are market failures that prevent individuals from efficiently insuring themselves in the private market against the risks posed by gross job loss. To a considerable extent, the possibility of gross job loss is a risky event beyond a worker's control, such as adverse changes in the business cycle, tastes, technology, or trade patterns. One would expect a worker to be willing to use some of his income to privately purchase insurance against those risks, just as individuals insure against the risk of death, fire, health problems, and so on. Yet the limited use of private unemployment insurance to supplement government-provided insurance suggests that market failures may significantly hamper the functioning of the private market. All insurance markets are hampered by two important market failures—adverse selection and moral hazard. A persuasive argument can be made that unemployment insurance may be more adversely affected by both types of market failure than most other types of insurance. Adverse selection is caused by asymmetric information: buyers of insurance know more about their riskiness than sellers. As a result, only buyers with higher risks will tend to purchase insurance because they are more certain that the benefit of the insurance will exceed the cost. This pushes up the price of insurance and hampers insurers' efforts to pool risk. Adverse selection hampers efficiency in the market for unemployment insurance because some causes of unemployment are beyond the worker's control, and some are not. Since insurance firms cannot identify which workers have a greater chance of losing their jobs because of the factors within their control, they cannot efficiently pool the risks that workers do not control. Moral hazard occurs when an individual's behavior becomes more risky once he is insured. Moral hazard also drives the cost of insurance above its efficient level. Moral hazard can occur in the unemployment insurance market in two ways: it can cause insured workers to engage in behavior that is more likely to lead to job loss, and once job loss has occurred it can make an insured worker less willing to take a new job (because the worker can subsist on the income provided by the insurance). Government provision of unemployment insurance solves the adverse selection problem by making participation universal. As long as all workers are participating, insurance can be priced at its efficient level, even though benefit will not match cost for any given worker. Government mitigates, but does not eliminate, the moral hazard problem by making the insurance temporary (normally 26 weeks in most states) and imposing eligibility restrictions (e.g., not providing insurance when the worker has quit or been fired). The government has also tended to extend the duration of insurance during economic downturns, since events beyond the worker's control are a greater source of job loss then. The private sector could use the same methods as the government to mitigate moral hazard, but it could not prevent adverse selection. If one accepts that government provision of unemployment insurance is more efficient than private provision, then the policy issue is whether or not insurance is adequate or excessive at current levels. Are workers adequately protected against the risk of gross job loss at existing benefit levels? Should benefit levels or duration be increased or coverage be expanded since gross job loss seems to be following an upward trend? Would more generous insurance reduce the social problems associated with gross job loss? The tradeoff here is between both benefit and cost to the individual (more generous insurance would require higher premiums) and cost to the economy because of the moral hazard problem: as the insurance becomes more generous, disincentives to maintain employment or seek new employment among the unemployed increase. Government's role in insuring workers against the risks associated with gross job loss can also be viewed through a broader prism than the unemployment insurance program. Disability insurance insures against the risk of job loss due to physical incapacity. Trade Adjustment Assistance (TAA), which offers extended unemployment benefits and job training, reduces the risk that workers adversely affected by trade will be unable to find re-employment. (Some policymakers have suggested that TAA be extended to workers in the service industry, given the growing concern with offshore outsourcing.) Government programs such as COBRA (named after Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985) reduce the loss of health care associated with job loss. Some would argue that income redistribution, in general, is a form of income insurance, whether it takes the form of progressive taxation, the Earned Income Tax Credit, the food stamps program, the Supplemental Security Income program, and so on. Kletzer and Litan have argued that the government should implement a "wage insurance" program so that workers who lose their jobs and are forced to take lower paid employment are directly compensated by the government. Along these lines, the Alternative Trade Adjustment Assistance Program for Older Workers was introduced in 2002. An eligible worker (over 50 years old, earning less than $50,000, and meeting other criteria) can receive half the difference between the wages received from reemployment and the wages received at the displaced job for up to two years and payments up to $10,000. This program applies only to workers affected by trade, although the economic rationale for such a program could apply to all workers. Bills in the 110 th Congress, such as S. 1330 (Senator Schumer) and H.R. 2202 (Representative McDermott), would create broader wage insurance programs. At the community level, fiscal transfers (differences between outlays received and taxes paid) that change with economic conditions and government programs such as the Empowerment Zone/Enterprise Communities Program provide what could be characterized as "insurance" for the community as a whole against the economic effects of significant job loss. Drawing a distinction between net job loss and gross job loss can help to inform the policy debate. Net job loss is a serious economic problem that fiscal and monetary policy can be used to mitigate. Although it has social costs, gross job loss is part of the normal functioning of a market economy, and has the beneficial role of reallocating resources to their most efficient use when tastes, technology, or comparative advantage changes. Even in expansions, gross job loss is sizeable, between 6.5 million and 8.5 million per quarter from 1992 to 2000, but it is more than offset by gross job gains. Trade, trade deficits, offshore outsourcing, overseas investment, and economic restructuring all cause gross job loss. But in normal economic conditions, none typically causes net job loss, according to theory and evidence. To see why, consider that they all have the same effect on employment as technological advances. For example, the advent of the automobile caused gross job loss in the horse buggy industry, but was more than offset by gross job gains in the rest of the economy. As the buggy example suggests, policies that impede gross job loss can have high efficiency costs. The difference in the unemployment experience of countries with high barriers to job loss, such as the high unemployment countries of Western Europe, and countries with low barriers, such as the United States, offers some evidence that barriers to gross job loss can lead to lower gross job gains, making such barriers ultimately self-defeating. However, public policies to protect workers against the risks posed by gross job loss can be justified on both social and economic grounds. If crafted properly, they have been shown not to reduce gross job gains, and they can arguably raise efficiency by addressing market failures. For example, public provision of unemployment insurance helps overcome moral hazard and adverse selection problems in that market. The challenge for policymakers going forward is to find the right balance between mitigating risk and maintaining market dynamism in an increasingly fluid labor market.

Total nonfarm private employment has fallen since the beginning of 2008. Job loss is one of the most important macroeconomic problems facing policymakers, both in terms of its economic and social cost. But what is often missing from the policy debate is a distinction between net job loss and gross job loss. Gross job loss is the total number of jobs eliminated by all contracting firms in a given period, whereas net job loss is the result of greater gross job loss than gross job gains in a given period. Economists view net job loss as a detrimental phenomenon, and most recommend that fiscal and monetary policy be used to mitigate it. However, they view gross job loss, as long as it is offset by gross job gains, as a healthy and normal part of a functioning market economy, although it may have social costs and will not affect all regions or industries equally. Data reveal that gross job loss and job gains are each, on average, 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. Clearly, gross job loss is not incompatible with a healthy labor market: during the 1990s expansion in which the unemployment rate was lower than it had been in three decades, gross job losses steadily increased as the expansion progressed. Even during the 2001 recession and subsequent "jobless recovery," gross job gains continued to average about 8 million per quarter; but these gross job gains were more than offset by gross job losses. In the subsequent expansion, gross job gains stayed relatively constant, but gross job losses fell. Small businesses have both higher gross job gains and losses than large firms, and have tended to contribute modestly more net job creation. Many causes of job loss have been offered, including imports, trade deficits, offshore outsourcing, direct investment abroad, and restructuring. But economic theory suggests that all of these cause gross job loss, not net job loss. Historical experience is supportive: neither imports, the trade deficit, nor the implementation of trade liberalization agreements are correlated with net job loss. Theory suggests, and empirical evidence has confirmed, that only recessions cause net job loss. Policies that impede gross job loss may seem to be a desirable way to limit net job loss at first blush. However, such policies could make firms reluctant to hire new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new workers proved to be only temporary. As a result, gross job gains could decline; if gross job gains declined by more than gross job loss declined, net job creation would decline. International comparison confirms this view: Germany, France, Italy, and Spain all had high barriers to job loss and unemployment rates that were typically twice as high in the 1990s as low barrier countries like the United States. Although attempts to impede gross job loss may reduce economic efficiency, policy can (and does) assist some of those affected by gross job loss through unemployment insurance and other parts of the social safety net. Whether the existing social safety net is adequate as gross job loss increases is the subject of policy debate. This report will be updated as events warrant.

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T his report contains two main parts: a section describing recent events and a longer background section on key elements of the U.S.-Japan relationship. Shinzo Abe has been Japan's prime minister since December 2012, and in 2017 he succeeded in extending the LDP's term-limit rules for party president from two consecutive three-year terms to three consecutive terms. In September 2018, Abe's Liberal Democratic Party (LDP) held an internal party leadership vote in which Abe defeated former Defense Minister Shigeru Ishiba, securing a three-year term as party president. With the LDP and its coalition partner, the much smaller Komeito party, firmly in control of Japan's legislature, Abe's victory in the LDP leadership contest means that he will continue serving as premier. If Abe remains in power beyond November 2019, he will become the longest-serving prime minister in the history of modern Japan. Shortly after his victory, Abe appointed a new Cabinet, retaining the members in charge of foreign affairs and U.S. relations, a likely indication of continuity in Japanese foreign and trade policy. Abe's new Cabinet includes one woman, down from two, despite Abe's campaign to increase women's representation in government and participation in the workforce. (See " Emphasis on "Womenomics" '" section below.) Abe's next electoral test will come in July 2019, when half the seats of Japan's Upper House of the bicameral legislature (called the Diet) will be chosen. In a reflection of the disarray of Japan's opposition parties, the LDP's approval ratings in most early October 2018 polls were between 40% and 50%, while none of Japan's other parties received more than 10% support. The September 2018 LDP vote exposed a gap between the LDP's Diet members, over 80% of whom voted for Abe, and the LDP's rank-and-file members, over 55% of whom voted for Abe's opponent, Ishiba. (For background on Japanese politics, see the " Japanese Politics " section.) At the outset of the Trump presidency, a shared approach to confronting the North Korean threat appeared to cement the U.S.-Japan relationship. Beginning at their first summit in Mar-a-Lago in February 2017, Abe and Trump presented a united front on dealing with Pyongyang's nuclear weapon test and multiple missile launches. The two leaders met multiple times and spoke often by phone, and Abe wholeheartedly endorsed the Trump Administration's "maximum pressure" strategy. Since the beginning of 2018, Trump has pursued a rapprochement with Pyongyang and held a friendly summit with North Korean leader Kim Jong-un. Many Japanese are unconvinced that North Korea will give up its nuclear weapons or missiles and fear that Tokyo's interests vis-à-vis Pyongyang will be marginalized if U.S.-North Korea relations continue to warm. Chief among those issues are the abduction of Japanese citizens by North Korean agents in the 1970s and 1980s, an issue on which Abe built his political career. Abe has said he would be willing to meet with Kim to resolve the abduction issue but analysts doubt that Kim has reason to conciliate Abe given his newfound stature in international diplomacy. Trump's shift on North Korea—including his decision to suspend U.S.-South Korean military exercises to obtain greater concessions from Pyongyang—and his statements critical of the value of alliances generally and Japan specifically have increased questions among Japanese policymakers about the depth and durability of the U.S. commitment to Japan's security. U.S. trade policy under the Trump Administration has focused partly on reducing U.S. bilateral trade deficits. This has strained U.S. trade relations with Japan, which accounted for $70 billion or 9% of the total U.S. goods trade deficit in 2017, with a deficit in auto trade alone of over $50 billion. As part of its focus on reducing the trade deficit and encouraging domestic manufacturing, among other rationales, the Administration has proclaimed increased tariffs and other import restrictions under rarely used U.S. trade laws. In addition to raising concerns over potential economic costs in the United States, these tariff actions have heightened tensions with U.S. trading partners. Japan, given its longstanding close alliance with the United States, has taken particular issue with the steel and aluminum tariffs imposed under Section 232 of the Trade Act of 1962, which are based on an investigation into the potential threat to national security posed by the imports. An ongoing Section 232 investigation on motor vehicles may pose a larger threat to the Japanese economy. U.S. imports of Japanese autos and parts were nearly $56 billion, about one-third of total U.S. imports from Japan in 2017. On September 26, 2018, the United States and Japan announced their intent to start new formal bilateral trade negotiations. On October 16, the United States Trade Representative (USTR) gave Congress official notification to that effect, allowing negotiations to start under Trade Promotion Authority (TPA) procedures after 90 days. Japan was reluctant to agree to such negotiations, but likely saw the talks as a way to avoid the possible increased U.S. motor vehicle tariffs. As it did in talks with the EU, the Trump Administration has agreed not to impose new tariffs while bilateral negotiations remain ongoing. The agreement may be negotiated in stages and be less comprehensive than a typical U.S. free trade agreement (FTA), though the scope of talks is unclear. Instead of bilateral talks, Japan had urged the Trump Administration to return to the regional Trans-Pacific Partnership (TPP). After the U.S. withdrawal from TPP in 2017, Japan took the lead in negotiating revisions to the agreement among the remaining 11 members, suspending certain commitments largely sought by the United States. The new deal, called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or TPP-11, was signed in July 2018 and requires ratification by six participants to take effect. Australia, Japan, Mexico, and Singapore have ratified the agreement to date, and Canada's parliament is in the final stages of ratification. Despite an ongoing territorial dispute in the East China Sea, Japan and China appear to be seeking stability in their bilateral relationship, a trend that has accelerated in the past several months. Abe is scheduled to visit Beijing in late October, the first dedicated leaders' summit between the two countries since 2011. On the agenda is deepening economic cooperation and increasing people-to-people exchanges. The emphasis on economic issues has emerged as the two sides have sought to manage tensions in the security realm. In May 2018, Tokyo and Beijing established a hotline for senior defense officials to avoid an unintended escalation in the event of a crisis over maritime disputes in the East China Sea. (See " Territorial Dispute with China in the East China Sea " for more background.) Abe's government has reversed its initial opposition to China's Belt and Road Initiative, which calls for building infrastructure projects in various regions around the world, saying that under the proper conditions it will cooperate with Beijing in providing infrastructure development. Some analysts posit that the mutual interest in improving relations may be driven by both countries' trade friction with the United States and more general sense of uncertainty about the durability of U.S. presence in the region. Although deep-seated historical distrust and regional rivalry are likely to endure in the long-run, relations appear to be on the upswing. Japan's relations with South Korea remain precarious despite a rapprochement in 2016. Koreans hold strong grievances about Japan's colonial rule over the peninsula (1910-1945), particularly on the issue of Korean comfort women who were forced to provide sex to Japanese soldiers in the World War II era. (See " Japan's Ties with South Korea " section.) After South Korea's progressive president, Moon Jae-in, was elected in May 2017, Seoul said it would uphold a U.S.-supported 2015 agreement on how to resolve the comfort women issue, but public mistrust suggests that it will remain a diplomatic irritant. Moon also has continued to participate in a 2016 ROK-Japan military intelligence-sharing agreement, which the United States helped to broker, but trilateral defense cooperation has flagged. Even when official relations are steady, historical grievances are just beneath the surface and can flare unexpectedly. In early October 2018, the Japanese Maritime Self Defense Force pulled out of an international fleet review in South Korea after the hosts asked Japan to refrain from hoisting its ensign, which is identical to Japan's pre-World War II imperial "rising sun" flag. In addition, Moon has suggested that his government plans to shut down the foundation established to oversee compensating comfort women after the 2015 agreement was signed, likely in response to public opinion that is critical of the arrangement. Recently, Abe has emphasized publicly that he wants to improve ties with South Korea, possibly reflecting the central role that Seoul has taken in driving international diplomacy with North Korea. The warming of relations between North and South Korea since early 2018 presents additional challenges to the relationship between the two U.S. allies. The North Korean threat has traditionally driven closer U.S.-Japan-South Korea trilateral coordination, and North Korea's consistent provocations in the past have provided both the motivation and the political room for South Korea and Japan to expand security cooperation. Japan is wary of Seoul's outreach to North Korea and Pyongyang's "smile diplomacy," however, particularly if it is not accompanied by significant tangible reductions in North Korean nuclear and missile capabilities. Although candidate Donald Trump made statements critical of Japan during his campaign, relations have remained strong on the surface throughout several visits and leaders' meetings. After Trump's victory, Abe was the first foreign leader to visit the President-Elect, and the second leader to visit the White House after the U.S. inauguration. Abe and Trump displayed a strong personal rapport and issued a joint statement that echoed many of the previous tenets of the bilateral alliance. However, Trump's long-standing wariness of Japan's trade practices and skepticism of the value of U.S. alliances abroad may have unnerved Tokyo. With Abe's political position ensured, he has looked to hedge against Japan's strong dependency on the United States by championing regional trade deals, stabilizing relations with China, and reaching out to other partners such as Russia, India, Australia, and the European Union. Japan remains committed to the alliance with the United States, and security cooperation at the working level continues to be robust. In some ways, U.S. pressure to provide more in the security realm may boost Abe's efforts aimed at increasing the flexibility and capabilities of Japan's military. The Japanese public remains somewhat wary of moving away from a strictly self-defense armed force, as well as of altering Japan's constitution to allow for more offensive capabilities. As a baseline, the Trump Administration has reaffirmed several key statements seen as crucial to Japan. Tokyo was likely reassured by the joint statement from the leaders' first summit, in February 2017. The United States provided a three-fold affirmation on the Senkaku Islands (the small islands are also claimed by China and Taiwan, and known as Diaoyu and Diaoyutai, respectively): recognizing Japanese administration of the islands, stating that Article 5 of the mutual defense treaty applies to the islands, and stating that it opposed "any unilateral action that seeks to undermine" Japan's administration of the islands. The Secretaries of State and Defense further affirmed the United States' "steadfast commitment" to Japan, and President Trump called the alliance "the cornerstone of peace and stability in the Pacific region." Some analysts have expressed concern about the differences in approach to global issues between the Trump Administration and Tokyo. Internationally, the two countries traditionally have cooperated on scores of multilateral issues, from nuclear nonproliferation to climate change to pandemics. Japan is a firm supporter of the United Nations as a forum for dealing with international disputes and concerns. In the past Japan and the United States have worked closely in fora such as the East Asia Summit and the Association of Southeast Asian Nations (ASEAN) Regional Forum. The shared sense of working together to forge a rules- and norms-based international order has long been a key component of the bilateral relationship. The Trump Administration, however, has expressed skepticism of multilateral organizations. To cite one example, several Japanese cabinet members expressed disappointment in the Trump Administration's decision to withdraw from the Paris climate accord. Additionally, under the President's "America First" approach, a shift away from the United States' role as the guarantor of regional stability raises broader questions for Japan and other countries in the region about the durability of the alliance. If Japan perceives the United States is moving away from its traditional security role, many experts believe Japan may decide to form other partnerships with like-minded countries and adjust its foreign policy to allow more flexibility to independently pursue its own national interests. If Abe remains in office through November 2019, as expected, he will become the longest-serving prime minister in post-war Japan. After his first stint as premier in 2006-2007, Abe led the conservative LDP back into power in late 2012 following a six-year period in which six different prime ministers served. Since then, he appears to have stabilized Japanese politics and emphasized strong defense ties with the United States. Under Abe's leadership, the government increased the defense budget after a decade of decline, passed a set of controversial bills that are reforming Japanese security policies, and won approval from a previous Okinawan governor for the construction of a new U.S. Marine Corps base on Okinawa. Abe also led Japan into the TPP FTA negotiations and has attempted to revitalize Japan's economy, including seeking a number of economic reforms favored by many in the United States. Historical issues have long colored Japan's relationships with its neighbors, particularly China and South Korea, which argue that the Japanese government has neither sufficiently "atoned" for nor adequately compensated them for Japan's occupation and belligerence in the first half of the 20 th century. Abe's selections for his cabinet posts over the years include a number of politicians known for advocating nationalist, and in some cases ultra-nationalist, views that many argue appear to glorify Imperial Japan's actions. Some of Abe's positions—such as changing the interpretation of Japan's constitution to allow for Japanese participation in collective self-defense—largely have been welcomed by U.S. officials eager to advance military cooperation. Other statements, however, suggest that Abe embraces a revisionist view of Japanese history that rejects the narrative of Imperial Japanese aggression and victimization of other Asians. He has been associated with groups arguing that Japan has been unjustly criticized for its behavior as a colonial and wartime power. Among the positions advocated by these groups, such as Nippon Kaigi Kyokai , are that Japan should be applauded for liberating much of East Asia from Western colonial powers, that the 1946-1948 Tokyo War Crimes tribunals were illegitimate, and that the killings by Imperial Japanese troops during the 1937 "Nanjing massacre" were exaggerated or fabricated. In December 2013, Abe paid a highly publicized visit to Yasukuni Shrine, a shrine that was established to house the "spirits" of Japanese soldiers who died during war, but also includes 14 individuals who were convicted as Class A war criminals after World War II. The U.S. Embassy in Tokyo directly criticized the move, releasing a statement that said, "The United States is disappointed that Japan's leadership has taken an action that will exacerbate tensions with Japan's neighbors." Since then, despite the U.S. statement, sizeable numbers of LDP lawmakers have periodically visited the Shrine on ceremonial days, including the sensitive date of August 15, the anniversary of Japan's surrender in World War II. Abe has refrained from visiting since 2013, although LDP lawmakers and cabinet ministers have periodically paid respects at the shrine. Since 2013, Abe himself has largely avoided language and actions that could upset regional relations. After some waffling on key government statements made by past Japanese leaders—chief among them the 1995 "Murayama Statement" that apologized for Japan's wartime action and the 1993 "Kono Statement" that apologized to the "comfort women" (see the "Japan and the Korean Peninsula" section below)—Abe reaffirmed the official government expressions of remorse after pressure from many forces, including U.S. government officials and Members of Congress. Abe appears to have responded to criticism that his handling of these controversial issues could be damaging to Japan's and—to some extent—the United States' national interests. Japan and China have engaged in a diplomatic and at times physical struggle over a group of uninhabited land features in the East China Sea known as the Senkaku Islands in Japan, Diaoyu in China, and Diaoyutai in Taiwan. The territory, administered by Japan but also claimed by China and Taiwan, has been a subject of contention for years, despite modest attempts by Tokyo and Beijing to jointly develop the potentially rich energy deposits nearby, most recently in 2008-2010. China and Japan also dispute maritime rights in the East China Sea more broadly, with Japan arguing for a "median line" equidistant from each country's claimed territorial border dividing the two countries' exclusive economic zones in the East China Sea; China rejects Japan's claimed median line, arguing it has maritime rights beyond this line. The Senkakus dispute has been in a state of varying tension since 2010, when the Japan Coast Guard arrested and detained the captain of a Chinese fishing vessel after it collided with two Japan Coast Guard ships near the Senkakus. The incident resulted in a diplomatic standoff, with Beijing suspending high-level exchanges and restricting exports of rare earth elements to Japan. In August 2012, the Japanese government purchased three of the five land features from a private landowner in order to preempt their sale to Tokyo's nationalist governor at the time, Shintaro Ishihara. Claiming that this act amounted to "nationalization" and thus violated the tenuous status quo, Beijing issued sharp objections. Chinese citizens held massive anti-Japan protests, and the resulting tensions led to a drop in Sino-Japanese trade. In April 2013, the Chinese Ministry of Foreign Affairs said for the first time that China considered the islands a "core interest," indicating to many analysts that Beijing was unlikely to make concessions on this sensitive sovereignty issue. Starting in the fall of 2012, China began regularly deploying maritime law enforcement ships near the islands and stepped up what it called "routine" patrols to assert jurisdiction in "China's territorial waters." In 2013, near-daily encounters occasionally escalated: both countries scrambled fighter jets, and, according to the Japanese government, a Chinese navy ship locked its fire-control radar on a Japanese destroyer and helicopter on two separate occasions. The number of Chinese vessels entering the territorial seas surrounding the islands decreased to a steady level of 7-10 vessels per month in 2014 and 2015, spiked to over 20 in August of 2016, before shifting to the 8-12 vessels per month range for most of the January-August 2017 period and decreasing again to 6-8 vessels per month in the first eight months of 2018. Most of these patrols are conducted by the China Coast Guard, which has been instrumental in advancing China's interests in disputed waters in the East and South China Seas. In 2016, for example, several China Coast Guard vessels escorted between 200 and 300 Chinese fishing vessels to waters near the Senkakus in an apparent demonstration of Chinese sovereignty. China-Japan tensions have played out in the airspace above and around the Senkakus as well. Chinese aircraft activity in the area contributed to an eightfold increase in the number of scramble takeoffs by Japan Air Self Defense Force aircraft between Fiscal Year 2010 (96 scrambles) and 2016 (842 scrambles); the number of scrambles decreased somewhat to 602 in 2017, and there were 278 in the first half of 2018. In November 2013, China abruptly established an air defense identification zone (ADIZ) in the East China Sea covering the Senkakus as well as airspace that overlaps with the existing ADIZs of Japan, South Korea, and Taiwan. China's announcement of the ADIZ produced indignation and anxiety in the region and in Washington for several reasons: the ADIZ represented a new step to pressure—to coerce, some experts argue—Japan's conciliation in the territorial dispute over the islets; the requirements for flight notification in China's proclaimed ADIZ go beyond international norms and impinge on the freedom of navigation; and the overlap of ADIZs could lead to accidents or unintended clashes, thus raising the risk of conflict in the East China Sea. Tensions have subsided somewhat after peaking in 2016, with Beijing and Tokyo seemingly committed to preventing a crisis or armed clash over the Senkakus. For example, in May 2018, China and Japan announced the establishment of a "hotline" for senior defense officials from both countries to communicate and deescalate in the event of a maritime clash. In addition, Chinese authorities in August 2018 reportedly banned Chinese fishermen from operating near the Senkakus. Efforts by both countries to defend their claims have played out primarily in the "gray zone," or the ambiguous space between peace and conflict, with non-military actors like coast guards, fishermen, and China's maritime militia on the front lines. China's approach to the dispute (as well as its disputes in the South China Sea) appears to be aimed at exploiting the gray zone to gradually consolidate its control and influence over contested space without escalating to armed conflict. In response, Japan has prioritized enhancing its ability to counter gray zone activities, in addition to strengthening its traditional military capabilities. Japan's administration of the Senkakus is the basis of the U.S. treaty commitment to defend that territory. U.S. administrations going back at least to the Nixon Administration have stated that the United States takes no position on the territorial disputes. However, it also has been U.S. policy since 1972 that the 1960 U.S.-Japan Security Treaty covers the Senkakus, because Article 5 of the treaty stipulates that the United States is bound to protect "the territories under the Administration of Japan," and Japan administers the Senkakus. In its own attempt to address this perceived gap, Congress inserted in the FY2013 National Defense Authorization Act ( H.R. 4310 , P.L. 112-239 ) a resolution stating, among other items, that "the unilateral action of a third party will not affect the United States' acknowledgment of the administration of Japan over the Senkaku Islands." The conflict in the East China Sea in many ways embodies Japan's security challenges. The maritime confrontation with Beijing is a concrete manifestation of the threat Japan has faced for years from China's rising regional power. It also brings into relief Japan's dependence on the U.S. security guarantee and its anxiety that Washington will not defend Japanese territory if Japan goes to war with China, particularly over a group of uninhabited land features. In contrast to Japan's and China's inability to reach an agreement on sharing undersea resources in the disputed area, in April 2013 Japan and Taiwan agreed to jointly share and administer the fishing resources in their overlapping claimed EEZs Senkakus (Diaoyu/Diaoyutai). The agreement, which had been discussed for 17 years, addressed neither the two sides' conflicting sovereignty claims, nor the question of fishing rights in the islands' territorial waters. On July 29, 2013, the Senate passed S.Res. 167 , which described the pact as a "model for other such agreements." In the 21 st century, Japan's relationship with South Korea has fluctuated between troubled and tentatively cooperative, depending on external circumstances and the leaders in power. Washington has generally encouraged closer ties between Tokyo and Seoul as two of its most important alliance partners; the two countries have shared security concerns, developed economies, and a commitment to open markets, international rules and norms, and regional stability. A poor relationship between Seoul and Tokyo jeopardizes U.S. interests by complicating trilateral cooperation on North Korea policy and on responding to China's rise. Tense relations also complicate Japan's desire to expand its military and diplomatic influence as well as the potential creation of an integrated U.S.-Japan-South Korea ballistic missile defense system. The North Korean threat has traditionally driven closer trilateral coordination, even when Tokyo and Seoul have faced political tension. Under North Korean leader Kim Jong-un, North Korea's consistent provocations from 2011 to 2017 provided both the motivation and the political room for South Korea and Japan to forge more cooperative stances, despite lingering mutual distrust. For example, in late June 2016, the three countries held their first joint military training exercise with Aegis ships that focused on tracking North Korean missile launches by sharing intelligence. The persistent Japan-Korea discord centers on historical issues. Officials in Japan have referred to rising "Korea fatigue" among their public and expressed frustration that for years South Korean leaders have not recognized and in some cases have rejected the efforts Japan has made to acknowledge and apologize for Imperial Japan's actions during the 35 years following its annexation of the Korean Peninsula in 1910. In addition to the comfort women issue (see below), the perennial issues of how Japan's behavior before and during World War II is depicted in Japanese school textbooks and a territorial dispute between Japan and South Korea continue to periodically rile relations. A group of small islands in the Sea of Japan, known as Dokdo in Korean and Takeshima in Japanese (the U.S. government refers to them as the Liancourt Rocks), are administered by South Korea but claimed by Japan. Japanese statements about the claim in defense documents or by local prefectures routinely spark official criticism and public outcry in South Korea. Similarly, Seoul expresses disapproval of some of the history textbooks approved by Japan's Ministry of Education that South Koreans claim diminish or whitewash Japan's colonial-era atrocities. The most prominent stumbling block to better Japan-South Korean relations involves the "comfort women," a literal translation of the Japanese euphemism referring to women who were forced to provide sexual services for Japanese soldiers during the imperial military's conquest and colonization of several Asian countries in the 1930s and 1940s. The long-standing controversy became more heated under Abe's leadership. In the past, Abe supported the claims made by many conservatives in Japan that the women were not directly coerced into service by the Japanese military. In 2015, Abe and then-President Park Geun-hye of South Korea concluded an agreement that included a new apology from Abe and the provision of 1 billion yen (about $8.3 million) from the Japanese government to a new Korean foundation that supports surviving victims. The two governments' foreign ministers agreed that this long-standing bilateral rift would be "finally and irreversibly resolved" pending the Japanese government's implementation of the agreement. Although the main elements of the agreement appeared to be implemented in 2016, the deal remains deeply unpopular with the South Korea public. The issue continues to be an irritant in bilateral relations: Japan objects to a comfort woman statue that stands in front of the Japanese Embassy in Seoul, and in 2018 Seoul suggested it would disband the foundation established by the agreement. The issue of the so-called comfort women has gained visibility in the United States, due in part to Korean-American activist groups. These groups have pressed successfully for the erection of monuments in California and New Jersey commemorating the victims, passage of a resolution on the issue by the New York State Senate, the naming of a city street in the New York City borough of Queens in honor of the victims, and approval to erect a memorial to the comfort women in San Francisco. In 2007, U.S. House of Representatives passed H.Res. 121 (110 th Congress), calling on the Japanese government to "formally acknowledge, apologize, and accept historical responsibility in ... an unequivocal manner" for forcing young women into military prostitution. Since 2009, Washington and Tokyo have been largely united in their approach to North Korea, driven by Pyongyang's string of missile launches and nuclear tests. In February 2017, North Korea launched the first of many missiles of that year during Abe's summit with Trump, setting the stage for the two leaders to bond over the North Korean threat. Japan has employed a hardline policy toward North Korea, including a virtual embargo on all bilateral trade and vocal leadership at the United Nations to punish Pyongyang for its human rights abuses and military provocations. When the Six-Party Talks were active, Japan was considered a key actor in a possible resolution of problems on the Korean peninsula, but the multilateral format has been dormant since 2009 and appears to be all but abandoned. Japan is directly threatened by North Korea given the demonstrated capability of Pyongyang's medium-range missiles; in 2017, North Korea twice tested missiles that flew over Japanese territory. North Korea has long-standing animosity toward Japan for its colonialism of the Korean peninsula in the early 20 th century. In addition, U.S. bases in Japan could be targeted by the North Koreans in any military contingency. Aside from these direct security concerns, Japan has prioritized the long-standing issue of Japanese citizens kidnapped by North Korean agents decades ago. In 2002, then-North Korean leader Kim Jong-il admitted to the abductions and returned five survivors, claiming the others had perished from natural causes. Japan officially identifies 17 individuals as abductees. Abe, then serving as Chief Cabinet Secretary to then-Prime Minister Junichiro Koizumi, has since been a passionate champion for the abductees' families and pledged as a leader to bring home all surviving Japanese. President Trump mentioned the abductee issue during his 2017 U.N. General Assembly address, and said that he also raised the issue with Kim Jong-un during the Singapore Summit in 2018. The Abe Administration's foreign policy has displayed elements of both power politics and an emphasis on democratic values, international laws, and norms. Shortly after returning to office in 2012, Abe released an article outlining his foreign and security policy strategy titled "Asia's Democratic Security Diamond," which described how the democracies of Japan, Australia, India, and the United States could cooperate to deter Chinese aggression on its maritime periphery. In Abe's first year in office, Japan held numerous high-level meetings with Asian countries to bolster relations and, in many cases, to enhance security ties. Abe had summit meetings in India, Russia, Great Britain, all 10 countries in the Association of Southeast Asian Nations (ASEAN), and several countries in the Middle East and Africa. Japan has particularly focused on issues of freedom of navigation in the South China Sea, in part because of the implications for Japan's trade flows and for the East China Sea dispute. Since 2012, even before Abe came into office, Japan had been working to strengthen the maritime capabilities of Southeast Asian countries such as Vietnam and the Philippines, and Abe has accelerated these efforts, which the Obama Administration supported as part of its "Asia Rebalance" strategy. This energetic diplomacy indicates a desire to balance China's growing influence with a loose coalition of Asia-Pacific powers, but this strategy of realpolitik is couched in the rhetoric of international laws and democratic values. Abe's international outreach has yielded positive results, according to many observers. Despite a failed submarine deal, bilateral ties with Australia are robust. Abe's highly publicized July 2014 visit to Canberra yielded new economic and security arrangements, including an agreement to transfer defense equipment and technology. Japan-India ties have blossomed under Abe and Prime Minister Narendra Modi, including expanded military exercises and negotiations on defense export agreements. Even as cracks have appeared in the U.S.-Philippines alliance, Abe has made efforts to maintain Japan-Philippines defense relations. Part of Abe's international diplomacy push has been to reach out to Russia. Japan and the Soviet Union never signed a peace treaty following World War II due to a territorial dispute over four islands north of Hokkaido in the Kuril Chain. The islands are known in Japan as the Northern Territories and were seized by the Soviets in the waning days of the war. Both Japan and Russia face security challenges from China and may be seeking a partnership to counter Beijing's economic and military power. Particularly in the past several years, however, China and Russia have developed closer relations and cooperate in multiple areas. Tokyo's ambitious plans to revitalize relations with Moscow, including resolution of the disputed islands, however, do not appear to have made progress. Russia's aggression in Ukraine in 2014 disrupted the improving relationship. Tokyo signed on to the subsequent G7 statement condemning Russia's action and implemented sanctions and asset freezes. Japan attempted to salvage the potential breakthrough by imposing only relatively mild sanctions despite pressure from the United States and other Western powers. With many countries in the West isolating Moscow, Russia and China appear to have grown closer. For decades, U.S. soldiers who were held captive by Imperial Japan during World War II have sought official apologies from the Japanese government for their treatment. A number of Members of Congress have supported these campaigns. The brutal conditions of Japanese POW camps have been widely documented. In May 2009, the Japanese Ambassador to the United States attended the last convention of the American Defenders of Bataan and Corregidor to deliver a cabinet-approved apology for their suffering and abuse. In 2010, with the support and encouragement of the Obama Administration, the Japanese government financed a Japanese/American POW Friendship Program for former American POWs and their immediate family members to visit Japan, receive an apology from the sitting Foreign Minister and other Japanese Cabinet members, and travel to the sites of their POW camps. Annual trips were held from 2010 to 2017. In the 112 th Congress, three resolutions— S.Res. 333 , H.Res. 324 , and H.Res. 333 —were introduced thanking the government of Japan for its apology and for arranging the visitation program. The resolutions also encouraged the Japanese to do more for the U.S. POWs, including by continuing and expanding the visitation programs as well as its World War II education efforts. They also called for Japanese companies to apologize for their or their predecessor firms' use of un- or inadequately compensated forced laborers during the war. In July 2015, Mitsubishi Materials Corporation (a member of the Mitsubishi Group) became the first major Japanese company to apologize to U.S. POWs on behalf of its predecessor firm, which ran several POW camps that included over 1,000 Americans. In addition, they made a one-time grant of $50,000 to a library in West Virginia to maintain a collection of POW materials. Under the Obama Administration, Japan and the United States cooperated on a wide range of environmental initiatives both bilaterally through multiple agencies and through multilateral organizations, such as the UNFCCC, the International Energy Agency (IEA), the Asia-Pacific Economic Cooperation (APEC), the Clean Energy Ministerial (CEM), the International Energy Forum (IEF), and the East Asian Summit (EAS). Japan was generally regarded by U.S. officials as closely aligned with the Obama Administration in international climate negotiations in its position that any international climate agreement must be legally binding in a symmetrical way, with all major economies agreeing to the same elements. However, because of the shutdown of Japan's nuclear reactors (see below), international observers raised concerns about losing Japan as a global partner in promoting nuclear safety and nonproliferation measures and in reducing greenhouse gas emissions. President Trump's 2017 decision to withdraw the United States from the UNFCCC Paris Agreement, an international climate accord designed to reduce global emissions, removed one channel through which the United States and Japan cooperated closely. Japanese officials expressed dismay when the United States withdrew from the Agreement, with the Japanese Ministry of Foreign Affairs calling the decision "regrettable"; the then Minister for the Environment had a stronger response, saying, "It's as if they've turned their back on the wisdom of humanity…. In addition to being disappointed, I'm also angry." Although Japanese officials—including Abe—emphasize the importance of acting on climate change both domestically and in coordination with the international community, some experts assess Japan's greenhouse gas emissions reduction plan is insufficiently ambitious, particularly in light of Japan's expansion of coal power plants. Nevertheless the two countries continue to cooperate on energy issues under a Japan-United States Strategic Energy Partnership established in November 2017. The partnership focuses on advanced nuclear energy technologies, clean coal technologies, natural gas market development, and energy infrastructure in the developing world. This effort dovetails with the Trump Administration's Asia-EDGE (Enhancing Development and Growth through Energy) initiative, one of the economic and commercial pillars of the Administration's Indo-Pacific strategy announced in July 2018. Among other things, Asia-EDGE aims to strengthen energy security in the region and grow Asian markets for U.S. energy products, particularly liquefied natural gas (LNG); Japan is the world's largest LNG buyer and has become a destination for U.S. LNG exports. Japan is undergoing a national debate on the future of nuclear power, with major implications for businesses operating in Japan, U.S.-Japan nuclear energy cooperation, and nuclear safety and nonproliferation measures worldwide. Prior to 2011, nuclear power was providing roughly 30% of Japan's power generation capacity, and the 2006 "New National Energy Strategy" had set out a goal of significantly increasing Japan's nuclear power generating capacity. However, the policy of expanding nuclear power was abruptly reversed in the aftermath of the March 11, 2011, natural disasters and meltdowns at the Fukushima Daiichi nuclear power plant. Public trust in the safety of nuclear power collapsed, and a vocal antinuclear political movement emerged. This movement tapped into an undercurrent of antinuclear sentiment in modern Japanese society based on its legacy as the victim of atomic bombing in 1945. As the nation's 54 nuclear reactors were shut down one by one for their annual safety inspections in the months after March 2011, the Japanese government did not restart them for several years (except a temporary reactivation for two reactors at one site in central Japan). No reactors were operating from September 2013 until August 2015. As of October 2018, only eight reactors are in operation. The drawdown of nuclear power generation resulted in many short- and long-term consequences for Japan: rising electricity costs for residences and businesses; heightened risk of blackouts in the summer, especially in the Kansai region near Osaka and Kyoto; widespread energy conservation efforts by businesses, government agencies, and ordinary citizens; significant losses for and near-bankruptcy of major utility companies; and increased fossil fuel imports. Japan's Ministry of Economy, Trade, and Industry estimated the direct cost of the decommissioning of the Fukushima Daiichi plant and compensation of victims to be $187 billion, and the cost of fossil fuel imports to replace power from subsequently shutdown reactors to be $31.3 billion in FY2013 alone. The Institute of Energy Economics, Japan, calculated that the nuclear shutdowns led to the loss of 420,000 jobs in 2012. The LDP has promoted a relatively pronuclear policy, despite persistent antinuclear sentiment among the public. The Abe Administration released a Strategic Energy Plan in April 2014 that identifies nuclear power as an "important base-load power source," and in 2015 announced it would seek for nuclear energy to account for 20-22% of Japan's power supply by 2030. In the coming years, the government likely will approve the restart of many of Japan's existing 42 operable nuclear reactors, but as many as half, or even more, may never operate again. Approximately 55% of the Japanese public opposes the restart of nuclear reactors, compared to approximately 25% in favor. The Abe Cabinet faces a complex challenge: how to balance concerns about energy security, promotion of renewable energy sources, the viability of electric utility companies, the health of the overall economy, and public concerns about safety. And if Japan closes down its nuclear power industry, some analysts wonder whether it will continue to play a lead role in promoting nuclear safety and nonproliferation around the world. The U.S.-Japan alliance has long been an anchor of the U.S. security role in Asia. Forged in the U.S. occupation of Japan after its defeat in World War II, the alliance provides a platform for U.S. military readiness in the Pacific under the 1960 Treaty of Mutual Cooperation and Security between the United States and Japan. About 50,000 U.S. troops are stationed in Japan and have the exclusive use of approximately 90 facilities (see Figure 2 ). In exchange, the United States guarantees Japan's security, including through extended deterrence, known colloquially as the U.S. "nuclear umbrella." The U.S.-Japan alliance, which many believe was missing a strategic rationale after the end of the Cold War, may have found a new guiding rationale in shaping the environment for China's rise. In addition to serving as a hub for forward-deployed U.S. forces, Japan provides its own advanced military assets, many of which complement U.S. assets. During the 2016 presidential campaign, candidate Trump repeatedly asserted that Tokyo did not pay enough to ease the U.S. cost of providing security for Japan. In response, Japanese and U.S. officials have defended the system of host nation support that has been negotiated and renegotiated over the years. Defenders of the alliance point to the strategic benefits as well as the cost saving of basing some of the most advanced capabilities of the U.S. military in Japan, including a forward-deployed aircraft carrier. The question of how much Japan spends, particularly when including the Japanese government's payments to compensate base-hosting communities and to shoulder the costs of U.S. troop relocation in the region, remains a thorny area with few easily quantifiable answers. Japan appears to anticipate new demands from the United States, and Abe has already stated that Japan will no longer cap its defense spending at the customary 1% of GDP. Since the early 2000s, the United States and Japan have taken strides to improve the operational capability of the alliance as a combined force, despite political and legal constraints. Japan's own defense policy has continued to evolve, and its major strategic documents reflect a new attention to operational readiness and flexibility. The original, asymmetric arrangement of the alliance has moved toward a more balanced security partnership in the 21 st century, and Japan's 2014 decision to engage in collective self-defense may accelerate that trend. Unlike 25 years ago, the Japan Self-Defense Force (SDF) is now active in overseas missions, including efforts in the 2000s to support U.S.-led coalition operations in Afghanistan and the reconstruction of Iraq. Japanese military contributions to global operations like counter-piracy patrols relieve some of the burden on the U.S. military to manage security challenges. Due to the colocation of U.S. and Japanese command facilities in recent years, coordination and communication have become more integrated. The joint response to the March 2011 tsunami and earthquake in Japan demonstrated the interoperability of the two militaries. The United States and Japan have been steadily enhancing bilateral cooperation in many other aspects of the alliance, such as ballistic missile defense, cybersecurity, and military use of space. Alongside these improvements, Japan continues to pay nearly $2 billion per year to defray the cost of stationing U.S. forces in Japan. (See " Burden-Sharing Issues " section below.) In late April 2015, the United States and Japan announced the completion of the revision of their bilateral defense guidelines, a process that began in late 2013. First codified in 1978 and later updated in 1997, the guidelines outline how the U.S. and Japanese militaries will interact in peacetime and in war as the basic framework for defense cooperation based on a division of labor. The new guidelines account for developments in military technology, improvements in interoperability of the U.S. and Japanese militaries, and the complex nature of security threats in the 21 st century. For example, the revision addresses bilateral cooperation on cybersecurity, the use of space for defense purposes, and ballistic missile defense, none of which were mentioned in the 1997 guidelines. The 2015 guidelines lay out a framework for bilateral, whole-of-government cooperation in defending Japan's outlying islands. They also significantly expand the scope of U.S.-Japan security cooperation to include defense of sea lanes and, potentially, Japanese contributions to U.S. military operations outside East Asia. The Abe Administration pushed through controversial legislation in fall 2015 to provide a legal basis for these far-reaching defense reforms, despite vocal opposition from opposition parties and the Japanese public. Japan's implementation of the new guidelines and related defense reforms has been slow and incremental, perhaps because of the controversy that surrounded passage of the new security legislation. The bilateral defense guidelines also seek to improve alliance coordination. The guidelines establish a new standing Alliance Coordination Mechanism (ACM), which will involve participants from all the relevant agencies in the U.S. and Japanese governments, as the main body for coordinating a bilateral response to any contingency. This new mechanism removes obstacles that had inhibited alliance coordination in the past. The previous ACM only would have assembled if there was a state of war, meaning that there was no formal organization to coordinate military activities in peacetime, such as during the disaster relief response to the March 2011 disasters in northeast Japan. The U.S. and Japanese governments have convened the ACM to coordinate responses to North Korea's January 2016 nuclear weapon test, the earthquakes near Kumamoto, on Japan's western island of Kyushu in April 2016, and other episodes affecting East Asian regional security. Perhaps the most symbolically significant—and controversial—security reform of the Abe Administration has been Japan's potential participation in collective self-defense. Dating back to his first term in 2006-2007, Abe has shown a determination to adjust this highly asymmetric aspect of the alliance: the inability of Japan to defend U.S. forces or territory under attack. According to the traditional Japanese government interpretation, Japan possesses the right of collective self-defense, which is the right to defend another country that has been attacked by an aggressor, but under Article 9 of the Japanese constitution, Japan has given up that right. However, Japan has interpreted Article 9 to mean that it can maintain a military for national defense purposes and, since 1991, has allowed the SDF to participate in noncombat roles overseas in a number of U.N. peacekeeping missions and in the U.S.-led coalition in Iraq. In July 2014, the Abe Cabinet announced a new interpretation, under which collective self-defense would be constitutional as long as it met certain conditions. These conditions, developed in consultation with the LDP's dovish coalition partner Komeito and in response to cautious public sentiment, are rather restrictive and could limit significantly Japan's latitude to craft a military response to crises outside its borders. The security legislation package that the Diet passed in September 2015 provides a legal framework for new SDF missions, but institutional obstacles in Japan may inhibit full implementation in the near term. However, the removal of the blanket prohibition on collective self-defense will enable Japan to engage in more cooperative security activities, like noncombat logistical operations and defense of distant sea lanes, and to be more effective in other areas, like U.N. peacekeeping operations. For the U.S.-Japan alliance, this shift could mark a step toward a more equal and more capable defense partnership. Chinese and South Korean media, as well as some Japanese civic groups and media outlets, have been critical, implying that collective self-defense represents an aggressive, belligerent security policy for Japan. Due to the legacy of the U.S. occupation and the island's key strategic location, Okinawa hosts a disproportionate share of the U.S. military presence in Japan. About 25% of all facilities used by U.S. Forces Japan (USFJ) and over half of USFJ military personnel are located in the prefecture, which comprises less than 1% of Japan's total land area. The attitudes of native Okinawans toward U.S. military bases are generally characterized as negative, reflecting a tumultuous history and complex relationships with both "mainland" Japan and with the United States. Because of these widespread concerns among Okinawans, the sustainability of the U.S. military presence in Okinawa remains a critical challenge for the alliance. The United States and Japan have faced decades of delay in an agreement to relocate a Marine Air Base. The new facility, slated to be built on the existing Camp Schwab in the sparsely populated Henoko area of Nago City, would replace the functions of Marine Corps Air Station (MCAS) Futenma, located in the center of a crowded town in southern Okinawa. The encroachment of residential areas around the Futenma base over decades has raised the risks of a fatal aircraft accident, which could create a backlash on Okinawa and threaten to disrupt the alliance. Most Okinawans oppose the construction of a new U.S. base for a mix of political, environmental, and quality-of-life reasons. A U.S. military official testified to Congress in 2016 that the expected completion of the new base at Henoko had been delayed from 2022 to 2025. Tokyo and Okinawa agreed in March 2016 to a court-recommended mediation process, suspending construction of the Futenma replacement facility while central government and Okinawan prefectural officials resumed ultimately fruitless negotiations. A December 2016 Japanese Supreme Court decision ruled that then-Okinawa Governor Takeshi Onaga could not revoke the previous governor's landfill permit needed to build the offshore runways at Camp Schwab. Also in December 2016, the United States returned nearly 10,000 acres of land in the northern part of the island to Japan. Onaga passed away in August 2018, triggering a special election to replace him. Denny Tamaki, son of an Okinawan woman and U.S. Marine, won by a large margin and vowed to pursue further obstruction tactics to prevent the construction. Calculating how much Tokyo pays to defray the cost of hosting the U.S. military presence in Japan is difficult and depends heavily on how the contributions are counted. Further, the two governments present estimations based on different data depending on the political aims of the exercise; because of the skepticism among some Japanese about paying the U.S. military, for example, the Japanese government may use different baselines in justifying its contributions to the alliance when arguing for its budget in the Diet. Other questions make it challenging to assess the value and costs of the U.S. military presence in Japan. Is the U.S. cost determined based strictly on activities that provide for the defense of Japan, in a narrow sense? Or is the system of American bases in Japan valuable because it enables the United States to more quickly, easily, and cheaply disperse U.S. power in the Western Pacific? U.S. defense officials often cite the strategic advantage of forward-deploying the most advanced American military capabilities in the Asia-Pacific at a far lower cost than stationing troops on American soil. Determining the percentage of overall U.S. costs that Japan pays is even more complicated. According to DOD's 2004 Statistical Compendium on Allied Contributions to the Common Defense (the last year for which the report was required), Japan provided 74.5% of the U.S. stationing cost. In January 2017, Japan's Defense Minister provided data that set the Japanese portion of the total cost for U.S. forces stationed in Japan at over 86%. Other estimates from various media reports are in the 40-50% range. Most analysts concur that there is no authoritative, widely shared view on an accurate figure that captures the percentage that Japan shoulders. One component of the Japanese contribution is the Japanese government's payment of nearly $2 billion per year to offset the cost of stationing U.S. forces in Japan. All Japanese contributions are provided in-kind. The United States spends $2.7 billion per year (on top of the Japanese contribution) on nonpersonnel costs for troops stationed in Japan. Japanese host nation support is composed of two funding sources: Special Measures Agreements (SMAs) and the Facilities Improvement Program (FIP). Each SMA is a bilateral agreement, generally covering five years, which obligates Japan to pay a certain amount for utility and labor costs of U.S. bases and for relocating training exercises away from populated areas. Under the current SMA, covering 2016-2020, the United States and Japan agreed to keep Japan's host nation support at roughly the same level as it had been paying in the past. Japan will contribute ¥189 billion ($1.6 billion) per year under the SMA and contribute at least ¥20.6 billion ($175 million) per year for the FIP. Depending on the yen-to-dollar exchange rate, Japan's host nation support likely will be in the range of $1.7-$2.1 billion per year. The amount of FIP funding is not strictly defined, other than the agreed minimum, and thus the Japanese government adjusts the total at its discretion. Tokyo also decides which projects receive FIP funding, taking into account, but not necessarily deferring to, U.S. priorities. In addition to host nation support, which offsets costs that the U.S. government would otherwise have to pay, Japan spends approximately ¥128 billion ($1.2 billion) annually on measures to subsidize or compensate base-hosting communities. These are not costs that would be necessarily passed on to the United States, but U.S. and Japanese alliance managers may argue that the U.S. bases would not be sustainable without these payments to areas affected by the U.S. military presence. Based on its obligations defined in the U.S.-Japan Mutual Security Treaty, Japan also pays the cost of relocating U.S. bases within Japan and rent to any landowners of U.S. military facilities in Japan. Japan pays for the majority of the costs associated with three of the largest international military base construction projects since World War II: the Futenma Replacement Facility in Okinawa (Japan provides $12.1 billion), construction at the Marine Corps Air Station Iwakuni (Japan pays 94% of the $4.8 billion), and facilities on Guam to support the move of 4,800 marines from Okinawa (Japan pays $3.1 billion, about a third of the cost of construction). Japan also procures over 90% of its defense acquisitions from U.S. companies. Japan's annual U.S. Foreign Military Sales are valued at about $11 billion. Recent major acquisitions include Lockheed Martin F-35 Joint Strike Fighters, Boeing KC-46 Tankers, Northrup Grumman E2D Hawkeye airborne early warning aircraft, General Dynamics Advanced Amphibious Assault Vehicles, and Boeing/Bell MV-22 Ospreys. The growing concerns in Tokyo about North Korean nuclear weapons development and China's modernization of its nuclear arsenal in the 2000s garnered renewed attention to the U.S. policy of extended deterrence, commonly known as the "nuclear umbrella." The United States and Japan initiated the bilateral Extended Deterrence Dialogue in 2010, recognizing that Japanese perceptions of the credibility of U.S. extended deterrence were critical to its effectiveness. The dialogue is a forum for the United States to assure its ally and for both sides to exchange assessments of the strategic environment. The views of Japanese policymakers (among others) influenced the development of the 2010 U.S. Nuclear Posture Review. Reportedly, Tokyo discouraged a proposal to declare that the "sole purpose" of U.S. nuclear weapons is to deter nuclear attack. Tokyo also reportedly discouraged the Obama Administration from declaring a "no first use" policy on the rationale that it would weaken deterrence against North Korea. A lack of confidence in the U.S. security guarantee could lead Tokyo to reconsider its own status as a non-nuclear weapons state. As discussed above, as a presidential candidate Donald Trump in spring 2016 stated that he was open to Japan developing its own nuclear arsenal to counter the North Korean nuclear threat. Japanese leaders, however, have repeatedly rejected developing their own nuclear weapon arsenal. Analysts point to the potentially negative consequences for Japan if it were to develop its own nuclear weapons, including significant costs; reduced international standing in the campaign to denuclearize North Korea; the possible imposition of economic sanctions that would be triggered by leaving the global nonproliferation regime; and potentially encouraging South Korea to develop nuclear weapons capability. For the United States, analysts note that encouraging Japan to develop nuclear weapons could mean diminished U.S. influence in Asia, the unraveling of the U.S. alliance system, and the possibility of creating a destabilizing nuclear arms race in Asia. Japan also plays an active role in extended deterrence through its ballistic missile defense (BMD) capabilities. The United States and Japan have cooperated closely on BMD technology development since the earliest programs, conducting joint research projects as far back as the 1980s. Japan's purchases of U.S.-developed technologies and interceptors after 2003 give it the second-most potent BMD capability in the world. The U.S. and Japanese militaries both have ground-based BMD units deployed on Japanese territory and BMD-capable vessels operating in the waters near Japan. In February 2017, the joint program achieved a significant milestone in a test off of Hawaii, when a new interceptor from a guided-missile destroyer hit a medium-range missile for the first time. U.S. trade and economic ties with Japan are viewed by many experts and policymakers as highly important to the U.S. national interest. By the most conventional method of measurement, the United States and Japan are the world's largest and third-largest economies (China is number two), accounting for nearly 30% of the world's gross domestic product (GDP) in 2017. Furthermore, their economies are closely intertwined by two-way trade in goods and services, and by foreign investment. Japan is a significant economic partner of the United States. Japan was the United States' fifth-largest export market for goods and services (behind Canada, Mexico, China, and the United Kingdom) and the fourth-largest source of U.S. imports (behind China, Canada, and Mexico) in 2017. Japan accounted for 5% of total U.S. exports in 2017 ($115 billion) and 6% of total U.S. imports ($171 billion). The United States was Japan's largest goods export market and second-largest source of goods imports (after China) in 2017. Japan is also a major investor in the United States accounting for more than 10% of the stock of inward U.S. direct investment in 2017 ($469 billion). The relative significance of the bilateral economic relationship, however, has arguably declined as other countries, including China, have become increasingly important global economic actors. Over the past decade, U.S. goods exports to the world grew by nearly 20%, while exports to Japan grew by less than 2%. Similarly, U.S. goods imports from the world grew by 10% while U.S. imports from Japan fell. Some of this shift stems from structural changes in the global economic landscape, including the growth of global supply chains. U.S. import numbers probably underestimate the importance of Japan in U.S. trade since, in particular, Japanese firms export intermediate goods to China and other countries that are then used to manufacture finished goods that Chinese enterprises export to the United States. Major economic events also have influenced U.S.-Japan trade patterns over the past decade. The global economic downturn stemming from the 2008 financial crisis had a significant impact on U.S.-Japan trade: both U.S. exports and imports declined in 2009 from 2008. Although trade flows recovered quickly, they peaked in 2012 and have declined or grown only modestly in most years since that time, as measured in U.S. dollars. (See Table 1 .) The decline in the value of the Japanese yen since 2012, tied to aggressive monetary stimulus in Japan as part of "Abenomics" (described below) has likely affected both the value and quantity of trade—measured in yen. U.S. trade with Japan has largely risen over the same time period. Under the Trump Administration, U.S. trade policy has increasingly focused on "unfair" trading practices, U.S. import competition, and bilateral trade deficits, leading to greater strain in U.S. economic relations, including with Japan. Issues of ongoing U.S. attention include concerns over market access for U.S. products such as autos and agricultural goods, and various nontariff barriers, which U.S. companies argue favor domestic Japanese products over U.S. goods and services. Despite this recent shift, the major trend in bilateral economic relations over the past two decades has largely been an easing of tension, in contrast with the contentious and frequent trade frictions at the fore of the bilateral relationship in the 1980s and early 1990s. A number of factors may have contributed to this trend: Japan's slow economic growth—beginning with the burst of the asset bubble in the 1990s—has changed the general U.S. perception of Japan from one as an economic competitor to one as a "humbled" economic power; significant Japanese investment in the United States including in automotive manufacturing facilities has linked production of some Japanese branded products with U.S. employment; the successful conclusion of the multilateral Uruguay Round agreements in 1994 led to further market openings in Japan, and established the World Trade Organization (WTO) and its enhanced dispute settlement mechanism, which has provided a forum used by both Japan and the United States to resolve trade disputes; the rise of China as an economic power and trade partner has caused U.S. policymakers to shift attention from Japan to China as a primary source of concern; and the growth in the complexity and number of countries involved in global supply chains has likely diffused or shifted concerns over import competition as many Japanese products are now imported into the United States as components in finished products from other countries, thereby reducing the bilateral trade deficit. Between the end of World War II and 1980s, Japan experienced high levels of economic growth. It was dubbed an "economic miracle" until the collapse of an economic bubble in Japan in the early 1990s brought an end to rapid economic growth. Many economists have argued that, despite the government's efforts, Japan has never fully recovered from the 1990s crisis. For decades Japan's economy suffered from chronic deflation (falling prices) and low growth. In the late 2000s, Japan's economy was also hit by two economic crises: the global financial crisis in 2008 and 2009, and the March 2011 earthquake, tsunami, and nuclear reactor meltdowns in northeast Japan. As a result, since the 1980s, Japan's average GDP growth has been consistently lower than that of the United States ( Figure 3 ). In sharp contrast to the booming years of the 1980s, this decades-long history of economic stagnation coupled with, and in part a result of, the demographic challenge of a shrinking and ageing population has led to a narrative in the media and elsewhere of Japan as a nation in decline, particularly vis-à-vis the rapid economic growth and growing global influence of neighboring China and South Korea. In the face of domestic anxiety caused by this shift, Prime Minister Abe came into office in 2012 with a goal to reinvigorate the Japanese economy. Specifically, the Abe Administration made it a priority to boost economic growth and to eliminate deflation. Abe has promoted a three-pronged, or "three arrow," economic program, nicknamed "Abenomics." The three arrows include monetary stimulus, fiscal stimulus, and structural reforms to improve the competitiveness of Japan's economy. Most economists agree that progress across the three arrows has been uneven. The first arrow of Abenomics, monetary stimulus to reverse deflation, has been implemented most aggressively. In the spring of 2013, Japan's central bank (Bank of Japan, or BOJ) announced a continued loose monetary policy with interest rates of 0%, quantitative easing measures, and a target inflation rate of 2%. The BOJ began a second round of quantitative easing in October 2014, after the economy slipped back into recession. The BOJ continued adopting new expansionary monetary policies in 2016, including negative interest rates for a portion of bank reserves and targeting 0% interest rates on 10-year government bonds. In July 2018, BOJ Governor Kuroda announced the BOJ would maintain Japan's loose monetary policy, acknowledging that the BOJ's 2% inflation target would not be reached before 2021. Japan's inflation rate was 0.5% in 2017 and the International Monetary Fund (IMF) predicts inflation of 1.2% in 2018. The BOJ actions contrast the Federal Reserve's steady tightening of U.S. monetary policy over the past year. The Japanese government has taken some steps to use fiscal policy to stimulate the economy (the second arrow), initially implementing fiscal stimulus packages worth about $145 billion, aimed at spending on infrastructure, particularly in the areas affected by the March 2011 disaster. The Abe government has also approved additional supplementary budget packages, including $32 billion in 2016. The government's willingness to use expansionary fiscal policies has been constrained by concerns about its public debt levels, the highest in the world at nearly 240% of GDP. To address fiscal pressures, the government raised the sales tax from 5% to 8% in April 2014. However, many economists argued that the sales tax increase was responsible for pushing Japan into recession in 2014. The government twice has postponed a planned second sales tax increase, to 10%, which now is scheduled to occur in October 2019, four years later than originally planned. The IMF urges Japan to implement mitigating fiscal policies to minimize the short-term downward pressure on demand expected from the tax hike. Progress on the third arrow, structural reforms, has been more uneven. The government has advanced measures to liberalize energy and agriculture sectors, promote trade and investment, reform corporate governance, and improve labor market functions. The IMF argues, however, that more reforms are needed, particularly: (1) labor market reforms to increase productivity and boost wages (such as reforming Japan's two-tier labor market system by implementing complementary measures to make recent equal pay for equal work legislation more effective); (2) reforms to increase private investment and long-term growth (such as deregulation and encouraging business investment); and (3) measures to diversify and enhance the labor supply (such as encouraging more female participation in the work force including by increasing availability of childcare). Abenomics had a difficult start, when Japan's economy slipped back into recession in 2014. This was Japan's fourth recession since 2008, and was largely attributed to the April 2014 sales tax increase. The lackluster performance of Japan's economy in 2015 and the first half of 2016 led some analysts to question whether Abenomics had run its course. More recently, Japan's economy has been building momentum, and increasingly analysts view the program as moderately successful though in need of additional productivity-enhancing measures to produce long-term growth. The IMF in its most recent evaluation of Japan's economic policies, for example, argued that "while the strategy of Abenomics remains appropriate, reinvigorated policies are needed to reflate the economy." The IMF urges Japan to make further progress on implementing structural reforms, particularly in the labor market; ensure fiscal policy space by establishing a feasible long-term plan for debt consolidation; and maintain patience in pursuing inflation targets with accommodative policy while closely watching the financial system for increased risk taking in the low-interest environment. In 2017, Japan's economy grew at 1.7% and unemployment, at 2.9%, reached its lowest point in over two decades. A key component of the third arrow in Abe's economic reform focuses on "womenomics," or boosting economic growth through reforms and policies to encourage the participation and advancement of women in the workforce. Japan lags behind many other high-income countries in terms of gender equality, with one of the lowest rates of female participation in the workforce among Organization for Economic Cooperation and Development (OECD) countries. In 2014, a strategist with Goldman Sachs in Japan estimated that closing the gender employment gap could boost Japan's GDP by nearly 13%. To advance its "womenomics" initiative, the government has proposed, and is in various stages of implementing, a number of policies, such as expanding the availability of day care, increasing parental leave benefits, and allowing foreign housekeepers in special economic zones, among other measures. Progress has been made by some measures, but a dearth of women in top positions has left many disappointed in the results. Japan's overall female participation rate in the labor force has increased sharply, to a record high of 66% in 2016, surpassing the United States (64%). The uptick is attributed to high demand for workers in Japan, as well as specific "womenomics" initiatives, including expanded day care capacity and more generous parental leave. Some observers, however, question whether the Abe government is truly working to promote gender equality in the workplace or simply looking to fill gaps in the workforce created by the shrinking population. Efforts to increase the number of women in management positions have stalled, and in 2017, Japan ranked 114 th out of 144 countries according to the World Economic Forum's national rankings of gender equality. Japan fared worst in political empowerment rankings (123 rd ), reflecting the relatively low number of female legislators and lone female Cabinet minister. The Abe government has scrapped its target of getting women in 30% of senior positions by 2020, now aiming for 15% in the private sector, and 7% in government. Analysts note that additional policy reforms could continue to encourage women to join and remain in the workforce, including reforms to Japan's tax and social security programs that discourage married women from working outside the home. Japan's work culture, which demands long hours, also makes it difficult for women and men to balance work and family. The Trump Administration has imposed tariffs on several significant U.S. imports from Japan. In March 2018, President Trump announced tariffs of 25% and 10% on certain U.S. steel and aluminum imports, respectively. The tariffs have drawn criticism from Japan (the sixth largest supplier of U.S. steel imports in 2017, worth $1.7 billion), which argues it should be exempt from tariffs imposed for national security reasons given its close security relationship with the United States. The tariffs were imposed under Section 232 of the Trade Expansion Act of 1962, based on two investigations by the Commerce Department that found steel and aluminum imports threaten to impair U.S. national security. Unlike South Korea, Japan has not negotiated a quota arrangement with the United States in exchange for tariff exemptions. Japan notified its intent to retaliate with comparable tariffs in the WTO, but has not yet announced a date for such retaliation or a list of affected tariff lines. Japanese exports of washing machines and solar panels are also subject to additional temporary U.S. tariffs. These safeguard tariffs were imposed under Section 201 of the Trade Act of 1974 to address serious or threatened serious injury from these imports to domestic industries. Japan has also announced retaliation in the WTO in response to these safeguard measures, and in line with WTO commitments on safeguard actions, this retaliation is scheduled to become effective in 2021. Unlike several other countries, Japan has not initiated WTO dispute settlement procedures with regards to either the U.S. Section 201 or Section 232 tariff measures, but is participating as a third party in disputes initiated by other countries. The Trump Administration has initiated an additional national security (Section 232) investigation into U.S. auto and auto parts imports. The Trump Administration has agreed to not proceed with tariffs on Japanese auto imports while new bilateral trade negotiations are ongoing—a similar agreement was reached with the EU. If the Administration were to increase tariffs on these products it could have a more significant negative economic effect for Japan, as well as the U.S. economy. Autos and auto parts are consistently the largest U.S. import from Japan (nearly $56 billion), accounting for roughly one-third of U.S. goods imports from Japan in 2017. The tariffs could also potentially disrupt Japan's numerous auto production facilities in the United States, which rely on parts supplied from Japan. On September 26, President Trump and Prime Minister Abe announced their intent to start formal bilateral trade agreement negotiations. This follows two informal rounds of bilateral trade and investment discussions that had produced few concrete outcomes. Japan had been hesitant to engage in formal bilateral trade talks as it remains committed to the regional Trans-Pacific Partnership (TPP) and through which it had already agreed to politically sensitive concessions, particularly in agriculture, to the United States, who withdrew from the agreement in 2017. Japan announced it would not open its agriculture market in the new talks beyond its commitments in TPP and other existing trade agreements, while the United States signaled its intent to increase U.S. production and employment in the motor vehicle industry through the negotiations. During the negotiations, U.S. imports from Japan are to be exempt from increased U.S. motor vehicle tariffs, which the Trump Administration is considering as part of an ongoing Section 232 investigation. The full scope of the new negotiations is currently unclear. In their public announcement the two leaders stated they will focus on goods and services negotiations initially and then proceed to discussions on investment and other trade issues, suggesting the agreement could be negotiated in stages. An agreement limited in coverage would represent a shift in approach from recent U.S. trade agreements, which typically aim to be more comprehensive in addressing trade barriers and disciplines on goods, services, agriculture, investment, labor, environment, and intellectual property rights, among other issues. This may raise questions about the extent to which it may meet U.S. trade negotiating objectives as set by Congress in legislation enacted in 2015 to renew U.S. Trade Promotion Authority (TPA). TPA potentially provides for the expedited consideration of trade agreement implementing legislation, if the agreement makes progress towards achieving negotiating objectives and the Administration adheres to certain notification and consultation requirements. These include that the Administration gives Congress written notification 90 days before beginning new trade talks: USTR Lighthizer provided such notification to Congress on October 16. TPA also requires that the Administration make available to Congress and the public the specific objectives for the new negotiation, 30 days before it commences. The Trump Administration also recently released the proposed modifications to the North American Free Trade Agreement (NAFTA), renamed as the U.S.-Mexico-Canada Agreement (USMCA), which was also notified to Congress under TPA procedures. Unlike the U.S.-South Korea (KORUS) FTA modifications, the USMCA is expected to require implementing legislation for entry into force. If the Trump Administration sees USMCA as its template moving forward, some commitments in that agreement could prove politically challenging for Japan, particularly enforceable commitments on currency. USMCA also includes tightened auto rules of origin, requiring 75% North American content to qualify for duty-free treatment under the deal. Such strict origin rules could prove difficult for both U.S. and Japanese automakers in a bilateral deal given their extensive supply chains in North America and Southeast Asia, respectively. U.S. interest in the new talks with Japan are, in part, a response to trade negotiations Japan recently concluded. Japan led efforts among the remaining 11 TPP countries to conclude the Comprehensive and Progressive TPP (CPTPP or TPP-11), which was signed on March 8, 2018, and does not include the United States. Japan was the second country to ratify the TPP-11. (Australia, Mexico, and Singapore have also ratified the new agreement, which requires ratification by six of the signatories to take effect.) On July 17, Japan signed an FTA with the EU, which would eventually remove nearly all tariffs between the parties, including elimination of the EU's 10% auto tariff, and elimination or reduction of most Japanese agricultural tariffs. If entered into force, both agreements have the potential to disadvantage U.S. exporters in Japan's market, a major concern of some U.S. sectors, particularly agriculture. Prime Minister Abe's LDP enjoys a dominant position in the Japanese political world. With its coalition partner, the smaller party Komeito, it holds two-thirds of the seats in the Lower House of Japan's Diet, and nearly that proportion of the Upper House. (See Figure 4 and Figure 5 for a display of major parties' strength in Japan's parliament.) These margins theoretically give Abe's coalition the votes to amend Japan's Constitution, including the war-renouncing clauses that Abe has said he would like to change. Following his September 2018 victory in the LDP's leadership vote, Abe said he would like to submit a constitutional amendment proposal to the Diet within the coming year. Any attempt to change the constitution would have to surmount formidable political and procedural hurdles. Abe likely would have to overcome opposition from Komeito, which is torn between its pacifist leanings and its desire to support the coalition. Decisions about priorities also will take time because there are calls to amend a number of other provisions of the constitution, which was written by the United States during the U.S. occupation of Japan in 1946 and has never been changed. Furthermore, any constitutional changes passed by the Diet also must be approved by a majority in a nationwide referendum, and many opinion polls show the Japanese public to be skeptical about the need for a revision. From 2007 to 2012, Japanese politics was plagued by instability. The premiership changed hands six times in those six years, and no party controlled both the Lower and Upper Houses of the parliament for more than a few months. The Abe-led LDP coalition's dominant victories in five consecutive parliamentary elections, in December 2012, July 2013, December 2014, July 2016, and October 2017 have ended this period of turmoil. The first event, the 2012 elections for Japan's Lower House, returned the LDP and its coalition partner, the Komeito party, into power after three years in the minority. Since 1955, the LDP has ruled Japan for all but about four years. Abe has benefitted from disarray among Japanese opposition parties, which in the fall of 2018 struggled to surpass 10% in public opinion polls (compared to 40%-50% for the LDP). Some Japanese and Western analysts argue that another factor contributing to Abe's strength is his government's and the LDP's success in managing the Japanese media. According to these sources, the government and the LDP have attempted to influence Japanese news outlets through measures such as hinting at revoking licenses of broadcasters, pressuring business groups not to purchase advertisements in certain media outlets, and shunning reporters from critical broadcasters and print publications. In 2013, the Diet passed an Act on Protection of Specially Designated Secrets that has been criticized for criminalizing the publication of information that the government had disclosed to the public. Since Abe came to power in December 2012, the nongovernmental organization Reporters without Borders has moved Japan down twenty-one places, to 72 nd place, in its rankings of global freedom of the press. Abe government officials deny that they have attempted to unduly influence the press or restrict press freedoms. Japan's combination of a low birth rate, strict immigration practices, and a shrinking and rapidly ageing population presents policymakers with a significant challenge. Polls suggest that Japanese women are avoiding marriage and child-bearing because of the difficulty of combining career and family in Japan; the fertility rate has fallen to 1.25, below the 2.1 rate necessary to sustain population size. Japan's population growth rate is -0.2%, according to the World Bank, and its current population of 125 million is projected to fall to about 95 million by midcentury. Concerns about a huge shortfall in the labor force have grown, particularly as the elderly demand more care. The ratio of working age persons to retirees is projected to fall from 5:2 around 2010 to 3:2 in 2040, reducing the resources available to pay for the government social safety net. Japan's immigration policies have traditionally been strictly limited, closing one potential source of new workers.

Japan is a significant partner of the United States in a number of foreign policy areas, particularly in security concerns, which range from hedging against Chinese military modernization to countering threats from North Korea. The U.S.-Japan military alliance, formed in 1952, grants the U.S. military the right to base U.S. troops—currently around 50,000 strong—and other military assets on Japanese territory, undergirding the "forward deployment" of U.S. troops in East Asia. In return, the United States pledges to protect Japan's security. Although candidate Donald Trump made statements critical of Japan during his campaign, relations have remained strong, at least on the surface, throughout several visits and leaders' meetings. Bilateral tensions have arisen in 2018, however. On North Korea policy, Tokyo has conveyed some anxiety about the Trump Administration's change from confrontation to engagement, concerned that Japan's priorities will be marginalized as the United States pursues negotiations with North Korea. More broadly, Japan is worried about the U.S. commitment to its security given Trump's skepticism about U.S. alliances overseas. Contentious trade issues have also resurfaced as the two governments look to negotiate a bilateral accord. In addition, Japan has expressed disappointment about the Trump Administration's decision to withdraw from the Trans-Pacific Partnership (TPP) agreement and the United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement on addressing climate change. Japan is the United States' fourth-largest overall trading partner, Japanese firms are the second largest source of foreign direct investment in the United States, and Japanese investors are the second largest foreign holders of U.S. treasuries. Tensions in the trade relationship have increased under the Trump Administration. The U.S.-Japan announcement on September 26, 2018, of their intent to begin formal bilateral trade agreement negotiations has eased concerns over potential U.S. import restrictions on motor vehicle and parts trade, but certain U.S. steel and aluminum imports from Japan remain subject to increased U.S. tariffs. The trade talks could prove challenging given the Trump Administration's focus on the bilateral U.S. trade deficit, particularly in autos—Japan's largest export to the United States in 2017. Japan had been hesitant to pursue bilateral negotiations as it remains committed to the TPP. After years of turmoil, Japanese politics has been relatively stable since the December 2012 election victory of Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP), and further consolidated in the LDP's subsequent parliamentary gains. With the major opposition parties in disarray, the LDP's dominance does not appear to be threatened. Abe could become Japan's longest serving post-war leader if he remains in office throughout this term. However, Abe may struggle to pursue the more controversial initiatives of his agenda, such as increasing the Japanese military's capabilities and flexibility, because of his reliance on a coalition with a smaller party. With his political standing secured, Abe continues his diplomatic outreach, possibly hedging against an over-reliance on the U.S alliance. Since 2016, Abe has sought to stabilize relations with China, despite an ongoing territorial dispute and Japanese concerns about China's increasing assertiveness in its maritime periphery. Relations with South Korea, while stable, remain fraught with sensitive historical issues and differences in how to approach North Korea. Elsewhere, Abe has pursued stronger relations with Australia, India, Russia, and several Southeast Asian nations. In the past decade, U.S.-Japan defense cooperation has improved and evolved in response to security challenges, such as the North Korean missile threat and the confrontation between Japan and China over disputed islands. Abe accelerated the trend by passing controversial security legislation in 2015. Much of the implementation of the laws, as well as of U.S.-Japan defense guidelines updated the same year, lies ahead, and full realization of the goals to transform alliance coordination could require additional political capital and effort. Additional concerns remain about the implementation of an agreement to relocate the controversial Futenma base on Okinawa, particularly after the September gubernatorial election of a politician opposed to the relocation.

govreport

Congressional hearings and press coverage critical of the medical care received by noncitizens in the custody of the Department of Homeland Security's (DHS's) Immigration and Customs Enforcement (ICE) have increased congressional interest in the subject, including the introduction of legislation related to detainee health care. An overarching debate on this issue concerns the appropriate standard of health care that should be provided to foreign nationals in immigration detention. The medical care required to be provided to detainees is outlined in ICE's National Detention Standards, and the Division of Immigrant Health Services (DIHS), which is detailed from the U.S. Public Health Service to ICE is ultimately responsible for the health care of noncitizens detained by ICE. However, the Florida Immigrant Advocacy Center has reported that problems with access to medical care is one of the chief complaints of aliens in detention. Similarly, the National Immigrant Justice Center states that complaints about access to medical care are a constant theme in conversations with detained aliens. In addition, the U.S. government recently admitted negligence in the death of Francisco Castaneda, a former ICE detainee. Thus, although standards exist, one of the questions raised is are the standards being followed? This report begins with an overview of noncitizen detention and then examines the procedures and policies related to the provision of health care to detainees. The report concludes with a discussion of the issues surrounding detainee health care. The report does not investigate the veracity of claims of substandard medical care made in the press or ICE's rebuttals. The law provides broad authority to detain aliens while awaiting a determination of whether they should be removed from the United States, and mandates that certain categories of aliens are subject to mandatory detention (i.e., the aliens must be detained) by the Department of Homeland Security (DHS). Aliens not subjected to mandatory detention can be paroled, released on bond, or continue to be detained. Any alien can be detained while DHS determines whether the alien should be removed from the United States. Although some detainees are criminal aliens, others are asylum seekers who have not committed a crime, and others are aliens who are present without status (illegal aliens) who, while in violation of their immigration status and immigration law, have not committed a criminal offense. In addition, some of the criminal alien detainees are legal permanent residents who have resided in the United States for many years. Other detained aliens include those who arrive at a port-of-entry without proper documentation (e.g., fraudulent or invalid visas, or no documentation), but most of these aliens are quickly returned to their country of origin through a process known as expedited removal . The majority of aliens arriving without proper documentation who claim asylum are held until their "credible fear hearing" and then released; however, some asylum seekers are held until their asylum claims have been adjudicated. Although noncitizens in immigration detention are in the custody of ICE, only a minority are detained at facilities owned or fully contracted by ICE. In October 2007, 65% of noncitizen detainees were detained at state and local prisons, 19% at contract facilities, 14% at Service Processing Centers (SPCs) owned and operated by ICE, and 2% at Bureau of Prisons (BOP) facilities. Notably, all facilities housing immigration detainees must comply with ICE's National Detention Standards (discussed below). On an average day, up to 33,000 immigration detainees are in ICE's custody in more than 300 facilities nationwide. The average stay is 37.5 days. For FY2008, as of December 31, 2007, the average daily detained population was 31,244. In FY2008, approximately 311,000 aliens were detained by ICE. As of April 30, 2007, ICE reported that, cumulatively, 25% of all detained aliens were removed within four days, and 90% within 85 days. Nonetheless, in FY2006, more than 7,000 aliens were in detention longer than six months. For FY2006, approximately 48% of the aliens in detention were criminal aliens. (For a more detailed discussion of the detention population, see Appendix A .) Currently, ICE contracts with Creative Corrections, L.L.C., to perform the annual inspections of detention facilities. ICE also contracts with another company, the Nakamoto Group Inc., to serve as on-site, full-time quality assurance inspectors at the 40 largest detention facilities. The Detention Facilities Inspection Group (DFIG) within the ICE's Office of Professional Responsibility (OPR) is primarily responsible for oversight of detention facilities. The DFIG, which began in February 2007, provides oversight and independent validation of the annual detention facility inspection program (done by Creative Corrections). DFIG also conducts investigations of serious incidents involving detainees. Lastly, DRO's Detention Standards Compliance Unit is tasked with ensuring that facilities that detain aliens comply with ICE's National Detention Standards. The press has reported that a DHS Inspector General's 2008 draft report finds that previous oversight has not been effective in identifying serious problems at the facilities. The US Immigration and Customs Enforcement (ICE), Office of Detention and Removal Operations (DRO) is responsible for ensuring safe and humane conditions of confinement for detained aliens in federal custody, including the provision of reliable, consistent, appropriate and cost-effective health services. —Immigration and Customs Enforcement In 2000, the former Immigration and Naturalization Service (INS) created National Detention Standards for aliens in detention, which are published in the Detention Operations Manual. In late 2008, ICE—reportedly with input from detention experts, non-governmental organizations, and DHS' Civil Rights and Civil Liberties Office—published new Detention Standards in a performance-based format. The standards specify the detention conditions appropriate for immigration detainees. In most cases, the standards mirror American Correctional Association (ACA) standards, though some of ICE's Detention Standards provide more specificity or are unique to the needs of alien detainees. The Detention Standards, however, do not have the force of law, thus detainees do not have legal recourse for violations of the standards. The Detention Operations Manual contains a section on health services, which addresses standards for medical care; hunger strikes; suicide prevention and intervention; and terminal illness, advanced directives, and death. The American Civil Liberties Union (ACLU) and the National Immigration Law Center have complained about the standards. They note that ICE lacks written guidelines for how to rate a facility's adherence to the Detention Standards, and that ICE notifies the facilities 30-days before their annual reviews, giving facilities opportunities to prepare for the reviews. In addition, they note that annual reviews do not require detainee interviews and are only observational reviews of the facilities and files. In 2007, the Assistant Secretary of ICE directed that ICE's Office of Detention and Removal (DRO) report semiannually on agency-wide adherence with the National Detention Standards. The semiannual reports explain the standards used to rate the detention facilities. The first report under this directive was issued in May 2008. According to ICE's Detention Operations Manual the Detention Standards ensure, "that detainees have access to emergent, urgent or non-emergent medical, dental, and mental health care that are within the scope of services provided by the DIHS, so that their health care needs are met in a timely and efficient manner." According to the Detention Operations Manual, every facility has to provide detainees with initial medical screening, primary medical care, and emergency care. The ICE Officer in Charge (OIC) must arrange for specialized health care, mental heath care, and hospitalization within the local community. All facilities are required to employ a medical staff large enough to provide basic exams and treatments to all detainees. Medical care at facilities ranges from small clinics with contract staff to facilities with on-site medical staff and diagnostic equipment. The facilities are required to have a mechanism (normally paper request slips) that allows detainees to request health care services provided by a physician or other qualified medical officer in a clinical setting. The facilities are required to have regularly scheduled times, known as sick call , when medical personnel are available to see detainees who have requested medical services. All detainees, without exception, have access to sick call, and the facilities have to have procedures in place that ensure that all sick call requests are received and triaged by medial personnel within 48 hours after the detainee submits the request. ICE detainee policy requires that all detainees receive an initial health screening immediately upon arrival at the detention facility to determine the appropriate necessary medical, mental health, and dental treatment. In addition to the initial screening, ICE policy also requires that detainees receive a health appraisal and physical examination within 14 days of arrival to identify medical conditions that require monitoring or treatment. In addition, all detainees are supposed to receive a mental health screening within 12 hours of admission. Detainees also receive a mental status evaluation during their physical examination, which is required to take place within 14 days of admission. According to ICE, a detainee with a medical condition will be scheduled for as many follow-up appointments as necessary. In addition, detainees have access to sick call (i.e., the opportunity to request non-emergeny health care provided by a health service provider during scheduled times at the detention facility). In addition, the manual states that an initial dental screening exam should be performed within 14 days of the detainee's arrival, and if an on-site dentist is not available, the initial dental screening may be performed by a physician, physician's assistant, or nurse practitioner. All detainees are afforded authorized emergency dental treatment. Aliens detained for more than six months are eligible for routine dental treatment. Detainees' dental care, reportedly, is often limited to extractions, and care for painful dental conditions is often delayed or denied. Dentures are not provided, nor are eyeglasses, unless the glasses were broken while the alien was in detention. In addition, detainees may not use their own money to get medical or dental care. Under the Medical Standards, detainees also have access to medication from an on-site pharmacy or a pharmacy in the community. Detainees may get medicine from their family members, provided that the medicine can be verified as appropriate for the detainee to take and is not contraband. There have been reports, however, of detainees having problems getting medications even when their families have been willing to provide them. The Division of Immigrant Health Services (DIHS), which is indefinitely detailed from the U.S. Public Health Service to ICE, is ultimately responsible for the provision of health care to noncitizens detained by ICE. At 15 of over 300 detention facilities, DIHS provides on-site health care, while in the others, mostly for detainees in local prisons and jails, health care is provided by contract workers who are not affiliated with DIHS. The amount of care available on-site at detention facilities is variable. Some facilities have full-time, on-site medical staff, while other facilities make use of local providers. Notably, DIHS is responsible for the approval of any off-site medical care, regardless of where the alien is detained. Some immigration advocates maintain that since the Detention Standards do not have the force or law or regulation, DIHS policy exercises the largest influence over the provision of medical care to detainees. Although the medical care that is supposed to be received is detailed in the Detention Standards Manual, one stated concern is that the procedures and standards are not followed. Another concern focuses on the covered benefits package (discussed below) and whether that and the Detention Standards allow for the provision of adequate services to the detained populations. DIHS is a stand-alone medical unit consisting of U.S. Public Health Service (PHS) Officers and contract medical professionals who work under DIHS supervision. DIHS serves as the medical authority for ICE. Prior to October 1, 2007, ICE received the medical services of DIHS through the Department of Health and Human Services's (HHS's) Health Resources and Services Administration (HRSA). In other words, HRSA oversaw DIHS, including the U.S. Public Health Service Officers assigned to DIHS. According to DHS, ICE was interested in greater administrative control over DIHS for a variety of reasons, including HRSA's inability to fill DIHS vacancies in a timely manner and unwillingness to provide Public Health Service (PHS) Officers to support ICE law enforcement missions. In October 2007, DIHS was detailed indefinitely to ICE. The detail of the PHS Officers in DIHS was accomplished via a memorandum of agreement (MOA), which also covers the assignment of PHS resources elsewhere within DHS. Since the detail became effective, ICE has provided both administrative support to DIHS and oversight of the administration of DIHS. Under the MOA, DHS is responsible for the day-to-day conduct of PHS Officers under its detail and assumes liability for their negligence or malpractice. Lawyers in the DHS Office of Health Affairs (OHA) handle such claims. In addition, beginning on October 1, 2007, ICE has stated that it has been collaboratively working with OHA on a variety of improvement initiatives, including selecting a new Director for DIHS at the appropriate rank; implementing aggressive hiring strategies to address staffing needs; identifying and implementing a new electronic medical records system; and reviewing (or changing, if necessary) the process by which Treatment Authorization Requests (TARS) are approved. ICE is also working with OHA to develop an enhanced process for TAR appeals. ICE has established a covered benefits package that delineates the health care services available to detainees in ICE custody, in addition to the minimum scope of services provided by the detention facilities. This package, known as the DIHS Medical Dental Detainee Covered Services Package (CSP), primarily provides health care services for emergency care, which is defined as "a condition that is threatening to life, limb, hearing or sight," rather than elective or non-emergency conditions. The CSP states that: [accidental] or traumatic injuries incurred while in the custody of ICE or BP [Border Patrol] and acute illnesses will be reviewed for appropriate care. Other medical conditions which the physician believes, if left untreated during the period of ICE/BP custody, would cause deterioration of the detainee's health or uncontrolled suffering affecting his/her deportation status will be assessed and evaluated for care.... Elective, non-emergent care requires prior authorization.... Requests for pre-existing, non-life threatening conditions, will be reviewed on a case by case basis. Detainees who require non-emergency medical care beyond that which can be provided at the detention facilities must get preauthorization. They submit a Treatment Authorization Request (TAR), which is evaluated by the DIHS Managed Care Program. The TAR must be approved before the detainee may receive care. According to ICE, more than 40,000 TARs are submitted each year; the average turn-around time is 1.4 days, and 90% are approved. Nonetheless, some detainees have described waiting weeks or months to get basic care. In addition, reportedly, detainees have been told that biopsies were "elective surgery" and, as such, have had trouble getting the diagnostic test. According to a 2007 GAO report, officials at several detention facilities reported difficulties obtaining approval for outside medical and mental health care. TAR reviews for care are conducted by DIHS nurses in Washington, DC, who review the paperwork submitted by physicians. These nurses are known as Managed Care Coordinators (MCCs). The nurses are on duty Monday through Friday, 7:30 a.m to 4 p.m. Regardless of where the alien is held, approval from DIHS is required for diagnostic testing, speciality care, or surgery. However, when an ICE detainee is hospitalized, the hospital assumes medical decision-making authority, including the patient's drug regimen, lab tests, X-rays, and treatments. Off-site medical care for people in the custody of the U.S. Marshals service is handled in a similar manner. According to ICE, DIHS has a formal appeals process that is similar to industry standards and comparable to that of the Bureau of Prisons for declined Treatment Authorization Requests (TARs). Facilities and individual detainees have the right to appeal denial determinations. TARs denied for lack of medical necessity may be resubmitted for reconsideration to the Managed Care Coordinator (MCC) (i.e., the DIHS nurses in Washington DC). If a TAR is denied for lack of timely submission, the medical records are forwarded to the Managed Care Coordinator (MCC) Branch Chief for review. According to DIHS Standard Operating Procedure, the Managed Care Review Committee (MCRC) conducts a second level review for all appeals which are upheld by the MCC. The MCRC is comprised of the DIHS Medical Director, appropriate medical, dental, or mental health consultants, and MCC(s). Decisions of the MCRC are made in writing within three working days of the appeal. ICE, DIHS, and OHA are working to develop a more independent appeal body outside of DIHS and ICE. The preauthorization (also called pre-certification of medical necessity) requirement is similar to those of many managed care/health insurers. Nonetheless, some contend that this procedure can prevent detainees from getting the necessary care, and note that off-site nurses have the ability to deny care that was requested by on-site medical personnel. Reportedly, the DIHS Medical Dental Detainee Covered Services Package (CSP) has been amended several times since 2005, to limit the scope of medical care for detainees. A repeating theme in press reports and congressional testimony concerned difficulties getting biopsies when there is a concern about cancer. The ACLU is involved in a class action suit regarding inadequate medical care for immigration detainees at the San Diego Correctional Facility, and contends that there are serious deficiencies in the CSP which should be fixed to ensure that detainees receive adequate medical care consistent with the ICE Detention Standards on Medical Care. The CSP primarily provides health care services for emergencies only. According to the ACLU, as recently as August 2005, the CSP did not extend to pre-existing conditions. In his testimony, Tom Jawetz of the ACLU argued that there is a disconnect between ICE's Detention Standards and the CSP. In addition, he contends that "the standard is inconsistent with established principles of constitutional law and basic notions of decency." Representative Zoe Lofgren also stated in a question to ICE at the October 2007 hearing that there seems to be an inconsistency between the CSP and the Detention Standards because the CSP states that medical conditions will be evaluated for treatment based on the criteria that, "if left untreated during the period of ICE/BP custody [the medical condition] would cause deterioration of the detainee's health or uncontrolled suffering affecting his/her deportation status [emphasis added]," (i.e., the detainees health issues would have to jeopardize the ability of ICE to remove the alien before treatment would be rendered.) ICE responded that it disagrees that the Detention Standards and CSP are inconsistent. ICE contends that all detainees receive medical treatment when DIHS determines that care is required, "regardless of whether the alien is about to be deported or not." There have been reports of problems with detainees being transferred without their medical records. ICE does not have a system to track the transfer of medication and medical records of detainees. Some lawyers described difficulties getting access to medical records on their client's behalf. Other detainees have complained about problems with getting interpreters during medical treatment. Female detainees have also reported not getting regular gynecological or needed obstetric care. The following section synthesizes the finding in three U.S. government reports that examined selected detention facilities' compliance with all or some of the National Detention Standards. All three reports examined compliance with the Medical Care standard. The reports are as follows: U.S. Immigration and Customs Enforcement, Office of Detention and Removal (DRO), Semiannual Report on Compliance with ICE National Detention Standards: January—June 2007 , May 9, 2008. Government Accountability Office (GAO), Alien Detention Standards: Telephone Access Problems Were Pervasive at Detention Facilities; Other Deficiencies Did Not Show a Pattern of Noncompliance, GAO-07-875, July 2007. Department of Homeland Security, Office of the Inspector General (DHS OIG), Treatment of Immigration Detainees Housed at Immigration and Customs Enforcement Facilities , OIG-07-01, December 2006. Table 1 presents the time period of the reviews, the number of facilities reviewed, and the total number of standards evaluated for the studies discussed. In May 2008, ICE released its first semiannual report on compliance with the National Detention Standards. The report covers reviews conducted during the first six months of 2007 and includes the inspections of more than 175 facilities. The report rated the facilities on the Detention Standards as either "acceptable" or "deficient." Overall, on the medical care standard, 98% of the facilities were rated acceptable, while 2% were rated deficient. Of the evaluated Service Processing Centers (SPCs) owned and operated by ICE, 80% were rated acceptable, while 20% were rated deficient. In July 2007, the Government Accountability Office (GAO) released an audit of 23 detention facilities. GAO found a lack of adherence to the medical care standards at 3 of the 23 facilities, including failing to administer the mandatory physical exams within 14 days of admission and failure to administer medical screening immediately after admission. In addition, GAO found that concerns about medical care were common reasons for aliens to file complaints. The DHS Office of the Inspector General (OIG) conducted an audit of compliance with selected detention standards at five facilities used to house immigration detainees. Of the five facilities reviewed, DIHS managed and administered health care at two facilities. At the other three facilities, DIHS was responsible for approving off-site care, but the on-site care was administered by contractors at those facilities. The OIG identified instances of non-compliance with the medical care standards at four of the five detention facilities, including failure to provide timely initial medical care. The one facility found to be in full compliance with the standards for initial medical screening and physical examination was Krome SPC, where medical care is provided by DIHS. The OIG stated in its review that the Detention Standards on sick calls do not clearly define what is considered a timely response to a non-emergency sick call request. Thus, the report found that in the absence of standards, local detention facilities have established differing policies regarding response time to non-emergency care. Nonetheless, at three of the detention facilities (two local prisons and one contract facility), 196 out of 481 detainee non-emergency medical requests were not responded to in the time-frame specified by the facility. As a result, the OIG recommended that ICE develop specific criteria to define a reasonable time for medical treatment. ICE responded to the recommendation, concurring in part and promising to examine the merits of the issue, but contending that its medical program provides adequate detainee care and is consistent with industry standards. ICE also stated that it "must rely on its service providers to make medical decisions regarding the provision of medical care and any criteria to be established that would determine timeliness." Reports of inadequate care being provided to detainees raise several policy issues pertaining to the health care provided to the detained noncitizen population. First, the detention population, both in funded bed space and in the total detention population, increased between FY2003 and FY2007 raising interest in spending on detainee medical care, and concerns that spending has not increased in the same proportion as the detained population. In addition, ICE has the authority to release aliens due to medical and psychological problems, elevating interest in the existing guidelines and practices for medical release, and their adequacy. Similarly, due to the likely special needs of asylum seekers in detention, another policy issue focuses on whether proper care is and can be provided to this population within a detention setting. While every death is regrettable, preventable deaths of aliens in detention who are reliant on the government for medical care heighten concerns about the quality of health care. Doubts about the propriety of the number of deaths in detention as a reliable measure of standard of care, lead to the policy question of which measures would provide insight into the adequacy and quality of care. Finally, an overarching debate on this issue concerns the appropriate standard of health care that should be provided to foreign nationals in immigration detention. This debate is especially emotional because of the balancing act between basic human rights and the cost of health care when U.S. citizens also face barriers in accessing health care. Concerns about the adequacy of health care for detained aliens has increased interest in funding for detainee medical care. As shown in Table 2 , from FY2003 to FY2007, the total amount spent on detainee medical care increased by 83%, from $50 million to $92 million. During that same time period, the total amount of funded bed space increased by 41%. The total amount of funds spent on ICE detainee health care increased between FY2003 and FY2004. Between FY2004 and FY2006, the total expenditures on detainee health care fluctuated but remained between $70 and $74 million. Between FY2006 and FY2007, the total expenditures increased from $74 million to $92 million. Most of the increase in total spending on detainee health care was from increases in program operations, not in medical claims, which are for services rendered by an off-site health care provider to detainees. The total amount of money spent on detainee health care program operations doubled between FY2003 and FY2007. However, the funds expended for medical claims increased between FY2003 and FY2004, then decreased between FY2004 and FY2005. Between FY2005 and FY2007, expenditures on medical claims remained almost constant. During the same time, the funded amount of bed space increased by 49%. ICE has the authority to release aliens due to medical and psychological problems; however, how often this authority is exercised and whether it is used effectively is unknown. ICE has prosecutorial discretion in determining custody for aliens with humanitarian (including medical) concerns. The alien may be released into an Alternatives to Detention program, released on an Order of Supervision, or released on his or her own recognizance. These decisions are made on a case-by-case basis, "whenever a medical or psychiatric evaluation makes the alien's detention problematic and/or removal [from the United States] unlikely." ICE does not keep track of how often this discretion is exercised. While there is general debate about the merits of detaining asylum seekers, asylum seekers often have medical and psychological issues and it is not clear how well-equipped the detention health care system is to deal with the specific physical and psychological needs of asylum seekers. As discussed, aliens in expedited removal must be detained, and thus aliens in expedited removal who claim asylum are detained while their "credible fear" cases are pending, and they may then be detained while their case is decided. In FY2006, 5,761 asylum seekers were detained, and 1,559 (27%) were detained for more than 180 days. Notably, some claim that the practice of detaining asylum seekers has helped reduced the number of fraudulent asylum claims. However, the position of the United Nations High Commission on Refugees is that detaining asylum seekers is "inherently undesirable." It argues that detention may be psychologically damaging to an already fragile population such as those who are escaping from imprisonment and torture in their countries. Often, the asylum seeker does not understand why he or she is being detained, which can increase psychological stress. In addition, asylum seekers may have unusual medical conditions resulting from the imprisonment and torture suffered in their home countries. Nonetheless, ICE reports that it routinely provides medical care for life-threatening conditions, such as cardiac arrest, kidney disease, HIV/AIDS, hypertension, and diabetes. As discussed earlier in the report, according to ICE detainees receive dental care, physical exams, sick call visits, prescription drugs, and mental health services. ICE states that staff are trained to spot detainees who may be at risk of suicide, and to use prevention and intervention techniques to assist such detainees. Between May 2007 and May 2008, psychologists and social workers have managed a daily population of over 1,350 seriously mentally ill detainees without a single suicide. Thus, current ICE procedures may adequately address the health care needs of detained asylum seekers. Two policy issues become highlighted when a detainee dies in custody. The first issue concerns the quality of oversight when a death occurs and whether there is enough oversight to identify possible cases of inadequate care. Secondly, while a detainee's death may heighten concerns about the quality of health care, there are doubts about the propriety of using deaths in detention as a reliable measure of standard of care. What follows is a discussion of these two issues. Although there is a system to report the death of a detainee, some question whether there is effective oversight when a death occurs in detention. Current ICE procedure dictates that when a detainee dies while in the custody of ICE's Detention and Removal Office (DRO), the death is to be reported to ICE headquarters via a system known as the Significant Event Notification (SEN) system. Under its proceedures, DRO is also supposed to report detainee deaths to the ICE Office of Professional Responsibility (OPR) and to the DHS Office of the Inspector General (OIG) so that they can conduct independent reviews of the incident. In addition, deaths are referred to the local medical examiner's office, which decides whether to perform an autopsy. The OIG is also notified of the death by the Joint Intake Center (JIC), which is notified by the SEN system and sends all records regarding the death (including those from the local medical examiner) to the OIG. The OIG may accept the case for investigation or may decline and refer the case back to the JIC for referral to the Office of Professional Responsibility. ICE has reported a decline in the number of deaths of aliens in detention between 2004 and 2008. Some, however, question whether mortality rates should be used in appraising health care in a transitional population, and truly reflect the quality of care provided to detainees. In May 2008, ICE published a fact sheet reporting that there were 71 deaths in immigration detention facilities from calendar year 2004 (inclusive) through May 2, 2008 (see Table 3 ). ICE reported a decline in the number of detainee deaths between 2004 and 2008, a period when the detainee population increased. ICE also asserted that the mortality rate in its facilities is lower than in U.S. prisons and jails and the general U.S. population. A critical analysis of the death rates was published by physicians at the New York University School of Medicine, who commented that ICE's comparisons were not valid because, among other things, the respective mortality rates had not been adjusted for age or for length of detention. These doctors stated that mortality is an imprecise method for appraising health care in a transitional population, and that morbidity which refers to sickness or having a disease would be a better measure of ICE healthcare. They also stated that, in their calculations, the length-adjusted mortality rate for detainees increased between 2006 and 2007. In addition, critics of the reported death rates stated that those who die outside the facilities but whose deaths were precipitated by their time in detention are not included in the mortality rates. There is debate about the appropriate standard of care that should be provided to aliens in detention. Many U.S. citizens lack health insurance and face barriers in accessing health care, and there are issues of patient safety in many medical settings, not just in correctional facilities. In addition, a proportion of aliens are in detention who are not authorized to be in the country. The cost of care for aliens in detention is paid by the American taxpayer. Reportedly, the health care provided to detained aliens tends to be similar to that provided to those in criminal incarceration. According to a press report, ICE has argued that some aliens are getting better health care in detention than they would in their home countries and that they had received earlier in their lives. Assistant Secretary of ICE, Julie Myers testified that in FY2007, 34% of detainees screened were diagnosed with and treated for preexisting chronic conditions (e.g., hypertension, diabetes), and many of these detainees would not have known of their medical condition or received treatment if it were not for the comprehensive health screening they obtained when entering the detention system. In addition, some health care decisions need to be made with the consideration that the alien is going to be removed to a country where he or she may not be able to get any follow-up care. Some contend that despite ICE's acknowledgment of the substantial burden of chronic diseases among the detained population, the ICE health plan focuses on an acute care model, and is not crafted for a population with significant chronic medical or mental health needs. Some aliens in detention, especially long-term residents, do have health insurance but are unable to use it. Some further allege that officers frequently view ICE detainees as criminals, even when they do not have a criminal record, and as such are sometimes quick to assume that the detainees are faking their illnesses, and sometimes slow to get the aliens care. Appendix A. Detention Statistics On an average day, up to 33,000 immigration detainees are in ICE's custody in more than 300 facilities nationwide. The average stay is 37.5 days. In FY2007, a total of 311,213 aliens were detained by ICE. As of April 30, 2007, ICE reported that, cumulatively, 25% of all detained aliens were removed within four days, 50% within 18 days, 75% within 44 days, 90% within 85 days, 95% within 126 days, and 98% within 210 days (see Table A -1 ). For FY2006, approximately 48% of the aliens in detention were criminal aliens. As Figure A -1 shows, the average daily detained population increased between FY2003 and FY2004 and then decreased between FY2004 and FY2006. The daily average detained population increased significantly between FY2006 and FY2007, from 20,594 to 30,295 detainees. As of December 31, 2007, the average daily detention population for FY2008 was larger than the FY2007 average daily population. For FY2008, as of December 31, 2007, the average daily detained population was 31,244. As illustrated in Figure A -1 , the total number of aliens detained by ICE during the fiscal year was fairly consistent between FY2003 and FY2005, and then increased in both FY2006 and FY2007. In FY2007, ICE detained 79,713 (34%) more noncitizens than in FY2003. Some of the increase in the total annual detention population was due to the expansion of expedited removal. Aliens in expedited removal are mandatorily detained but tend to be in detention for shorter periods of time than other aliens because they are not entitled to the same judicial review as aliens who are not subject to expedited removal (i.e., who are in removal proceedings under INA §241). Appendix B. Legislation in the 110 th Congress The Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009 ( P.L. 110 - 329 ) appropriated $2 million for the Office of Professional Responsibility to undertake an immediate comprehensive review of the medical care provided to ICE detainees. The Act also directed ICE to immediately implement the Government Accountability Office's recommendation to improve medical services. The Detainee Basic Medical Care Act of 2008, H.R. 5950 , was introduced by Representative Zoe Lofgren on May 1, 2008. The companion bill, S. 3005 , was introduced by Senator Robert Menendez on May 12, 2008. The bills would have required the Secretary of Homeland Security (DHS) to establish procedures for the timely and effective delivery of medical and mental health care to immigration detainees, designed to ensure continuity of care throughout the alien's detention. The procedures would have been required to address all health needs, including but not limited to primary care, emergency care, prenatal care, dental care, eye care, and mental health care. The procedures would have to have been designed to ensure that each detainee received a comprehensive medical and mental health screening upon intake; each detainee received a comprehensive medical and mental health examination and assessment within 14 days after arrival at the detention facility; each detainee taking prescribed medications was allowed to continue taking such medications on schedule and without interruption; and each detainee with a serious medical or mental condition, subject to immigration laws, been given priority consideration for release on parole, bond, or an alternative to detention program. The procedures would also have been required to ensure that medical records are accessible by the detainee or his or her designate, and were transferred if the detainee was moved to another detention facility. Also, H.R. 5950 / S. 3005 would have required the procedures to include "discharge planning" for aliens with serious medical or mental health conditions to ensure continuity of care, for a reasonable period of time, upon removal or release from detention. The bills would also have required the Secretary of DHS to establish an administrative appeals process for denials of medical or mental health care. The process would have included the opportunity to appeal the denial of services to an impartial board. H.R. 5950 / S. 3005 would have required that the Secretary report to the Inspector Generals of the Departments of Homeland Security and Justice information regarding a detainee's death no later than 48 hours after the death of the detainee. The bills would have also require an annual report to Congress detailing any detainee deaths during the previous fiscal year.

Congressional hearings and press coverage critical of the medical care received by those in the custody of the Department of Homeland Security's (DHS's) Immigration and Customs Enforcement (ICE) have raised interest in the subject. The law provides broad authority to detain aliens while awaiting a determination of whether they should be removed from the United States and mandates that certain categories of aliens are subject to mandatory detention by DHS. Aliens not subject to mandatory detention may be detained, paroled, or released on bond. The medical care required to be provided to aliens detained in ICE custody is outlined in ICE's National Detention Standards, which address standards for medical care; hunger strikes; suicide prevention and intervention; and terminal illness, advanced directives, and death. According to ICE's Detention Standards, "All detainees shall have access to medical services that promote detainee health and general well-being." In addition, every facility has to provide detainees with initial medical screening, "cost-effective" primary medical care, and emergency care. The Division of Immigrant Health Services (DIHS), which is detailed indefinitely from the U.S. Public Health Service to ICE, is responsible for the health care of noncitizens detained by ICE. In some detention facilities, DIHS provides all medical care; in others, DIHS is responsible only for approving medical services that are not provided by the detention facility. ICE has established a covered benefits package that delineates the health care services available to detainees in ICE custody. Detainees who require non-emergency medical care beyond that which can be provided at the detention facilities must submit a Treatment Authorization Request (TAR) to the DIHS Managed Care Program. TARs are reviewed by DIHS nurses in Washington, DC, who review the paperwork submitted by physicians and decide whether to allow the treatment. There have been press reports and congressional testimony of individuals in ICE custody who apparently received inadequate medical care. In addition, problems with access to medical care is one of the chief complaints of aliens in detention. However, others state that immigration detainees may receive better health care than some U.S. citizens, and assert that the death rate in ICE custody is lower than that of the prison and general populations. Overall, there seem to be two major policy questions: (1) do the Detention Standards and the covered benefits package allow for the provision of adequate services to the detained populations; and (2) are the procedures and standards for the provision of medical care being followed? The report does not investigate the veracity of claims of substandard medical care made in the press, or ICE's rebuttals of such claims. This report will be updated to reflect legislative activity.

govreport

On January 23, 2004, President Bush signed into law the Consolidated Appropriations Act,2004 ( P.L. 108-199 ) within which Congress authorized the creation of the Millennium ChallengeAccount and appropriated $994 million for FY2004. The MCA legislation, included in Division Dof the omnibus spending bill, resolved several key issues on which the House and Senate differed. The measure creates a new Millennium Challenge Corporation (MCC), headed by a CEO whoreports to the Board of MCC Directions, instead of the Secretary of State (Senate) or the President(House). The Board includes the Secretary of State (chairman), the Secretary of the Treasury, theU.S. Trade Representative, the USAID Administrator, the MCC CEO, and four others from listssubmitted by congressional leaders and nominated by the President. Low-middle income countriesmay participate in MCA programs beginning in FY2006, as proposed, but may not receive more than25% of MCA appropriations. The legislation creates a roughly 90-day period during which theCorporation will name the list of countries that will compete for MCA selection in the first year("candidate countries"), publish the methodology that will be used for identifying best performingcountries, seek public comment on the initiative, and consult with Congress. Following this reviewperiod, countries will be selected ("eligible countries") and invited to submit program proposals forfunding. This could take place as early as May 2004. In a speech on March 14, 2002, at the Inter-American Development Bank, President Bushoutlined a proposal for the United States to increase foreign economic assistance beginning inFY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. Hefurther pledged to maintain economic aid amounts at least at this level into the future. The fundswould be placed in a new Millennium Challenge Account (MCA) and be available on a competitivebasis to a few countries that have demonstrated a commitment to sound development policies andwhere U.S. support will have the best opportunities for achieving the intended results. These"best-performers" will be selected based on their records in three areas: Ruling justly -- promoting good governance, fighting corruption, respecting human rights, and adhering to the rule of law. Investing in people -- providing adequate health care, education, and other opportunities that sustain an educated and healthy population. Pursuing sound economic policies that stimulate enterprise and entrepreneurship -- promoting open markets, sustainable budgets, and opportunities for economicgrowth. If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan following World War II and the LatinAmerica-focused Alliance for Progress in the early 1960s. Administration officials characterize theMCA as representing the most comprehensive policy change ever in how the United States designs,implements, and monitors development assistance to low and lower-middle income nations. Inparticular, Executive officials emphasize the "results-based" aspect of the initiative in whichcountries will be selected based on past and current performance, and programs will be evaluatedon and required to show measurable achievements that impact favorably on economic growth andpoverty reduction. Conditioning assistance on policy performance and accountability by recipient nations is not a new element of U.S. aid programs. Since the late 1980s at least, portions of Americandevelopment assistance have been allocated by the U.S. Agency for International Development(USAID) to some degree on a performance-based system. What is significantly different about theMCA is that the entire $5 billion money pool -- which is nearly twice the size of the FY2003USAID "core" development aid budget -- will be tied to performance and results. Moreover,program proposals will be based on national development strategies developed by the countriesthemselves, with a U.S. role limited to providing technical assistance in project design. Further, inanother major departure from past policy, the MCA is intended to focus exclusively on developmentgoals without being influenced by other U.S. foreign policy and geo-strategic objectives that oftenstrongly influence U.S. aid decision making. Nevertheless, while new details regarding countryeligibility, selection criteria, and organizational structure were announced in December 2003, manyissues have not yet been decided and remain under review by the Executive branch. Congress plays a key role in the approval of the initiative by way of considering authorization and funding legislation, and in confirming the head, or CEO, of the Millennium ChallengeCorporation that manages the MCA under the President's plan. Congress will also maintaincontinuing oversight of the program as it is implemented and additional funding is sought insubsequent years. Among numerous policy issues for Congress raised by the MCA proposal were: Country eligibility : Should the MCA target both low and lower-middle income countries, as proposed by the Administration, or should it focus exclusively on the poorestnations where the needs are the greatest and where access to other financial resources is limited? And, if both, how should funds be allocated between the two groups? Performance indicators and selection process : Will the indicators and the methodology proposed by the Administration identify the "best performers"? Implications for other U.S. development aid programs : How will the MCA affect global and country aid programs not part of the new initiative? U.S. organizational structures: Is the proposed Millennium Challenge Corporation, with a staff of 100, the most appropriate structural model for managing the MCA? What are the implications for the U.S. Agency for International Development, the primarygovernment bilateral aid agency? Program development and selection: What types of activities should the MCA fund and how will these programs be designed? Legislative and funding matters: What should be the relationship between MCA authorizing legislation and current foreign aid laws and legislative practice? What are thebudgetary implications on the MCA? The concept of the Millennium Challenge Account is based on the premise that economic development succeeds best where it is linked to sound economic and good governance policies,especially where these conditions exist prior to expanding resource transfers. Past failures ofeconomic aid provided by the United States and other international donors, some argue, have beencaused to a large extent by a lack of attention to performance and the requirement for measurableresults. (1) Executive branch officials say that theMCA abandons the process of basing aid allocationson promises by recipient governments to initiate policy changes in the future, and instead will makethose decisions based on achievements already made and policies that are currently working. (2) This view has been joined by a growing body of literature in the late 1990s concluding that there was little relationship between the amount of development aid provided and success in raisingeconomic levels and reducing poverty. Rather, some researchers argued that foreign assistanceproduced the greatest impact where the recipient country had already adopted sound policies. (3) Others have concluded that international development assistance has largely failed and will continueto do so unless the donor community fundamentally shifts its focus to support real policy change. (4) Despite many development successes in such areas as agricultural production and childimmunization, by one calculation 97 countries receiving $144 billion (constant dollars) in U.S. aidsince 1980 had their median per capita gross domestic product (GDP) decline from $1,076 to $994by 2000. (5) Also influencing the debate over the launch of a new foreign aid initiative are the terrorist attacks of September 11and an evaluation of their causes. There remain differences of perspectiveregarding a possible direct relationship between poverty and terrorism, especially given the fact thatmany terrorist leaders come from relatively wealthy backgrounds. But most agree that poverty canbe a contributing factor. President Bush, in announcing the MCA on March 14, 2002, madenumerous references to the war on terrorism, noting that "We also work for prosperity andopportunity because they help defeat terror." He further emphasized that although poverty does notcause terrorism, "poverty prevents governments from controlling their borders, policing theirterritory, and enforcing their laws. Development provides the resources to build hope and prosperity,and security." (6) Accompanying this was a renewed interest in global development aid funding levels as governments, international institutions, and non-governmental organizations prepared for amid-March 2002 U.N.-sponsored International Conference on Financing for Development inMonterrey, Mexico. Conference proponents hoped the session would serve as a catalyst for donorsto increase aid commitments in order to achieve by 2015 the ambitious goal of reducing poverty byone-half relative to 1990. At the 2000 Millennium Summit, international leaders, including theUnited States, had pledged support for a set of specific targets, including those related to hunger,education, women's empowerment, child health, HIV/AIDS, and other infectious diseases, thatbecame known collectively as the Millennium Development Goals. A World Bank analysis, releasedFebruary 2002, estimated that to achieve these goals by 2015, donors would need to increasespending by $40 to $60 billion per year, or roughly double the amount provided in 2001. (7) As theMonterrey conference approached, international development advocates began pressing participatinggovernments to issue specific pledges that would help close this funding gap identified by the WorldBank. Following the President's speech in March, an inter-agency team, including representatives from the National Security Council, Office of Management and Budget, State Department, USAID,and the Department of Treasury, met frequently to work out proposals to design and implement theU.S. initiative. The NSC managed overall policy development while the State Department tookcharge of outreach -- seeking input from the non-governmental community -- and the TreasuryDepartment assembled economic and governance indicators that would be used to determine eligiblecountries. The team drafted recommendations on many, but not all MCA issues, and after beingapproved by the Secretaries of State and Treasury, the proposals were forwarded to the President. After making further modifications, on November 25 President Bush endorsed several key principles of the initiative. Thereafter, the process of writing legislation, deciding on budget levelsfor FY2004, and consulting with Congress began. On February 3, 2003, the President proposed $1.3billion for the MCA in FY2004, followed two days later by submission of a draft bill authorizing theinitiative. The requested legislation was introduced as H.R. 1966 and S. 571 , but ultimately enacted as part of the Consolidated Appropriations Act, 2004 (Division D of P.L.108-199 ). While several important issues have been decided, both through enactment of authorizing legislation and through inter-agency discussions, others remain under review as the MCA frameworkevolves. These issues are highlighted below and discussed in more detail in the following sectionon the MCA and congressional consideration. MCA features announced by the Administration. The Administration issued proposals on a number of key MCA elements, some of which wereincorporated into the enacted authorizing legislation: Country eligibility. In the first year -- FY2004 -- countries that can borrow from the World Bank's International Development Association (IDA) with a per capita incomebelow $1,415 are eligible. The list will expand to 115 over the next two years to include allcountries with per capita GNI less than $2,935. (For complete list, see appendixB.) Selection criteria and performance indicators. MCA participants will be selected based on their performance measured by 16 economic and political indicators. In mostcases, a score above the group median on the indicator would represent a passing "grade". The MCABoard of Directors will be guided by the statistical outcomes, but maintain some discretion over thefinal selection. Corruption measure is "pass-fail". To be eligible, a country must score above the median on the corruption indicator, as compiled by the World BankInstitute. Program development and submission. MCA programs will be "country-driven" in which participating country officials will design and submit project proposalsbased on national development objectives. Types of programs supported. MCA programs will be available not only for government-sponsored projects, but for activities proposed and implemented by local governmentsand communities, civil society, and other private entities. National governments, however, wouldremain responsible for the program and be the party to sign a compact between the U.S. and thecountry. Moreover, according to Administration officials, all types of assistance -- budget supportfor government initiatives, infrastructure projects, and more targeted activities focused on specificsectors -- are available for consideration. Organizational management of the MCA. The Administration asked and Congress approved the creation of a new entity -- the Millennium Challenge Corporation (MCC)-- that will be supervised by a Board of Directors chaired by the Secretary ofState. FY2004 funding. The Administration proposed $1.3 billion for the MCA's first year and continues to support its pledge of $5 billion by FY2006. Congress, however, reducedthe FY2004 funding to $994 million. MCA issues undecided within the Administration. Beyond some of these key decisions, other matters remain under discussion. Number of countries participating. Because the MCA will be a "performance-driven" program, it is difficult to predict how many nations will qualify andparticipate. Administration officials have suggested, however, that the number will be relativelysmall -- perhaps less than 20 by the third year. It is also undecided whether all or only some of thecountries that qualify based on the performance indicators will receive MCA funding. The final listmay comprise selections from the pool of best performing countries or the selection could be basedon the quality of program proposals submitted by qualifying nations. Other options are also underreview. Impact on USAID program objectives in MCA countries. MCA participants may or may not continue to receive regular development aid under existing USAIDprograms. If they do, it is unclear whether those activities will change focus in order to supportMCA projects. The role of USAID missions in MCA countries is also yet to be clearlystated. Monitoring and accountability. Executive officials say that MCA programs will be closely monitored and scrutinized, perhaps by some independent auditing system, but theyhave not established plans or procedures. Graduation or exit strategies. A main objective in providing an increased resource pool to help "jump-start" or accelerate a country's development process, is to set it on theroad toward graduation. What criteria to use to end programs in successful countries or how towithdraw from a non-performing MCA participant remain undecided. As Congress considered MCA authorizing legislation and funding recommendations in 2003,and will later debate the confirmation of the MCC chief officer, followed by continuing oversightof program implementation, several key elements of the initiative have been, and will continue tobe closely examined. These will include matters that have already been decided within the executivebranch, as well as issues that remain under discussion. One of the first questions addressed by the executive steering committee was where the income cutoff point should be drawn for purposes of defining potential MCA participants. The debatechiefly focused on whether only the poorest nations should be considered for MCA programs. Asnoted above, the Administration announced in late November 2002 that a pool of 115 countries,phased in over three years, would compete for MCA resources. They are grouped into three clustersaccording to income level and World Bank borrowing status, with a new cluster added to thecompetition each year corresponding to the anticipated rise in MCA resources. In FY2004, only the75 IDA-eligible countries with per capita incomes below $1,415 can compete, while 12 more willbe added the next year. (8) By FY2006, when $5 billionis planned for MCA programs, countries withper capita incomes between $1,415 and $2,935 -- 28 in number -- will be added. Since countriesabove $1,415 per capita income are likely to score higher on the eligibility indicators, the WhiteHouse further has decided to have separate competitions for the low and low-middle income groupsto avoid income bias. Issue: Income eligibility. There emerged at the outset a relatively broad consensus within the U.S. development community that the MCA shouldfocus on IDA-eligible, low-income countries. (9) Fora policy aimed at promoting economic growth and reducing poverty, mostagreed that it made sense to place emphasis where the greatest needs existed. By expanding thenumber and income level of MCA participants beyond IDA-eligible status, some argued, the amountof money available for the poorest nations would be reduced. Some also noted that the 28 memberlow-middle income group includes nations that maintain strong political and strategic ties with theU.S. -- Egypt, Jordan, Colombia, Turkey, and Russia. That would increase the possibility, or atleast the perception, that countries might be selected on criteria other than MCA performancemeasures. It may further tend to blur the distinction between MCA goals and objectives of other aidprograms, jeopardizing the unique approach of the MCA and the need for programmatic flexibility. (10) Achieving economic results as an objective has frequently taken a position secondary to strategicinterests in U.S. aid allocation considerations in the past. In addition, some point out that the poorest countries have far less access to capital from private sources, making MCA resources even more valuable to them. According to one analysis, aid as apercent of gross national income (GNI) for IDA-eligible countries with per capita incomes below$1,415 totals 10.8% compared with 1.4% for the higher income group (below $2,935); gross privatecapital flows as a percent of GDP for the poorer IDA-eligible countries (below $1,415) is 6.9% whilethose between $1,415 and $2,935 receive 10.3%. Tax revenues and domestic savings as a percentof GDP among low-middle income countries are roughly double the level of those for IDA-eligibleborrowers below $1,415, thus providing a more expansive potential source of financing. (11) Others, however, argue that low-middle income countries deserve equal consideration in a program intended to identify and partner with the "best-performers." In some cases, they assert,commitments to sound policies have enabled nations to move into the higher income range. If aprimary goal of the MCA is to maximize the effectiveness of aid resources, then non-IDA countriesshould be included. (12) In addition, countries fallingin the $1,415 - $2,935 per capita income range,while maintaining higher income levels, also have large numbers of people living in poverty. Thesecountries, with stronger institutions and better capacity may also be better positioned to apply MCAresources more effectively. One argument of those favoring exclusive participation of countries below the $1,415 level -- that better-off economies would score higher on the eligibility indicators, raise the median standardsfor qualification, and squeeze out the poorest nations -- seems to be addressed by theAdministration. Based on a preliminary estimate of the median scores of each group, the medianwould be higher -- and in some cases significantly higher -- for 14 of the 16 indicators forlow-middle income countries compared with those below $1,415 GNI per capita. (13) In FY2006, whenthe 28 higher-income countries become eligible, they will be evaluated separately from the other 87,competing against each other to score above the group median on the 16 indicators. This wouldallow countries to qualify based on comparisons with their income-level peers. Whether theAdministration will divide MCA resources into two pots of money for each income group has notbeen determined. In any case, unless the Administration and Congress agree to increase the MCAbeyond the proposed $5 billion target, whatever number of low-middle income nations that qualifywill reduce the amount of resources that would otherwise be available for those below the $1,415level. Congressional proposals to modify income eligibility. Reflecting the perspective that the MCA should remain focused on thepoorest countries, the Senate Foreign Relations Committee recommended in S. 1160 (as added to S. 950 ) to permit participation by low-middle income country in FY2006and beyond only if MCA funding exceeds $5 billion. If not, MCA programs could only be supportedin countries that fall below the "historical per capita income cutoff of the International DevelopmentAssociation," a level that is currently $1,415. Even in years when the MCA appropriation exceeds$5 billion, the Senate bill would limit funding to low-middle income participants to 20% of the totalamount. The Foreign Relations Committee further expressed its intention that MCA programs inthe low-middle income countries should focus on poor communities in those nations. The House International Relations Committee, in H.R. 1950 , also limited to 20% the amount of MCA resources that could be allocated in FY2006 to low-middle income participants. But unlike the Senate, the House measure did not require an appropriation in excess of $5 billion forinclusion of the low-income group in FY2006. The Committee considered two amendments duringmarkup related to the income issue. The first, offered by Congressman Payne and approved by theHouse panel, would have required low-middle income countries that are selected for MCA grantsto make a contribution from their own resources to whatever MCA programs are funded. Thesecond amendment, proposed by Congressman Menendez, originated out of concern that few (7)Latin American nations would be eligible to compete for MCA resources in the first two years,despite large pockets of poverty in these countries. The Menendez amendment, which was defeated(10-24), would have made low-middle income nations, a group which includes nine from LatinAmerica eligible from the beginning. Similarly, Congressman Kolbe proposed an amendment duringHouse floor debate that would have allowed low-middle income countries to be eligible beginningin FY2005 rather than FY2006. The Kolbe amendment failed 110-313. While sympathetic to theconcerns expressed by sponsors of the amendment, those opposed to changing the income eligibilitystructure argued that resources diverted from Latin America and many other nations would come atthe expense of the world's poorest nations where the needs are greatest. As enacted in Division D of P.L. 108-199 , the MCA authorizing legislation follows the earlier House and Senate plan of including only low-income countries in the program during FY2004 andFY2005. Beginning in FY2006, low-middle income nations, with per-capita income above $1,415,may also participate, but they can only receive 25% of the amount appropriated for the MCA in thatyear. Executive branch decisions on which performance indicators to use have been guided by whether the data and methodology are transparent, publically available, accurate, and easy tounderstand. Another key factor is whether the data source provides full coverage for as manycountries as possible and is relatively current. Officials further sought to identify indicators thatwould be few in number but sufficient to reflect broad policy results in each of the three policycategories, and valid relationships between the indicators and economic growth and povertyreduction. Finding indicators that meet all of these requirements is difficult, and according to some,impossible. Gathering valid economic, social, and political statistics, especially in developingnations, has always been difficult, often resulting in significant gaps in coverage and long lag times. Gaining consensus on whether a given set of indicators accurately measures policy achievementsunfettered of institutional bias by whatever organization or individuals collect and interpret the datais also a major challenge. As noted above, the Administration has settled on 16 indicators for measuring performance and determining country eligibility. As shown in Table 1, six fall within each of the ruling justly andencouraging economic freedom categories, while four will determine results in the area of investingin people. Sources include international institutions, such as the World Bank, IMF, and U.N., andnon-governmental and private organizations like Freedom House, Heritage Foundation, and theInstitutional Investor Magazine. National statistics will also be drawn upon where gaps occur, butnone of the data sets will be compiled by the U.S. government. For aggregating country scores, the Administration decided to use a "hurdles" approach instead of adding up the results and ranking nations top to bottom. To qualify, a country must score above the median on half of the indicators in each policy area; in other words, a country's ranking must beabove the median of all 75 countries in the first year on three of the six indicators for ruling justlyand economic freedom, and two of the four for investing in people. The one exception to the medianstandard is the inflation indicator -- a country's inflation must be below 20 percent in order to passthat hurdle. Officials believe that the hurdle methodology will demonstrate that a country iscommitted in all three areas and more precisely identify policy weaknesses. In year three andbeyond, when low-middle income countries are added to the competition, there will be separateevaluations for countries below and above $1,415 per capita incomes so that higher income countrieswill not drive up the median and exclude poorer nations from qualifying. Importantly, one indicator -- control of corruption -- will be a "pass-fail" test, in which any country scoring at or below the median on this measure will be disqualified regardless ofperformance on any of the other 15 indicators. Executive officials argue that since there are stronglinks between financial accountability and economic success, a strong commitment to fightcorruption must be demonstrated by all MCA participants. Further, after passing all the required hurdles, a country's score will be evaluated by the MCC Board of Directors who will make the final recommendations to the President. The Board will begranted a degree of discretion in selecting the final participants, taking into account such things asmissing or old data, trends in performance, and other information that might reflect on a country'scommitment to economic growth and poverty reduction. Moreover, officials have yet to decidewhether to fund programs in all countries that qualify and pass the final review. Final selection, forexample, could hinge on the quality of program proposals submitted by the best performing nations,although other selection options are also under discussion. Presumably, the President will alsomaintain flexibility as to whether to agree with the Board's recommendations. Congressional action on performance indicators. Measures considered in the Senate and House ( S. 1160 , as amended and incorporatedinto S. 925 ; and H.R. 2441 , as amended and incorporated into H.R. 1950 ) did not directly legislate the list of performance indicators to be used,thereby allowing the executive branch to apply the measures that it has recommended. Both,however, provided for advance congressional consultation and public awareness. S. 925 required that the list of proposed indicators be published in the Federal Register and on theInternet and that the Administration consider public comment prior to issuing the final determinationof the indicators. In this way, the Committee believed that the indicators could be refined andimproved. H.R. 1950 required the Corporation's CEO to consult with congressional committees prior to establishing eligibility criteria and methodology and publish such criteria oncefinalized. Both bills further directed that country eligibility would be based on an evaluation ofperformance criteria that closely matched the 16 indicators listed in Table 1 below. In its report on S. 1160 , the Senate Foreign Relations Committee expressed its intent that the selectionbe based on development needs and performance, and not on immediate political considerations. The enacted legislation, like earlier House and Senate bills, does not specify the specific performance indicators. In describing the criteria by which countries should be assessed, the MCAAct makes reference to the extent to which countries respect the rights of people with disabilities,promote the sustainable management of natural resources, and invest especially the health andeducation for women and girls. While none of the 16 indicators chosen by the Administrationdirectly address these three additional concerns, it is likely that MCC officials will review existingindicators or search for new performance measure in order to better evaluate progress on these threefactors added by Congress. The legislation further requires the Corporation to publish the eligibilitycriteria and methodology used for country evaluation on its website and in the Federal Register , andreceive public comment and congressional input prior to country selection decisions. Table 1. MCA Performance Indicators Issue: Association of performance indicators with economic growth and poverty reduction. Analysts will beexamining the set of 16 indicators to determine how well they predict successfuldevelopment outcomes. An initial assessment by the Center for Global Developmentsuggests that many of the indicators show a reasonable or strong relationship witheconomic growth, infant mortality, and literacy rates, although a few show weakassociations, especially in the economic freedom category. According to the Center'sanalysis, each of the six governance indicators maintains good or strong correlationto development outcomes. The measure of public primary education spending as apercent of GDP, however, is weakly associated with the three development standards. Three of the six economic freedom indicators -- trade policy, days to start a business,and three-year budget deficits -- are also found in the study as being weaklycorrelated with development achievements. (14) Issue: Hurdles and median vs. aggregated ranking. Some argue that an aggregation of scores andtop-to-bottom ranking rather than the use of hurdles is a better way in which todetermine eligibility with an above-the-median score requirement. While theAdministration holds that passing half the hurdles in each of the three policy areasensures broad commitment to both economic growth and poverty reduction, it alsomeans that countries do not have to meet each of the 16 standards to qualify. Thisapproach departs from more traditional aid requirements in which recipients mustcomply with all conditions associated with a program framework, especially thoseof the World Bank, IMF, and in some cases U.S. aid agreements. Once a countrypasses a hurdle, there are limited incentives to keep improving in those areas. Forcountries that miss qualifying by a small margin, however, the incentive remains. PDF version Use of the median also in some cases complicates efforts for a country to passthe hurdle due to outcomes beyond its control. The median will change over time,sometimes because new countries are added to the pool, as will be the case inFY2005. In other instances, a country may improve on a particular indicator but stillnot pass the hurdle because other countries improve more significantly and push themedian higher. Conversely, a government could regress or remain stagnant over timebut pass a hurdle it had failed the previous year because the median drops. A numberof observers have suggested that instead of using the median, it would be better eitherto set specific, individual thresholds that would be relevant to each indicator or to useabsolute scores. (15) A further issue in use of the median is that for three of the indicators -- political rights, civil liberties, and trade policy -- the range is relatively narrow for scoringcountry performance, resulting in many falling at the median. The Freedom Houseassigns scores on a 1-7 scale, while the Heritage Foundation uses a scale of 1-5. Forthe trade policy indicator, for example, 15 of the 75 IDA-eligible countries areassigned the median score of 4. Since a country must place above the median to passa hurdle, this eliminates a number of candidates with limited differentiation ofperformance. Issue: Surprising country outcomes and modifying the indicators. Many have been surprised by the possibility thatcountries such as Vietnam and China might qualify, despite scoring near the bottomon half of the indicators for ruling justly. Both countries pass the hurdles forcorruption, rule of law, and government effectiveness, but have some of the worstscores in the categories of political rights, civil liberties, and voice andaccountability. Since they score above the median for three of the six indicators andpass the corruption measure, they would qualify, at least in the ruling justly category. One analyst attributes this to the high degree of correlation among several indicators in a single category that tends to magnify existing data deficiencies. Whenhalf the indicators in a single category are strongly related to one another, and acountry scores well in those areas, the other indicators essentially become irrelevant. Egypt is also cited as an example of a country with a poor record on regulation andtrade, but would have passed the economic freedom grouping with data available inearly 2003 based on the strength of macroeconomic indicators. (16) One modification to the current proposal that would address this potential weakness would be to make sure that highly correlated indicators represent less thanone-half the total cluster. In this way, a country would not pass one of the threecategories based on a strong showing in one respect but very poor standards for theother measures. Another alteration to the Administration's plan would be to add anadditional indicator in each category so that there would be an odd number ofmeasurements in each category. In a sense, the added element would become a"tie-breaker" in cases where the current indicators tended to cluster in two, evenlydivided, highly correlated groupings. One review of the MCA proposal argues thatthe initiative does not include sufficient attention to democracy issues because itincludes indicators in the ruling justly category that are better measures of economic,not political freedoms. This analysis recommends a shift of the corruption, rule oflaw, and government effectiveness indicators to the economic policy category. Under this scenario, countries like Vietnam and China would fail the ruling justly test. (17) Issue: Data accuracy and availability. Due to the difficulty in collecting accurate data,especially those based on perceptions, a certain degree of error can be expected ineach of the 16 measurements. This cannot be overcome but is mitigated to someextent by the requirement of only having to pass half the hurdles in each policy area. But it appears most problematic for the pass/fail test of corruption. According to anassessment made by the authors of the corruption index, there is a large margin oferror and high degree of uncertainty for 25 countries that score slightly above orslightly below the median. Either cross-country data are not informative or sourcesdisagree on a country's corruption standing. Of the total of 25, 13 fall below themedian and would therefore be eliminated from further consideration, despite strongdoubt as to whether the data measured performance accurately. To overcome thispotential weakness, the authors recommend that MCA managers employ in-depthcountry diagnostics regarding governance performance for countries that fall near themedium -- the "yellow light countries." (18) Missing data also pose challenges. A strict interpretation of the data would result in a failing grade on a hurdle where no figures were available. Only 87 of the115 possible MCA-eligible countries have been reported with regard to the indicator"days to start a business," although the number has increase from 63 a year ago. Forother indicators where data were incomplete or lagged, especially in the cases ofeducation and health spending as a percent of GDP, executive officials say they willrely on information collected at U.S. embassies in each country. Issue: MCA Board of Directors discretionary authority. Allowing the Board some latitude to depart from thepurely statistical record will help address some of the data accuracy and availabilityproblems. But there appears to be divided opinion over how much discretion shouldbe permitted. Arguing for broader flexibility, some note that countries that just miss qualifying, possibly because of the lack of data, could still be reconsidered andapproved. (19) In the case of "close-calls," the Boardcould examine trends over timeto assess if a borderline country was improving or falling back in performance, andmake appropriate adjustments. In order to maintain the integrity and transparency ofthe selection process, final judgments that deviate from the methodological base willneed to be clearly explained and closely examined. (20) This will be especiallyimportant in cases where the country with close strategic and political ties to theUnited States is included despite not meeting all the hurdle tests. The same will betrue should the President decide to reject a country that has recently opposed orrefused to support an important U.S. security-related policy. Others disagree,however, contending that any discretion on the part of the Board would inviteunwarranted political influence and undermine MCA effectiveness. (21) Anotheranalyst argues that one way to avoid undue foreign policy intrusion would be tochannel MCA funds through multilateral entities, such as the World Bank. (22) Congressional proposals to modify Board of Directors discretion. As noted below, the Senate Foreign RelationsCommittee initially reported an MCA authorization bill that did not authorize thecreation of a Millennium Challenge Corporation, with a Board overseeing itsoperations. Instead, S. 1160 placed the MCA within the StateDepartment under the authority of the Secretary of State and gave the Secretary thepower to determine eligible countries through the evaluation of a government'scommitment to several factors in the three areas of ruling justly, economic freedom,and investing in people. Subsequently, however, the Senate voted on July 9, 2003, to modify the MCC structure and the role of the Board of Directors by adopting revised text that waslargely based on a proposal offered by Senator Lugar ( S. 1240 ). Themodified arrangement, which was incorporated as Division C of S. 925 ,established a Corporation to be managed by a CEO. Under the Senate measure, theCEO would report to and be under the direct authority and foreign policy guidanceof the Secretary of State. S. 925 , as amended, further established aBoard of Directors, chaired by the Secretary of State, and grants the Board the powerto determine eligible countries by evaluating the commitment of a country todemocratic governance, economic freedom, and investments in people. This did not,however, appear to limit the Board's selections based solely on the results of theperformance indicators. In this way, the Senate measure seemed to permit a similardegree of discretion that the Administration's plan envisioned. The House-passed measure ( H.R. 1950 ) was similar to the Senate bill in that it required eligible countries to have demonstrated a commitment tobolstering democracy, investing in health and education, and promoting soundeconomic policies, but did not specifically identify how such a commitment wouldbe determined, other than through the creation of eligibility criteria and amethodology. As enacted, the MCA authorizing legislation follows the general themes of earlier House and Senate bills. "Eligible" countries are to be determined, to themaximum extent possible, by objective and quantifiable indicators measuring acountry's commitment to the three core policy goals of ruling justly, promotingeconomic freedom, and investing in people. The legislation directs that the selectionis to be based on the consideration of three factors: the extent to which the countrymeets or exceeds the eligibility criteria; the opportunity to reduce poverty andpromote economic growth in the country; and how much money is available to carryout MCA programs. This appears to provide substantial flexibility and discretionaryauthority in the selection process. Where the House and Senate bills diverged, however, regarded who made the determination of eligibility and therefore, who would be in position to exercisediscretion in deviating from a strictly statistical evaluation. S. 925 , asamended on July 9, gave the Board of Directors authority to determine whether acountry is eligible, while H.R. 1950 placed the power with theCorporation's CEO. The enacted legislation gives this authority to the Board ofDirectors. The MCA initiative will be an additional economic assistance tool of the United States, and is not intended to replace or substitute for any existing channel of U.S.foreign aid. It can be expected, therefore, that overall American aid will continue toserve multiple national interests and foreign policy goals, including security,humanitarian, multilateral, and commercial objectives. Administration officials havemade a commitment that the MCA will be in addition to existing aid activities andthat regular U.S. programs will continue even in MCA-participating countries. Nevertheless, because of the priority being placed on the MCA policy orientation andthe size of the financial investment, there almost certainly will be ramifications of thenew initiative for current programs. Foremost may be funding tradeoffs, especiallygiven rising budget deficits and the costs of fighting the war on terrorism. (Spendingissues are also discussed below in the section on legislation and budgets.) Issue: Commitment to global initiatives. During the past year, some analysts have argued that aportion of the MCA should be dedicated to effective and results-oriented globalprograms operated on a multilateral basis. One concern is that the large amount ofresources directed to the MCA may limit the U.S. ability to maintain or expand uponcommitments to such activities as the Global Fund to Fight HIV/AIDS, Tuberculosis,and Malaria. Another worry is that soundly managed, high impact programs incountries with weak governance and poor corruption standards will miss out on theMCA opportunity to accelerate a process that is already making a contribution tolong-term economic growth and poverty reduction. Proponents of this view advocatea "two-tiered" approach to the MCA in which separate pools -- and perhapsmultiple pools -- are maintained to serve several types of activities. (23) The trade-off for this approach would be that significantly fewer resources per country would be available, most likely reducing the impact of MCA assistance. Some also caution that multilateral programs, regardless of their merits, do notnecessarily have the same results-oriented performance requirements of the MCA,a fact that would undermine the main objective of the MCA. Increased resources areonly one important feature of the new initiative, and to many MCA advocates, themost significant feature by far is the goal of allocating the aid where it will have thegreatest impact and be most readily accounted for. Issue: Policy coherence and USAID program goals in MCA countries. The Administration says it will maintain regulardevelopment aid programs in a country while it simultaneously launches a far largerMCA-designed activity. Executive officials have not said, however, how this mightaffect the shape and goals of continuing programs managed by USAID missions. Some may argue that regular aid objectives should be re-oriented to maintain policyconsistency with the MCA initiative and in some cases to help facilitate the corefocus of the larger pool of resources. Others, especially within USAID countrymissions, may question whether successful projects should be abandoned, with apotential negative impact on the target population. In perhaps the clearest statementto date, USAID Administrator Natsios told the House Foreign OperationsAppropriations Subcommittee that actions may vary from country to country. Henoted that USAID missions in MCA-selected countries would likely undertake astrategic review of their programs and may adjust projects to support the MCAcontract. In other cases, however, missions might continue high-priority activities,such as those combating HIV/AIDS or curbing trafficking in persons, or terminatecertain activities. (24) Some of these same issues regarding policy coherence are being raised regarding the relationship between the MCA and other U.S. economic and trade tools aimed atpromoting economic growth in developing nations. One study, for example,concludes that there is very little overlap between countries likely to qualify for theMCA and those currently eligible for debt reduction under the Heavily Indebted PoorCountry (HIPC) initiative or for trade preferences under the African Growth andOpportunity Act. (25) Congressman Jim Kolbe,Chairman of the House ForeignOperations Subcommittee, the House panel with jurisdiction over funding the MCA,suggests that MCA qualifiers should get special consideration for expedited tradepreferences that would further accelerate economic growth possibilities. (26) Still otherswho support the MCA framework find fault with the Administration for not devisingsimultaneously an overall foreign aid strategy into which the MCA fills one ofseveral elements of a comprehensive policy. (27) Beyond U.S. programs and policies, other foreign aid donors and institutions are expressing concerns that the MCA may be creating additional, and perhapscompeting performance goals to those that already exist. How MCA program goalsalign with the Millennium Development Goals is of particular concern. One of the most contentious issues associated with the MCA policy review process has been and is likely to continue to be where the MCA programmanagement will be placed. This debate has raised issues discussed for many yearsconcerning under what auspices U.S. foreign aid policy should be designed,coordinated, and managed. Over the years, suggestions have ranged fromcoordination within the National Security Council, creation of umbrellaorganizations, like the ill-fated International Development Cooperation Agency, andmost recently the merger of such responsibilities into the State Department. Afterextensive debate during the mid-1990s, a decision was reached to make USAID, theprincipal U.S. government bilateral aid agency, totally independent, but to have itoperate under the guidance of the Secretary of State. After considering numerous options, including the placement of the MCA as a separate unit with the State Department, the Administration proposed to create a newgovernment entity -- the Millennium Challenge Corporation -- to manage theinitiative. Given the innovative and non-traditional approach inherent in the MCAconcept, executive officials said it makes sense to establish a new entity to overseeits implementation. The Corporation, as proposed, would have a CEO, confirmedby the Senate, and a staff of no more than 100 that would be drawn largely from othergovernment agencies and serve for limited-term appointments. A Board of Directors,chaired by the Secretary of State and include the Treasury Secretary and OMBDirector, would oversee the MCC. Although it appears there is no precise existingmodel in the U.S. government, officials said that the MCC would most closelyresemble the Overseas Private Investment Corporation, an organization that promotesprivate American investment overseas, and the Commodity Credit Corporation, anarm of the Department of Agriculture that manages export credit guarantee programsfor the commercial sale of American agricultural goods. An important differencebetween these and the MCC, however, is the proposal to have a cabinet-memberBoard oversee the latter and make final recommendations. Issue: The need for a new organization. Before agreeing on the MCC, the inter-agencysteering committee reportedly looked seriously at the option of creating a separateunit within the State Department to manage the MCA. One reason for rejecting thisproposal may have been the relative lack of experience of State Department staff inadministering aid programs. This was one of the central issues considered when thequestion of whether to fold USAID into the Department was under debate. Thistechnical shortcoming, however, could have been overcome by adopting the MCCprinciple of detailing aid experts from other agencies to staff the office. A broaderreason for not placing the MCA within the State Department, however, may havebeen a concern that it would be located too close to the center of the U.S. foreignpolicy apparatus that would limit the program's immunity from strategic and politicalinfluences. At a minimum, many observers believed, there would be a perceptionproblem -- whether true or not -- that the MCA did not truly represent a departurefrom the past aid entanglements with broad U.S. foreign policy interests. At the same time, many groups encouraged the Administration to establish the MCA as an office within USAID, but apart from the normal operations of the agency. Various external groups have argued that USAID, with its 40 years of developmentexperience, maintained the knowledge, staff, and on-the-ground country presence tomost effectively administer and monitor the MCA. To place responsibilityelsewhere, they contend, would risk duplication of effort, competing priorities, andinconsistent policies. (28) Another, business-relatedorganization also opposes thecreation of a new institution. Rather it recommends the establishment of a "smallcore office" (unspecified as to where it would be placed) that would identify programpriorities and distribute the MCA funds to USAID and the Trade and DevelopmentAgency (TDA). (29) Others are skeptical, however, that USAID is best suited to implement the MCA concept. The Agency is frequently criticized as encumbered with excessiveregulations, managed with poor financial systems and time-consuming planningcycles, and burdened by extensive congressional oversight. One analysis, afterweighing both the merits and disadvantages of placing the MCA within USAID,concluded that if the Administration wants the MCA to operate differently than USAID, it should create a new agency to manage it. (30) Congressional proposals to modify the organization structure. Proposals considered by the Senate shifted positions onthe organizational issue as bills moved through the legislative process in 2003. S. 1160 , as reported by the Foreign Relations Committee in May 2003,did not authorize the creation of the MCC, as proposed by the President. Instead, thelegislation designated the Secretary of State as the coordinator of MCA assistanceand directed the Secretary to designate a coordinator within the State Department formanaging the program. The coordinator, who would be confirmed by the Senate,would have authority to develop the list of performance indicators, select eligiblecountries, and to coordinate MCA programs with other donors. The Committee adopted this approach by approving an amendment offered by Senators Hagel and Biden (approved 11-8). The sponsors noted that in 1998Congress had consolidated two independent agencies -- USIA and ACDA -- in theState Department in order to give the Secretary more director authority over all toolsof U.S. foreign policy. To create a separate entity to manage what could become thecornerstone of American foreign assistance, they argued, would run counter to theserecent efforts to better integrate and coordinate foreign policy decision-making. Supporters further questioned what value the OMB Director would provide by beingon the Board of Directors, given that the Director is generally not assignedpolicy-making responsibilities. The Administration strongly opposed the Committee's action to place the MCA in the State Department. At the markup session on May 21, 2003, Chairman Lugarread a letter from Secretary Powell underscoring the value of a new, independent, andcreative entity for managing this "new start" to U.S. foreign aid. The Secretary saidthat if this approach remains in the final bill, he would recommend that the Presidentveto the legislation. Senator Lugar, who opposed the Biden-Hagel amendment, proposed an alternative structure in new legislation. S. 1240 , as introduced on June11, would create a Millennium Challenge Corporation, headed by a CEO who wouldreport to the Secretary of State. Senator Lugar intended that such an arrangementwould provide the Corporation with the same degree of independence and status asUSAID, but establish a chain of command that would permit the Secretary of Stateto exercise broad authority over the MCA. S. 1240 created a Board ofDirectors, made up of the Secretary of State (Chairman), the Secretary of theTreasury, the USAID Administrator, the U.S. Trade Representative, and the MCCCEO. The full Senate adopted the general approach proposed by Senator Lugar whenit voted on July 9, 2003, to incorporate a modified text of MCA authorizinglegislation into S. 925 , an omnibus foreign policy authorization bill. The approved text further strengthened the explicit relationship between theCorporation and the Secretary of State by adding that the CEO shall "report to andbe under the direct authority and foreign policy guidance of the Secretary." TheAdministration did not express objection to the revised legislation. The House bill, H.R. 1950 , took a somewhat different approach than the modified Senate proposal that was closer to the Administration's position,although with some important differences. H.R. 1950 would create anew Millennium Challenge Corporation sought by the President, but altered thecomposition of the Board of Directors and, as noted above, the authority of theMCC's Chief Executive Officer. The Board would include the Secretary of State asChairman and the Secretary of the Treasury, as proposed, but deleted the Director ofOMB and added the USAID Administrator, the U.S. Trade Representative, and theCEO of the MCC. The bill also included four additional members, to be appointedby the President from a list submitted by the majority and minority leaders of theHouse and Senate. The Board would further include as non-voting ex-officiomembers, the CEO of OPIC, and the Directors of the Trade and DevelopmentAgency, Peace Corps, and OMB. The House measure further created an AdvisoryCouncil that would advise, consult, and make recommendations to the CEO andBoard of Directors for improving the MCA. The Council would include sevenCEO-appointed members from the non-governmental sector, including business,labor, private and voluntary organizations, foundations, public policy organizations,and the academic community. As enacted (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ), the MCA authorizing legislation combinedapproaches found in both House and Senate bills. The statute creates an independentMillennium Challenge Corporation, headed by a CEO who is confirmed by theSenate and reports to the Board of Directors. The Board consists of the Secretary ofState (Chairman), the Secretary of the Treasury, the USAID Administrator, the U.S.Trade Representative, and the CEO. Four additional individuals will be on the Boardthat "should" be named by the President from lists of candidates supplied by theMajority and Minority leaders in the House and Senate. The enacted legislation,however, does not require Advisory Council as proposed by the House. Issue: Role of MCC staff in managing and monitoring the MCA. One of the first concerns of aid managers isthe ability of a 100-staff organization to maintain proper oversight and accountabilitystandards over what will become a $5 billion program. By comparison, USAIDmaintains a staff of nearly 2,000 American direct-hires and several thousand morecontractors and foreign nationals based overseas to implement a roughly $8 billionprogram. Few would argue that a similar work-force is needed -- indeed, therewould likely be minimal support for a bureaucracy even half that size. But with acentral mandate of performance, results, and accountability, the MCA requires astrong monitoring capability. The Administration has mentioned the prospect of anoutside, independent auditing system, but the issue appears to remain unresolved. Even though USAID will not manage the MCA, it is likely that its staff, especially those located in MCA participant countries, will play a supporting role invarious capacities. USAID Administrator Andrew Natsios has told his staff that theAgency's long record of best practices and experience will be required if the MCCis to be successful. But how this will operate in the field is an open question. Thereis concern among some USAID professionals that the time and attention of missionstaff to support administrative, contracting, and procurement needs of MCAprograms will diminish their ability to manage regular aid programs. And asmentioned above, how the current mission portfolio relates to MCA objectives isunclear. Issue: Future of USAID. The creation of a new agency to manage the MCA is likely to be viewed by some as avote of no confidence in USAID. This may stimulate renewed debate over whetherthe USAID mandate should be modified -- perhaps limiting it to a strictlyhumanitarian aid agency -- or folding it into the State Department or the MCC itselfat some future date. USAID supporters are concerned that an MCA managed outsidethe principal U.S. development organization will establish a two-class aid systemwith USAID responsible for addressing the needs of the "weaker" performers whilethe main emphasis will transfer to the MCC. The potential impact on staffrecruitment and morale, and eventually resources, they believe, could be serious. Anargument could be made as well, however, that this provides an opportunity forUSAID not only to demonstrate its expertise as an aid organization and serve theMCC as a valued "consultant," but also can serve as incentive to review its ownoperations and correct some of the persistent problems identified by critics. (31) Congressional proposals to modify USAID's role. During legislative consideration of MCA authorizing bills,Congress attempted to clarify the relationship between the MCC and USAID inefforts to minimize overlap and inconsistency of aid policies and operations. Asmentioned above, under both bills the USAID Administrator would become a votingmember of the Board of Directors. S. 925 , as amended, further directedCorporation staff posted overseas to coordinate the MCA program with the USAIDmission director in that country. The legislation also directed USAID to ensure thatagency programs would help prepare potential MCA participant countries to becomeeligible for assistance. Similarly, H.R. 1950 gave USAID the lead role in assisting countries to become eligible in the future that had demonstrated a commitment todevelopment but failed to qualify based on the performance indicators (the so-called"near-miss" countries). Up to 15% of the amount authorized annually for the MCAcould be made available for such USAID programs. (The Senate measure alsoprovided up to 10% of annual MCA funds be available to countries that failed toqualify because of unreliable data or lack of performance on only one indicator,although the Corporation, not USAID would provide the assistance.) H.R. 1950 also directed the MCC to consult with USAID officialsregarding the contents of a contract -- or Compact -- between the U.S. and an MCAparticipant country, and required that the MCC and USAID coordinate their programsto the maximum extent possible. During House floor debate, Members adopted anamendment by Congressman Kolbe intended to further clarify USAID's role inproviding U.S. economic assistance. The language stated that the USAIDAdministrator shall report to the President "through, and operate under the foreignpolicy authority and direction of the Secretary of State." (32) The Kolbe amendmentalso authorized USAID to extend assistance to countries ineligible for MCA aid sothat they may become eligible, and permitted USAID to help in the evaluation,execution, and oversight of the MCA projects. The enacted legislation authorizing the MCA (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ),specifically addresses the issue of the MCA and USAID relationship. Section 615of the measure requires the CEO to consult with the USAID Administrator, and thatUSAID must ensure that its programs play a primary role in preparing countries tobecome eligible for the MCA. As such, the legislation makes available up to 10%of the MCA appropriation ($99 million in FY2004) for assisting countries thatdemonstrate a "significant commitment" to the MCA requirements, but narrowlymiss qualifying. USAID may provide this support. The statute further requiresUSAID to seek to ensure that agency programs play a primary role in helping preparea country that has failed to qualify previously to better compete in the next selectionprocess. With broad agreement that development programs work best when they are designed and therefore "owned" by the host country and not imposed from outside,executive officials stress that MCA programs will be country-driven. Once a nationis identified as eligible, it will be invited to draft and submit program proposals forevaluation and selection through the MCC. Projects should directly support broadnational development strategies already in place, preferably constructed withextensive input from civil society. Since several of the possible MCA countries havealready designed such strategies as part of the Heavily Indebted Poor Country (HIPC)debt reduction initiative -- the Poverty Reduction Strategy Papers -- these PRSPsmight serve as the guiding framework for program goals where appropriate. The Administration has outlined numerous types of programs that might be supported by the MCA: budget support for various community, sector, or nationalinitiatives; infrastructure development, commodity financing, training and technicalassistance, and capitalization of enterprise funds or foundations. Selection woulddepend on country-specific circumstances and would not be appropriate in all cases. For example, budget support programs would only be suitable where governmentsmaintain transparent budgeting, accounting, and control systems and have stronggovernance and anti-corruption records. Endowing enterprise funds or foundationsmight be appropriate where other alternatives are weak or where innovative ways offinancing development proposals appear attractive. An eligible country could submit multiple proposals annually, some of which might take several years to implement. The MCC would create a contractualrelationship with selected countries and require the establishment of project performance goals so that progress could be closely monitored. Should performancefall behind or fail, the contract could be declared void and funding cut-off. Issue: Detailing the types and targets of programs. One of the next steps for MCA planners will be to refinemore precisely the nature of programs the MCA will support, who the beneficiarieswill be, and what criteria will be used in making the selection. A number of groups,especially in the U.S. NGO community, have stressed the need to include programsthat will directly support non-governmental and civil society activities that mayoperate independently of the government. Some advocate that the MCC solicitproposals directly from private, non-governmental groups. (33) The Administration appears to be receptive to the principle that MCA funded activities need not support only government-run or sponsored initiatives, but alsocould include projects operated directly by the private sector or NGOs. The draftlegislation submitted to Congress in February 2003 allowed the MCC to issue grantsto both private and public entities. What may be more problematic is the receipt ofproposals straight from these non-governmental sources. This might result in anawkward competitive relationship between government and non-governmentsubmissions, a competition that might be best settled by the country itself prior totransferring recommendations to the MCC. USAID Administrator Natsios told theHouse Appropriations Foreign Operations Subcommittee on May 21, 2003. thatwhile the MCA would likely include programs proposed by non-governmentalentities, the contract would need to be signed by the host government and that thegovernment would be responsible for managing and overseeing the project. Another issue related to the types of programs eligible for MCA resources is the capacity of both the U.S. and participant countries to manage the projects. Budgetsupport, infrastructure, and commodity assistance most likely would be large-scaleactivities where substantial amounts of resources could be invested, thereby reducingthe total number of projects to be managed and monitored. Community-based orNGO projects, on the other hand, likely would be much smaller in size and fundingrequirements, but far more numerous in totality. While supporting the broadest arrayof development programs with MCA funds provides the maximum opportunities,U.S. policy makers will have to decide whether they are prepared to assumeresponsibility for a large number of projects in the MCA portfolio and the associatedmanagement, oversight, and accountability demands. A key principal endorsed by numerous MCA proponents is that programs must be country-owned, designed by a broad spectrum of government and civil society. As noted above, some have suggested that PRSPs that have been developed by manypotential MCA countries could be used as the guiding framework in devisingprogram proposals. (34) Recognizing, however, thatmany MCA countries do not havesufficient capacity to design program proposals on their own, many suggest thatUSAID and others assist -- but do not control -- the development of programsubmissions. (35) Congressional action on program issues. The enacted MCA authorizing legislation permits resourcesto be provided to a wide range of entities, including central governments, NGOs,regional and local governments, and private groups. Assistance may take the formof a grant, cooperative agreement, or contract with any of these eligible entities. Thelegislation requires that the United States enters into a "Compact" with a qualifyingcountry that describes the program to be funded, how it will be monitored, and howthe development goals will be achieved. The Compact cannot exceed a five yearcommitment. The measure specifically prohibits assistance for military purposes, forany project that would likely result in the loss of American jobs, for projects thatwould likely cause a significant environmental, health, or safety hazard, or forabortions or involuntary sterilizations. The legislation further sets out the process bywhich the CEO can suspend or terminate a Compact in cases where the country hasengaged in activities contrary to U.S. national security interests, has taken actionsinconsistent with the criteria for determining MCA country eligibility, or has failedto meet the requirements of the Compact. The Administration submitted in early February 2003 draft MCA authorizing legislation and separately proposed $1.3 billion for the first year funding level. Program flexibility, as expected, was one of the key themes integrated throughout thedraft bill. Executive officials said that while the MCA should have its own statutorybase separate from existing laws, including the Foreign Assistance Act of 1961,current restrictions that prohibit U.S. assistance to countries would remain. Theseinclude a lengthy list of potential infractions including those related to human rights,drug production, terrorism, nuclear weapons transfers and testing, military coups,debt payment arrears, and trafficking in women and children, just to name a few. In keeping with the desire for flexibility the draft legislation would make available MCA resources "notwithstanding any provision of law," but with a notableexception. Countries that currently cannot qualify for U.S. assistance under part 1of the Foreign Assistance Act of 1961 -- that part of the Act authorizing programsfor bilateral development aid, narcotics control, international disasters, the formerSoviet Union, and Central Asia, among others -- would remain ineligible for MCAfunds. However, if the President waived any prohibition under Part 1 for a particularcountry, that nation would then be eligible for MCA resources. (36) Another area of flexibility highlighted in the draft bill concerned personnel and administrative authorities. The CEO of the Corporation would be granted authorityto establish and modify in the future a human resources management system withoutregard to existing laws governing Civil Service and Foreign Service activities,although certain provisions, including merit and fitness principles, cannot be waived. The draft submission further granted the CEO the authority to appoint and terminatepersonnel notwithstanding Civil Service and Foreign Service laws and regulations. The bill would also allow the MCC to transfer MCA resources to any U.S. agency,and would permit the Corporation to draw on the services and facilities of otherfederal agencies in carrying out the program. On the funding question, the Administration expressed a commitment to a $5 billion MCA program by FY2006, although the pace at which resources approachthat figure would be influenced by anticipated demand as well as larger budgetaryconsiderations stemming from competing spending priorities, a growing deficit, andother possible policy initiatives. For FY2004, the President requested $1.3 billion,a figure less than one-third of the three year goal that some had expected. TheAdministration did not provide any projections for FY2005. The President further made a commitment that MCA resources would not be drawn from existing aid programs, but would be in addition to those appropriations,although of course final decisions on appropriations are made by Congress. TheAdministration sought a large -- $2.6 billion, or 16% -- increase in ForeignOperations Appropriations programs for FY2004, including the MCA funds, butsome areas of the proposal, especially for bilateral development assistance programs,fell below current amounts for FY2003. Issue: Flexibility and congressional directives and oversight. An issue that has been heatedly argued between Congressand all Administrations for many years has been the practice of congressionallegislative directives and earmarks in foreign aid authorization and spending laws. Executive officials argue that the excessive use of such directives, both formal andinformal, seriously erodes their ability to manage foreign policy and operate acoherent foreign aid program. Most in Congress view the use of directives and earmarks, however, as a legitimate tool for congressional participation in setting foreign aid policy andspending priorities. Some Members point to congressional emphasis in recent yearson initiatives such as child health, basic education, and international HIV/AIDS,programs that both the Clinton and Bush Administrations subsequently came toembrace and support with higher budget requests. Without congressional pressurethrough earmarks, U.S. commitment and leadership on these policies would not existto the extent they do today, many argue. Moreover, some contend that these broad,sector allocation directives represent priority-setting decisions by lawmakers andreflect the appropriate and constructive power of Congress to manage the federal"purse." It is the far more targeted earmarks, they contend, benefitting specialinterests or specific organizations and firms, that are problematic from theExecutive's perspective. The dispute over congressional foreign aid directives is unlikely to be resolved during any MCA debate. However, the distinctive nature of the MCA initiative provided the Administration with a different set of arguments against earmarks. Because of the demand-based, results-driven concept of the MCA, executive officialscontended that the traditional pattern of congressional directives -- specifyingfunding amounts for selected countries or activities, and placing restrictions oncertain operations -- would undermine the basic principles of the MCA concept. Legislative set-asides for a particular set of countries or for certain program activitieswould arguably undercut the transparent, objective process of selecting thebest-performers. In settling these differences, one model to examine might be how Congress authorizes and funds other demand-driven programs in the annual Foreign Operationsappropriation bill. Since it is not known in advance who may request or requiresupport under programs such as the Export-Import Bank, the Trade and DevelopmentAgency, or international disaster assistance, Congress generally appropriates amountsthat are expected to be needed to meet the resource demands placed on theseactivities, with few or no set-asides for specific requirements. Authorizing laws forthese programs include some restrictions, but are generally not nearly as extensiveas those for regular bilateral economic and military aid programs. An importantdifference, however, between such programs and the MCA is that their purpose is farmore narrowly defined than that of the MCA. Linking existing foreign aid eligibility requirements with the MCA drew broad support within Congress, since many of those requirements reflect fundamental socialand political values and were congressionally initiated. But the prospect of applyingto an MCA participant these overarching aid prohibitions, especially those thatrequire an Administration discretionary determination to trigger the aid cut-off, raiseda new set of issues. Would, for example, the extent to which the U.S. has a majorfinancial investment in a successful MCA project influence a decision on whether todeclare the government in violation of narcotics cooperation standards? Congressional action on flexibility and oversight issues. For the most part, the enacted MCA authorizing act refrainsfrom earmarking, providing authorities consistent with MCA principals set out by theAdministration, and permitting the executive to implement the program with a degreeof flexibility. The measure authorizes assistance "notwithstanding any otherprovision of law." However, countries which are ineligible for American economicaid due to restrictions contained in the Foreign Assistance Act of 1961 or any otherprovision of law cannot be selected for MCA support. This provision will likelyeliminate consideration of a number of countries, although in most cases thesecountries would most likely be weak performers under the MCA selection criteria. Moreover, as noted above, assistance may not result in the loss of American jobs,displace U.S. production, pose a major environmental, health, or safety hazard, beused for military support, or finance abortions or involuntary sterilizations. Thestatute also adds several requirements aimed at strengthening congressional oversightof the MCA. The legislation requires the Secretary of State to post information aboutthe MCA in the Federal Register and on the Internet, and to submit an annual reporton MCA operations. Issue: Funding and possible tradeoffs. Following submission of the FY2004 budget, MCAadvocates closely examined two funding issues: the size of the MCA request andproposals for other U.S. economic aid programs. Many believed that MCA resourcesshould and would grow in equal amounts of $1.67 billion per year to reach the $5billion total in three years. Conflicting Administration statements gave credibilityto the view that this was the intention, although officials have said more recently thatthis is not the case. For one reason, since the number of qualifiers the first year isstill far from certain, the funding requirements may be quite different from $1.67billion. In addition, the budget environment was much different than it was in March 2002 when the President issued his policy statement. Budget deficits had risen,creating greater pressure to hold spending down in nearly all areas. Such pressuresare likely to continue throughout future budget debates, making the task ofaccommodating a new and large funding initiative more difficult. One way to manage MCA increases would be to rearrange overall foreign aid spending priorities and reduce amounts elsewhere. But the President said theAdministration would not take that path. While the FY2004 budget request largelymaintained funding for other foreign aid programs at existing levels -- although witha few important exceptions -- congressional appropriators faced limitations in theirability to fully provide for both the MCA and other aid accounts. The effects of awar in Iraq and unanticipated foreign policy contingencies arising later in 2003created new resource demands. When Congress decided on different appropriationpriorities than the President and allocated a smaller amount to the Foreign Operationsfunding bill, it set the stage for direct trade-offs between the MCA and competingsecurity, economic, and humanitarian activities. In addition, the MCA was not theonly Foreign Operations program that was vying for increased spending for FY2004. The President's budget included several other new initiatives, including those foradditional HIV/AIDS resources, "topping up" the HIPC debt reduction initiative, acontingency funds addressing famine and conflict needs. While the overall requestfor Foreign Operations was well above FY2003 enacted levels -- up 16% -- thesenew initiatives accounted for most of the increase, leaving continuing programs witha more modest 3.6% rise. Some foreign aid proponents were especially concerned about reductions in the President's FY2004 budget for development assistance and global health programs. Compared with the Administration's request for FY2003, the FY2004 budgetblueprint was the same -- a combined $2.96 billion total for these "core" bilateraldevelopment aid activities. But due to Congressional additions, the FY2003 levelshad increased to $3.23 billion, making the FY2004 request 8% less than enactedamounts for FY2003. Some argued that these, and similar reductions below FY2003appropriations for refugees, disaster, and food aid, broke the President's pledge tomake the MCA an additional source of funding. In order to reach a conclusion,however, one would have to know whether funds proposed for the MCA would bemade available for accounts supporting similar activities if this new initiative was notsubmitted. It is unclear that in the absence of the MCA or any of the other newinitiatives, that an equivalent amount of resources would have been made availablefor other bilateral economic aid programs. Congressional proposals to modify MCA funding levels. Throughout the 2003 debate over MCA authorization andappropriation funding amounts, Congress struggled with the challenge of fullyfunding the President's $1.3 billion MCA request and addressing other foreign aidpriorities. Senate bills ( S. 1160 and S. 1426 ) authorizedand appropriated $1 billion for the MCA in FY2004. The authorization furtherprovided for $2.3 billion in FY2005 and $5 billion for FY2006. In the House, H.R. 1950 authorized $1.3 billion, while H.R. 2800 appropriated $800 million. As enacted in Title VI of the Foreign Operations Appropriations Act, 2004 (included in Division D of P.L. 108-199 ), authorizations for MCA appropriations forFY2004 and FY2005 are set as "such sums as may be necessary." Elsewhere in thesame Act, Congress provides $1 billion for MCA appropriations in FY2004, $300million less than requested. (37) This appropriationreduction may affect the number ofcountries and program proposals selected for FY2004, and the pace at which theinitiative would move forward towards the $5 billion goal by FY2006. Throughout this report, Congressional recommendations to alter key elements of the President's MCA initiativeare discussed. The table belowsummarizes these changes. a. The status of the Senate bill is based on S. 925 , the Foreign Affairs Act, Fiscal Year 2004, as amended during debate on July 9 and 10. S. 925 remains pending in the Senate. Previously, the Senate Foreign Relations Committee had approvedlegislation authorizing theMillennium Challenge Account in S. 1160 . A modified text of S. 1160 was subsequently incorporatedinto S. 925 as Division C on July 9. The House bill, H.R. 1950 , is also a combined foreign policy authorization measureto which earlier MCAauthorizing text was added. The House International Relations Committee had reported H.R. 2441 , whichwas incorporated, withmodifications, to H.R. 1950 , and passed by the House on July 16. For many years, the United States has been criticized by other nations andinternational development organizations for not contributing enough to fight globalpoverty and promote economic growth. Although the United States was the largestprovider of Official Development Assistance (ODA) (38) until the early 1990s and wassecond to Japan in most years since until 2001, its contribution has been at or nearthe bottom of the list of international donors when measured as a proportion ofnational wealth. Figure 1. ODA Performance 2002 The United States defends its record as a development aid provider, arguing that contributions to global poverty reduction should not be measured simply in terms ofaid transfers as a percent of GNP. (39) U.S. officialsnote that in dollar terms, AmericanODA has remained substantial, and is programmed on more favorable terms than thatof other donors. The United States, they emphasize, was a leading voice over thepast several years in the Heavily Indebted Poor Country (HIPC) debt initiative, beingthe first government to advocate 100% cancellation of bilateral debt owed by theworld's poorest nations. American charitable organizations and businesses providea significant proportion of annual aid transfers and private investment to thedeveloping world. Given the large amount spent by the United States on defense andthe security it provides to allies and friends around the world, American contributionsto global stability and a stable environment in which economic development can takeshape is much larger than ODA expenditures suggest, they contend. In the coming years, if Congress continues to appropriate funds for the MCA initiative that are in addition to other ODA resources, the dollar value of U.S. ODAwill increase -- perhaps significantly -- especially if other new foreign aid programs,like the Global HIV/AIDS Initiative, proceed as planned. The Administration saysthat the MCA would add 50% to U.S. ODA contributions, and while that figure maynot be reached by FY2006, it is likely to be in the 25-40% range. But on the otherpoint of measurement -- ODA as a percent of GDP -- the impact will not be sodramatic, largely because MCA appropriations are likely to be very small relative tothe size of the U.S. economy and because of projected GDP growth estimates overthe next several years. According to current projections, assistance would rise fromthe 2002 level of 0.12% of GDP to 0.15%. IDA-eligible, per capita income $1,415 and below MCA eligible FY2004 and beyond * Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003. ** Precise data unavailable. Per capita income $1,415 and below MCA eligible FY2005 and beyond Per capita income $1,416 - $2,935 MCA eligible FY2006 and beyond * Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003.

In a speech on March 14, 2002, at the Inter-American Development Bank, President Bush outlined a proposal for the United States to increase foreign economic assistance beginning inFY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. Thenew funds, which would supplement the roughly $16.3 billion economic aid budget for FY2003,would be placed in a separate fund -- Millennium Challenge Account (MCA) -- and be availableon a competitive basis to a few countries that have demonstrated a commitment to sounddevelopment policies and where U.S. support is believed to have the best opportunities for achievingthe intended results. These "best-performers" would be selected based on their records in three areas -- ruling justly, investing in people, and pursuing sound economic policies. Development of a new foreign aid initiative by the Bush Administration was influenced by a number of factors, including the widely perceived poor track record of past aid programs, recentevidence that the existence of certain policies by aid recipients may be more important for successthan the amount of resources invested, the war on terrorism, and the March 2002 U.N.-sponsoredInternational Conference on Financing for Development in Monterrey, Mexico. The MCA initiative is limited to countries with per capita incomes below $2,935, although in the first two years -- FY2004 and FY2005 -- only countries below the $1,415 level would competefor MCA resources. Participants will be selected based on a transparent evaluation of a country'sperformance on 16 economic and political indicators, divided into three clusters corresponding tothe three policy areas of governance, economic policy, and investment in people. Eligible countriesmust score above the median on half of the indicators in each area. One indicator -- control ofcorruption -- is a pass/fail measure: a country must score above the median on this single measureor be excluded from further consideration. The Administration proposed to create a new entity -- the Millennium Challenge Corporation (MCC) -- to manage the initiative. The MCC would be supervised by a Board of Directors chairedby the Secretary of State. Several other key issues, including the number of participating countriesand monitoring mechanisms, have yet to be determined. Congress plays a key role in the policy initiative by considering authorization and funding legislation, and confirming the head of the proposed MCC. A number of issues have been addressedin the congressional debate, including country eligibility criteria, performance indicators used toselect participants, creation of the new MCC, and budget considerations. Congress approvedlegislation (Division D of P.L. 108-199 ) authorizing the new program and appropriating $994million for the first year. The measure creates a Corporation, as proposed, but alters the compositionand size of the Board of Directors. It further limits the extent to which lower-middle incomecountries in FY2006 and beyond can participate in the MCA so that more resources will be availablefor the poorest nations. The legislation creates a roughly 90-day period after the Corporation isestablished for consultation and public comment before selecting MCA participants for FY2004. It is expected that the Board will name the initial MCA eligible countries in May 2004.

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The 112 th Congress is in the midst of considering an omnibus farm bill that will establish the direction of agricultural policy for the next several years. Many provisions of the current farm bill (the Food, Conservation, and Energy Act of 2008, P.L. 110-246 ) expire this year. The Senate Agriculture Committee approved its version of the 2012 omnibus farm bill on April 26, 2012 (Agriculture Reform, Food and Jobs Act of 2012), and officially filed the measure, S. 3240 , on May 24, 2012. After the bill was filed, more than 300 amendments were proposed for consideration on the Senate floor. By mid-June, an agreement was reached to limit the debate to 77 of the proposed amendments, of which 45 were adopted between June 19 and June 21. The full Senate approved S. 3240 , as amended, by a vote of 64-35 on June 21. The House Agriculture Committee completed markup of its version of the farm bill ( H.R. 6083 , the Federal Agriculture Reform and Risk Management Act of 2012) on July 11, 2012, and approved the amended measure by a 35-11 vote. Nearly 100 amendments were offered for committee consideration, of which nearly half were adopted by the committee. The House bill was officially filed and reported by the committee on September 13, 2012. Within their 12 titles, the five-year House and Senate farm bills would reshape the structure of farm commodity support, expand crop insurance coverage, consolidate conservation programs, revise the Supplemental Nutrition Assistance Program (formerly food stamps), and extend authority to appropriate funds for many U.S. Department of Agriculture (USDA) discretionary programs through FY2017. Following are summaries of the major similarities and differences within each of the 12 titles of the respective versions of the House Agriculture Committee-approved and Senate-passed 2012 farm bills. The summaries are followed by a comprehensive title-by-title comparison of all of the House and Senate provisions with each other and with current law or policy. The Congressional Budget Office (CBO) projects that the programs of the 2008 farm bill, if they were to continue, would cost nearly $1 trillion over the next 10 years. Compared to this "baseline," the Senate-passed farm bill, S. 3240 , would reduce spending by $23.1 billion (2.3%); and the House Agriculture Committee-reported bill, H.R. 6083 , would reduce it by $35.1 billion (-3.5%). The $23 billion 10-year reduction (or "score") in the Senate bill is consistent with a joint House-Senate Agriculture Committee proposal to the Joint Select Committee on Deficit Reduction in fall 2011. The $35 billion 10-year reduction in the House bill is consistent with reconciliation instructions in the House budget resolution for FY2013. The net reduction in each bill is composed of some titles receiving more funding than in the past, while other titles provide offsets for deficit reduction. Figure 1 illustrates the budgetary impacts of changes to each title in each bill, and the following table contains the data in tabular form. More background and detail on the budget available to write the farm bill, the CBO scores of each bill, and other budgetary issues is available in CRS Report R42484, Budget Issues Shaping a 2012 Farm Bill . Under both the Senate-passed ( S. 3240 ) and House Agriculture Committee-reported ( H.R. 6083 ) farm bills, farm support for traditional program crops is restructured by eliminating direct payments, the existing counter-cyclical price program, and the Average Crop Revenue Election (ACRE) program. Authority is continued for marketing assistance loans, which provide additional low-price protection at "loan rates" specified in current law (with an adjustment made to the cotton loan rate). Direct payments account for most of current commodity spending and are made to producers and landowners based on historical production of corn, wheat, soybeans, cotton, rice, peanuts, and other "covered" crops. Some of the 10-year, $50 billion in savings associated with the proposed elimination of direct payments would be used to offset the cost of revising farm programs and enhancing crop insurance in Title XI. Both bills provide programs for covered crops, except cotton, which would have its own program (see " Farm Bill Title XI, Crop Insurance "). Both bills borrow conceptually from current programs, revising (and renaming) them to enhance price or revenue protection for producers. The House bill is similar to the current mix of farm programs in that it retains producer choice between a counter-cyclical price program (renamed Price Loss Coverage or PLC) and a revenue program (renamed Revenue Loss Coverage or RLC). For PLC, the price guarantees ("reference prices") that determine payment levels are increased relative to parameters in the current program to better protect producers in a market downturn. For RLC, the guarantee is based on historical revenue at the county level, so losses are more likely to be covered than under the current ACRE, which calculates the guarantee at the state level. In contrast to the House bill, the Senate bill provides for only a revised revenue program called Agriculture Risk Coverage (ARC). It offers a slightly higher guarantee than in the House bill, plus an option for farmers to select coverage at either the county or individual farm level. Five disaster programs were established in the 2008 farm bill for weather-induced losses in FY2008-FY2011. Both S. 3240 and H.R. 6083 reauthorize four programs covering livestock and tree assistance for FY2012-FY2017. The crop disaster program from the 2008 farm bill (i.e., Supplemental Revenue Assistance, or SURE) is not reauthorized in either bill, but elements of it are folded into the new ARC in the Senate bill by allowing producers to protect against farm-level revenue losses (not included in House bill). S. 3240 also provides disaster benefits to tree fruit producers who suffered crop losses in 2012. Farm commodity programs have certain limits that cap payments (currently $105,000 per person) and set eligibility based on adjusted gross income (AGI, currently $500,000 per person for nonfarm income and $750,000 for farm income). The two bills diverge from current law and each other, with S. 3240 reducing the farm program payment limit to $50,000 per person for ARC and adding a $75,000 limit on loan deficiency payments (LDPs). The program payment limit under the H.R. 6083 is $125,000 for PLC and RLC, with no limit on LDPs. The Senate bill changes the threshold to be considered actively engaged and to qualify for payments, by effectively requiring personal labor in the farming operation. Both bills also tighten limits on AGI, with a combined AGI limit of $750,000 in S. 3240 and $950,000 in H.R. 6083 . For dairy policy, both bills contain similar, significant changes, including elimination of the dairy product price support program, the Milk Income Loss Contract (MILC) program, and export subsidies. These are replaced by a new program, which makes payments to participating dairy producers when the national margin (average farm price of milk minus average feed costs) falls below $4.00 per hundredweight (cwt.), with coverage at higher margins available for purchase. Another provision makes participating producers subject to a separate program, which reduces incentives to produce milk when margins are low. Federal milk marketing orders have permanent statutory authority and continue intact. However, S. 3240 (but not H.R. 6083 ) includes two provisions that require more frequent reporting of dairy market information and studies on potential changes to the federal milk marketing order system. The sugar program is left unchanged in both bills, with an exception in the Senate bill that advances the date (to February 1 from April 1) that USDA can increase the import quota. The current agricultural conservation portfolio includes over 20 conservation programs. The conservation titles of both the Senate-passed ( S. 3240 ) and House Agriculture Committee-reported ( H.R. 6083 ) farm bills reduce and consolidate the number of conservation programs while also reducing mandatory funding more than $6 billion over the 10-year baseline. Many of the larger existing conservation programs, such as the Conservation Reserve Program (CRP), the Environmental Quality Incentives Program (EQIP), and the Conservation Stewardship Program (CSP), are reauthorized by both bills with smaller and similar conservation programs "rolled" into them. In response to reduced demand and as a budget saving measure, the largest conservation program, CRP, is reauthorized with a reduced acreage enrollment cap using a step-down approach from the current 32 million acres to 25 million by FY2017 under both bills. CRP also is amended to include the enrollment of grassland acres similar to the Grasslands Reserve Program (GRP), which is repealed. These grassland acres are limited to 1.5 million acres in S. 3240 and 2 million acres in H.R. 6083 . EQIP, a program that assists producers with conservation measures on land in production, is reauthorized by both bills with a 5% funding carve-out for wildlife habitat practices (similar to the Wildlife Habitat Incentives Program, WHIP, which is repealed). The Senate-passed bill reduces EQIP a total of almost $1 billion over 10 years, while the House committee bill offers no reduction from the current $1.75 billion annually. CSP, another working land program, is reauthorized at a reduced enrollment level under both bills: 10.348 million acres annually under S. 3240 and 9 million acres annually under H.R. 6083 , down from 12.769 million acres annually under current law. Both bills create two new conservation programs—the Agricultural Conservation Easement Program (ACEP) and the Regional Conservation Partnership Program (RCPP)—out of several of the remaining programs. Conservation easement programs, including the Wetlands Reserve Program (WRP), Farmland Protection Program (FPP), and GRP, are repealed and consolidated to create ACEP. ACEP retains most of the program provisions in the current easement programs by establishing two types of easements: wetlands easements (similar to WRP) that protect and restore wetlands, and agricultural land easements (similar to FPP and GRP) that prevent non-agricultural uses on productive farm or grassland. The Agricultural Water Enhancement Program (AWEP), Chesapeake Bay Watershed program, Cooperative Conservation Partnership Initiative (CCPI), and Great Lakes basin program are repealed by both bills and consolidated into the new RCPP. RCPP uses partnership agreements with state and local governments, Indian tribes, farmer cooperatives, and other conservation organizations to leverage federal funding and further conservation on a regional or watershed scale. The Senate-passed bill adds the federally funded portion of crop insurance premiums to the list of program benefits that could be lost if a producer is found to produce an agricultural commodity on highly erodible land without an approved conservation plan or qualifying exemption, or converts a wetland to crop production. This prerequisite, referred to as conservation compliance, has existed since the 1985 farm bill and currently affects most USDA farm program benefits, but has excluded crop insurance since 1996. The House committee bill offers no comparable provision. The trade title of the farm bill deals with statutes concerning U.S. international food aid and agricultural export market development programs. Both S. 3240 and H.R. 6083 reauthorize all of the international food aid programs, including the largest, Food for Peace Title II (emergency and nonemergency food aid). Both bills contain amendments to current food aid law that place greater emphasis on improving the quality of food aid products (i.e., enhancing their nutritional quality). The Senate bill places new restrictions on the practice of monetization or selling U.S. food aid commodities in recipient countries to raise cash to finance development projects. In this regard, S. 3240 requires implementing partners such as U.S. private voluntary organizations or cooperatives to recover 70% of the U.S. commodity procurement and shipping costs. The Senate bill repeals the specified dollar amounts for nonemergency food aid required in current law (the "safe box"). In place of the safe box S. 3240 provides that nonemergency food aid be not less than 20% nor more than 30% of funds made available to carry out the program, subject to the requirement that a minimum of $275 million be provided for nonemergency food aid. The House bill places no limits on the practice of monetization, other than new reporting requirements, and fixes the amount of "safe box" nonemergency assistance at $400 million annually. Both bills reauthorize funding for the Commodity Credit Corporation (CCC) Export Credit Guarantee program and various agricultural export market promotion programs. S. 3240 reduces the value of U.S. agricultural exports that can benefit from export credit guarantees from $5.5 billion to $4.5 billion annually. The House bill retains the $5.5 billion level of guarantees. Both bills authorize CCC funding of $200 million annually for the Market Access Program (MAP), which finances promotional activities for both generic and branded U.S. agricultural products. MAP had been targeted in a number of deficit reduction proposals for elimination. Authorized CCC funding for the Foreign Market Development Program (FMDP), a generic commodity promotion program, continues in both bills at $34.5 billion annually through F2017. H.R. 6083 authorizes the Secretary of Agriculture to establish the position of Under Secretary of Agriculture for Foreign Agricultural Services, while S. 3240 calls for a study of the trade functions of USDA, noting that in implementing the study, the Secretary may include a recommendation for the establishment of an Under Secretary for Trade and Foreign Agriculture. Title IV of both S. 3240 and H.R. 6083 largely maintains the nutrition program policies and discretionary and mandatory funding that are contained in the Food and Nutrition Act of 2008 and other nutrition program authorizing statutes. Of the changes made, many are the same in the two bills, but the bills also differ in a number of ways, most notably in recognized cost savings associated with the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps). CBO estimates total 10-year budget savings of $4.0 billion in the Senate bill and $16.1 billion in the House bill. SNAP provisions in both bills include changes to the requirements for retailers who apply for authorization to accept SNAP and changes to some of the rules that govern participants' and retailers' redemption of SNAP benefits. Both bills provide additional mandatory funding for reducing SNAP trafficking (the sale of SNAP benefits for cash or ineligible goods), although the Senate provides a larger amount. In terms of eligibility for SNAP and the calculation of monthly benefit amounts, both bills identically change how a household's receipt of Low-Income Home Energy Assistance Program (LIHEAP) benefits affects the household's SNAP benefit calculation. However, the House bill also restricts categorical eligibility, repeals state performance bonuses, and clarifies the consideration of medical marijuana expenses. The House bill also makes changes to the nutrition assistance provided to the Northern Mariana Islands and Puerto Rico. Both bills increase Community Food Projects grants (the Senate by $5 million and the House by $10 million); the House bill also carves out $5 million of these grants for projects that incentivize low-income households to purchase fruits and vegetables. Both bills increase mandatory funding for the Emergency Food Assistance Program (TEFAP), the Senate by $174 million over 10 years, and the House Committee by $270 million (according to CBO). Both bills would limit eligibility for the Commodity Supplemental Food Program (CSFP) to low-income elderly participants, phasing out eligibility for low-income pregnant and post-partum women, infants, and children. The Senate adds discretionary authority for a Healthy Food Financing Initiative, a financing mechanism to sustain and create food retail opportunities in communities that lack access to healthy food; and provides $100 million (over five years) in mandatory funding for Hunger-Free Communities Incentive Grants, which funds programs that provide incentives for SNAP participants' purchase of fruits and vegetables; neither of these programs are included in the House committee's bill. Within the child nutrition programs, the Senate bill includes authorization and funding to continue a whole grain pilot program and to begin a pulse crops pilot program, whereas the House bill does not include these pilots and eliminates the "fresh" requirement in the Fresh Fruit and Vegetable Program. Both bills include additional authorizations for farm-to-school efforts. The Consolidated Farm and Rural Development Act (also known as the ConAct) is the permanent statute that authorizes USDA agricultural credit and rural development programs. USDA serves as a lender of last resort by providing direct and guaranteed loans to farmers and ranchers who are denied direct credit by commercial lenders but have the wherewithal to repay the loan. Both the Senate and House bills make relatively small policy changes to USDA's credit programs. Both bills give USDA discretion to recognize (1) alternative legal entities to qualify for farm loans and (2) alternatives to meet a three-year farming experience requirement; and both bills increase the maximum size of down-payment loans. The Senate farm bill also updates and modernizes the ConAct's statutory language and organizes the various programs into separate subtitles (new Subtitle A is farm loans; Subtitle B is rural development; Subtitle C is general provisions). Generally, most of the revised ConAct provisions are substantially the same, but are renumbered and reorganized. The Senate bill also extends the number of years that farmers can remain eligible for direct farm operating loans, and eliminates term limits on guaranteed operating loans. The House bill's credit title does not restructure the ConAct nor change any term limits provisions. However, the House bill does create a new microloan program, increases the percentage of a conservation loan that can be guaranteed, and adds another lending priority for beginning farmers, among other changes. Other non-USDA credit programs—such as the Farm Credit Act, which establishes the Farm Credit System and Farmer Mac—could be part of the farm bill, but neither the House bill nor the Senate addresses these programs. Like Title V, discussed above, Title VI of S. 3240 is a restructuring of the ConAct, which provides permanent authority for USDA to carry out its portfolio of rural development programs. Title VI of H.R. 6083 makes funding authorization amendments to many existing rural development programs (at levels mostly lower than those of the Senate bill), but generally offers no new provisions, nor does it significantly modify current programs authorized under the ConAct and the Rural Electrification Act. The House bill does include a new provision directing the Secretary of Agriculture to begin collecting data on the economic effects of the projects that USDA Rural Development funds, and directs the Secretary to develop simplified applications for funding. The Senate bill consolidates various rural water and wastewater assistance programs and the Community Facilities loan and grant program into a new Rural Community Program category, and establishes criteria for which rural communities will receive priority in making loan and grant awards. The restructuring of the ConAct also eliminates several business programs, but consolidates many of their objectives into a broad program of Business and Cooperative Development grants. Separately, S. 3240 provides a total of $115 million in mandatory rural development funding, including funds for the Value-Added Producer Grant Program ($12.5 million annually for FY2014-FY2017) and the Rural Microentrepreneur Assistance Program ($3.75 million annually for FY2014-FY2017), and $50 million in mandatory spending for pending rural development loans and grants. The House bill contains no mandatory spending authorization. S. 3240 retains the definition of "rural" and "rural area" for purposes of program eligibility and makes it the basis for all rural development programs. The definition of "rural area" for electric and telephone programs has been eliminated, and becomes the same as for other rural programs. The bill retains the 2008 farm bill provision permitting communities that might otherwise be ineligible for USDA Rural Development funding to petition USDA to designate their communities as "rural in character," thereby making them eligible for program support. S. 3240 also eliminates the existing statutory definition of "rural" and "rural areas" for water and waste water programs and community facilities, but permits areas currently deemed as rural to remain eligible for these programs, unless USDA determines that they are no longer "rural in character." Also included in both the House and Senate bills is reauthorization of funding for programs under the Rural Electrification Act of 1936, including the Access to Broadband Telecommunications Services in Rural Areas Program and the Distance Learning and Telemedicine Program. The Senate bill also establishes a new grant program for the Access to Broadband Telecommunications Services in Rural Areas Program in addition to its current loan guarantee program. The Delta Regional Authority and the Northern Great Plains Regional Authority are reauthorized by both bills, but the Senate bill makes various technical changes to the organizational structure and operation of the two authorities. USDA is authorized under various laws to conduct agricultural research at the federal level, and provides support for cooperative research, extension, and post-secondary agricultural education programs in the states. Both bills reauthorize funding for these activities for FY2013-FY2017, subject to annual appropriations, and amend authority so that only competitive grants can be awarded under certain programs. In both bills, mandatory funding is increased for the Specialty Crop Research Initiative ($416 million over 10 years) and the Organic Agricultural Research and Extension Initiative ($80 million over 10 years). Also, mandatory funding is continued for the Beginning Farmer and Rancher Development Program in both the Senate bill ($85 million) and House bill ($50 million). New in S. 3240 is mandatory funding of $100 million to establish the Foundation for Food and Agriculture Research, a nonprofit corporation designed to supplement USDA's basic and applied research activities. It will solicit and accept private donations to award grants for collaborative public/private partnerships with scientists at USDA and in academia, nonprofits, and the private sector. General forestry legislation is within the jurisdiction of the Agriculture Committees, and past farm bills have included provisions addressing forestry assistance, especially on private lands. Both the Senate-passed and House Agriculture Committee-reported farm bills generally repeal, reauthorize, and modify existing programs and provisions under two main authorities: the Cooperative Forestry Assistance Act (CFAA), as amended, and the Healthy Forests Restoration Act of 2003 (HFRA), as amended. Most federal forestry programs are permanently authorized, and thus do not require reauthorization in the farm bill. The Senate bill, however, amends several forestry assistance programs by replacing their permanent authority to receive annual appropriations of such sums as necessary with a set level of appropriations through FY2017. The House bill also limits permanent authority for some programs, but in fewer instances than the Senate bill. Both bills repeal programs that have expired or have never received appropriations. Other provisions in both bills include reauthorizing stewardship contracting, requiring revised strategic plans for forest inventory and analysis, and adding alternatives for addressing insect infestations and disease. An energy title first appeared in the 2002 farm bill, and was both extended and expanded by the 2008 farm bill. USDA renewable energy programs have been used to incentivize research, development, and adoption of renewable energy projects, including solar, wind, and anaerobic digesters. The primary focus of USDA renewable energy programs has been to promote U.S. biofuels production and use. Cornstarch-based ethanol dominates the U.S. biofuels industry. However, the 2008 farm bill attempted to refocus U.S. biofuels policy initiatives in favor of non-corn feedstocks; the most critical program to this end is the Biomass Crop Assistance Program (BCAP), which assists farmers in developing nontraditional crops for use as feedstocks for the eventual production of cellulosic ethanol. All of the major Title IX energy programs expire at the end of FY2012 and lack baseline funding going forward. Both the Senate-passed bill ( S. 3240 ) and the House Agriculture Committee-reported measure ( H.R. 6083 ) extend most of the renewable energy provisions of Title IX, with the exception of the Repowering Assistance Program, the Rural Energy Self-Sufficiency Initiative, and the Renewable Fertilizer Study, which are repealed by both bills. In addition, S. 3240 repeals the Forest Biomass for Energy Program, while the House bill repeals the Biofuels Infrastructure Study. The primary difference between the House and Senate bills is in the source of funding. The Senate bill contains $800 million in new mandatory funding and authorizes $1.140 billion in appropriations for the various Title IX programs over the FY2013-FY2017 period. In contrast, H.R. 6083 contains no mandatory funding for Title IX programs, while authorizing $1.355 billion subject to appropriations. In addition, the House bill prevents USDA from spending Rural Energy for America (REAP) program funds on retail blender pumps and eliminates all support for the collection, harvest, storage, and transportation (CHST) component of BCAP, severely limiting its potential effectiveness as an incentive to produce cellulosic feedstocks. The horticulture titles of both S. 3240 and H.R. 6083 reauthorize many of the existing farm bill provisions supporting farming operations in the specialty crop and certified organic sectors. CBO estimates a total increase in mandatory spending of $360 million (FY2013-FY2017) for Title X in the Senate bill and $428 million in the House bill. Many of the Title X provisions fall into the categories of marketing and promotion; organic certification; data and information collection; pest and disease control; food safety and quality standards; and local foods. The House bill also includes several provisions that are not in the Senate bill that would provide exemptions from certain regulatory requirements under some laws, including the Federal Insecticide, Fungicide, and Rodenticide Act, the Clean Water Act, and the Endangered Species Act, among other modifications. Provisions affecting the specialty crop and certified organic sectors are not limited to Title X, but are contained within several other titles of the farm bill. These include programs in the research, nutrition, and trade titles, among others. Both the House and Senate bills reauthorize (and in some cases provide for increased funding for) several key programs benefitting specialty crop producers, including the Specialty Crop Block Grant Program, plant pest and disease programs, USDA's Market News for specialty crops, the Specialty Crop Research Initiative (SCRI), and also the Fresh Fruit and Vegetable Program (Snack Program) and Section 32 purchases for fruits and vegetables under the nutrition title. Both bills also reauthorize most programs benefitting certified organic agriculture producers, including continued support for USDA's National Organic Program (NOP) and development of crop insurance mechanisms for organic producers, Organic Production and Market Data Initiatives (ODI), and research programs such as the Organic Agriculture Research and Extension Initiative (OREI) and the Organic Transitions Program (ORG) under the Integrated Research, Education, and Extension Competitive Grants Program. One exception is that the House bill would repeal the National Organic Certification Cost Share Program (NOCCSP), while the Senate would maintain that program. Programs in other farm bill titles benefitting specialty crop and certified organic producers also include the Value-Added Producer Grant Program, Technical Assistance for Specialty Crops (TASC), the Market Access Program (MAP), and most conservation programs (including assistance specifically for organic producers), among other programs, within the crop insurance, credit, and miscellaneous titles. Title X and other titles in both the House and Senate bills also include provisions that would expand opportunities for local food systems and also beginning farmers and ranchers. For example, both bills reauthorize and expand the scope and overall funding for USDA's farmers' market program, which would be renamed the Farmers' Market and Local Food Promotion Program. Other provisions supporting local food producers are within the horticulture, nutrition, rural development, and research titles, among others. Both bills increase funding for crop insurance relative to baseline levels by making several changes to the existing federal crop insurance program, which is permanently authorized by the Federal Crop Insurance Act. The federal crop insurance program makes available subsidized crop insurance to producers who purchase a policy to protect against individual farm losses in yield, crop revenue, or whole farm revenue. An amendment to S. 3240 adopted during floor debate reduces crop insurance premium subsidies by 15 percentage points for producers with average adjusted gross income greater than $750,000. With cotton not covered by the farm revenue programs established in Title I of both bills, a new crop insurance policy called Stacked Income Protection Plan (STAX) is made available in both bills for cotton producers. Producers could purchase this policy alone or in addition to their individual crop insurance policy, and the indemnity from STAX would pay all or part of the deductible under the individual policy. STAX sets a revenue guarantee based on expected county revenue. For other crops, a similar type of policy called Supplemental Coverage Option (SCO), based on expected county yields or revenue, is made available by both bills as an additional policy. The farmer subsidy as a share of the policy premium is set at 80% for STAX and 70% for SCO. Additional crop insurance changes in both bills are designed to expand or improve crop insurance for other commodities, including specialty crops. Provisions in both bills revise the value of crop insurance for all organic crops to reflect prices of organic (not conventional) crops. The bills require USDA to conduct more research on whole farm revenue insurance with higher coverage levels than currently available. Studies are also required on insuring (1) specialty crop producers for food safety and contamination-related losses, (2) swine producers for a catastrophic disease event, (3) producers of catfish against reduction in the margin between the market prices and production costs, (4) commercial poultry production against business disruptions caused by integrator bankruptcy, and (5) poultry producers for a catastrophic event (House bill only). A provision in S. 3240 makes payments available to producers who purchase private-sector index weather insurance, which insures against specific weather events and not actual loss. A peanut revenue insurance product also is mandated. For conservation purposes, a "sod saver" provision in Title XI of S. 3240 reduces crop insurance subsidies and noninsured crop disaster assistance for the first four years of planting on native sod acreage. The same provision in the House bill would apply only to the Prairie Pothole National Priority Area (i.e., portions of Iowa, Minnesota, Montana, North Dakota, and South Dakota). In the Senate bill only, crop insurance premium subsidies are available only if producers are in compliance with wetland conservation requirements (goes into effect immediately) and conservation requirements for highly erodible land (within five years). Title XII of S. 3240 and H.R. 6083 includes provisions that cover three areas: socially disadvantaged and limited-resource producers; livestock; and other miscellaneous. Both bills extend authority through FY2017 for the Office of Small Farms and Beginning Farmers and Ranchers, which was established in the 2008 farm bill to ensure that minorities and limited-resource producers have access to all USDA programs. They also add military veteran farmers and ranchers as a qualifying group. In addition, the bills establish a military veterans agricultural liaison within USDA to advocate for and to provide information to veterans. Both bills reauthorize funding for the USDA Office of Advocacy and Outreach, which assists socially disadvantaged and limited-resource producers, and both establish an Office of Tribal Relations to coordinate USDA activities with Native American tribes. Both S. 3240 and H.R. 6083 make available higher coverage levels under the Noninsured Crop Assistance Programs, prohibit attendance at animal-fighting events, and include grants to promote the U.S. maple syrup industry and for technological training for farm workers. Within its livestock provisions, Title XII of S. 3240 renews the trichinae certification and aquatic animal health programs that were established in the 2008 farm bill; establishes a grant program for research on brucellosis, bovine tuberculosis, and other priority animal diseases; sets up a grant program to study the eradication of feral swine; and establishes a competitive grant program to improve the sheep industry. Title XII of H.R. 6083 includes identical provisions for the trichinae certification and aquatic animal health programs, but does not contain the grant provisions for the animal disease initiative, the sheep industry, and feral swine eradication that are in S. 3240 . H.R. 6083 includes a provision to repeal regulations on livestock and poultry practices that USDA finalized on February 7, 2012. Within 90 days of enactment, USDA is required to repeal regulations on the definitions of additional capital investments and suspension of delivery of birds, and on applicability of live poultry and the 90-day notification regulation for suspension of delivery of birds. The House bill also requires that USDA submit to Congress reports on how to comply with the World Trade Organization's ruling on country-of-origin labeling and how to meet the needs of small and very small meat and poultry growers and processors. H.R. 6083 reauthorizes funding for the National Sheep Industry Improvement Center, subject to appropriations. These provisions are not included in S. 3240 . Other miscellaneous provisions in Title XII of H.R. 6083 , but not in S. 3240 , are the High Plains Water Study; prohibitions on closing Farm Service Agency offices with high workloads; flood protection for the Missouri River basin; and a prohibition that states may not establish production standards that would prevent interstate sales of agricultural goods. Provisions in S. 3240 that are not in H.R. 6083 include clarifications of conditions for releasing data gathered by USDA to state or local government agencies; an increase in the population threshold for the definition of "rural" and "rural areas"; an increase in administrative expenses for three regional development commissions that were established by the 2008 farm bill; and a provision to remove Canada geese from National Park Service lands near airports to diminish flight safety risks. In addition, S. 3240 repeals the 2008 farm bill provision that made catfish an amenable species subject to inspection by USDA and animal welfare provisions that exempt household pets from some exhibition regulations. Two provisions included in Title XII of S. 3240 that are unrelated to food and agriculture policy are a prohibition on federal funding for presidential nominating conventions and a requirement for three reports on sequestration under the Budget Control Act of 2011 ( P.L. 112-25 ).

Congress periodically establishes agricultural and food policy in an omnibus farm bill. The 112th Congress faces reauthorization of the current five-year farm bill (the Food, Conservation, and Energy Act of 2008, P.L. 110-246) because many of its provisions expire in 2012. The 2008 farm bill contained 15 titles covering farm commodity support, horticulture, livestock, conservation, nutrition assistance, international trade and food aid, agricultural research, farm credit, rural development, bioenergy, and forestry, among others. The Senate approved its version of the 2012 omnibus farm bill (S. 3240, the Agriculture Reform, Food, and Jobs Act of 2012) by a vote of 64-35 on June 21, 2012. Subsequently, the House Agriculture Committee conducted markup of its own version of the farm bill (H.R. 6083, the Federal Agriculture Reform and Risk Management Act of 2012) on July 11, 2012, and approved the amended bill by a vote of 35-11. Floor action on the House farm bill is pending. Within the 12 titles of S. 3240 and H.R. 6083, both farm bills would reshape the structure of farm commodity support, expand crop insurance coverage, consolidate conservation programs, revise the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and extend authority to appropriate funds for many U.S. Department of Agriculture (USDA) discretionary programs through FY2017. Among the major differences in the two farm bills is how each would restructure the farm safety net. Both farm bills borrow conceptually from current programs, by revising (and renaming) them to enhance price or revenue protection for producers. The House farm bill is similar to the current mix of farm programs in that it retains producer choice between a counter-cyclical price program and a revenue enhancement program, while the Senate farm bill provides for a revised revenue program with a slightly higher guarantee than in the House farm bill. The Congressional Budget Office (CBO) projects that the programs of the 2008 farm bill, if they were to continue, would cost nearly $1 trillion over the next 10 years. Compared to this "baseline," the Senate-passed farm bill would reduce spending by $23.1 billion and the House Agriculture Committee-reported farm bill would reduce it by $35.1 billion, both over the same 10-year horizon. Explaining much of the $12 billion difference in estimated savings between the two farm bills are provisions in the nutrition title of the House bill that would affect program eligibility for SNAP. This report contains a detailed summary of the major similarities and differences between the House and Senate 2012 farm bills and also provides a side-by-side comparison of every provision in the two farm bills and how these provisions relate to current federal law or policy.

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Inland waterways are a significant component of the nation's marine transportation system. These waterways carry approximately one-sixth of the national volume of intercity cargo on 25,000 miles of commercially active inland and intracoastal waterways. Included in this total are approximately 12,000 miles of fuel-taxed federal waterways known as the Inland Waterway System (IWS), which are managed by the U.S. Army Corps of Engineers (Corps). These waterways cover 38 states and handle approximately half of all inland waterway freight (or one-twelfth of all national freight). The Corps develops, operates, and maintains the infrastructure of these commercial waterways (e.g., navigation channels, harbors, locks, and dams), and also maintains and regulates the channel depths through dredging and water management. Costs for maintenance and construction on inland waterways are funded by the Corps (through appropriations) and the commercial user industry (through user fees paid to the federal government). The Corps pays for 100% of the cost for studies and for operations and maintenance on the IWS, while the cost for new construction or major rehabilitation (currently defined as any upgrade in excess of $8 million) is shared equally between the Corps and the commercial industry. Congress is faced with competing proposals relating to future financing for inland waterway system investments, including who will finance what investments, and at what level. The current revenue source, a set tax on fuel agreed to in the mid-1980s, is insufficient to cover the nonfederal costs of major capital expenditures on inland waterways. This has in some years resulted in federal taxpayers covering more than half of these costs. The ongoing shortfall is currently limiting the number of new and ongoing inland waterway construction projects, and is expected to continue to do so unless changes to the financing system are enacted by Congress. Recent proposals highlight a number of issues associated with inland waterways. On multiple prior occasions, the executive branch has proposed to phase out the fuel tax in favor of lock usage fees, but these efforts have been rejected by Congress. More recently, the user industry proposed and continues to favor a plan that includes increases to the existing fuel tax in combination with an increase in the overall federal share for inland waterway costs. The use of inland waterways for commercial transport predates the founding of the nation itself. Before the onset of rail and highway transport, inland waterways were a primary means of transporting many goods. Through the early 1800s, inland waterway development was left to the states, until the Supreme Court gave the United States authority over interstate commerce in 1824. Shortly thereafter, the federal government began funding and support for waterways to benefit commerce. Improvements in other forms of transportation (rail and highway) have decreased overall reliance on inland waterways as a means of commercial freight transportation, but these waterways remain a significant part of the nation's transportation mix for many commodities. Annually, inland waterway traffic on the federal IWS accounts for 4%-5% of total commercial tonnage shipped. While in terms of tonnage, inland waterways are a relatively small part of the nation's overall freight transportation network, waterways remain an important transportation route in some regions of the country, especially those that rely on movement of bulk goods over long distances. In these areas, the percentage of commercial tonnage shipped by barge, especially for specific commodities, is much higher. Along with freight rail, inland waterways are a primary means of transport for the nation's grain and oilseed exports, and for bulk products such as coal, petroleum, chemicals, processed metals, cement, sand, and gravel. Although previous estimates by the Corps and others projected that inland waterway traffic would increase, actual traffic on inland waterways has remained somewhat flat over the last 20 years in terms of both tonnage and ton-miles. At the same time, overall freight tonnage for all modes of domestic freight shipping increased at an average annual rate of 1.2% from 1997 to 2007, and is expected to continue to increase. The Department of Transportation projects that overall freight tonnage will double over the next 25 years, with inland waterway traffic projected to increase at a rate significantly less than that projected for rail and highway shipping. The system of fuel-taxed inland and intracoastal waterways is displayed in Figure 1 . Inland waterway tonnage relative to other modes of freight transit is shown in color in Figure 2 . As Figure 2 indicates, almost all of the tonnage (approximately 90%) transported on inland waterways comes through the Mississippi and Ohio River System, primarily through bulk shipping on barges. The federal government invests in inland waterways because of the value of the IWS to the nation. The federal government first began to invest in inland waterways in the early 1800s. Over time, this gave way to a significant federal investment in the form of full funding for investigations, operations and maintenance, and construction costs funded through the U.S. Army Corps of Engineers. However, legislation in the 1970s and 1980s changed this system and created user cost-sharing requirements for a subset of these costs. Two pieces of legislation transformed inland waterway financing and created the framework for the current system: the Inland Waterways Revenue Act of 1978 ( P.L. 95-502 , 26 U.S.C. §9506) and the Water Resources Development Act (WRDA) of 1986, as amended ( P.L. 99-662 , 26 U.S.C. §4042). These two laws underpin the current financing system for Corps inland waterway projects. Prior to these laws, investments had been entirely funded by the federal government as a result of established policies (see box below). Together, the acts of 1978 and 1986 established a fuel tax on commercial barges, cost-share requirements for inland waterway projects, and a trust fund to hold these revenues and fund investments in construction. The overall effect of these changes was a greater financial and decision-making responsibility for commercial operators on the inland waterway system. The federal policy of taxing fuel on commercial barge traffic was codified in the Inland Waterways Revenue Act of 1978. The act of 1978 also established the Inland Waterways Trust Fund (IWTF), which was initially funded by this fuel tax ($0.04 per gallon, beginning in FY1980, gradually increasing to $0.10 per gallon in FY1986), and established those waterways that are subject to the tax. However, no appropriations were authorized from the IWTF until later, in WRDA 1986. WRDA 1986 authorized additional increases to the 1978 act's fuel tax, which were set to rise to the current level of $0.20 per gallon beginning in 1994. (See Table 1 for the full schedule of tax increases.) Similar to the initial tax under the 1978 act, this tax was not indexed for inflation. Significantly, WRDA 1986 also laid out a cost-sharing process for inland waterway expenditures: it stipulated that inland waterway construction projects would be funded on a 50/50 basis, with 50% of the funds required for construction coming from the IWTF and the remaining 50% funded by the Treasury's General Revenue (GR) fund. On the other hand, operations and maintenance (O&M) costs were to remain a 100% federal responsibility. Under WRDA 1986, expenditures from the IWTF on a construction project are not automatic. They must be first authorized by Congress and then funded in annual discretionary appropriations. WRDA 1986 authorized an initial round of projects to be funded by the IWTF, and subsequent Water Resources Development Acts passed by Congress have authorized additional projects. Pursuant to the WRDA requirements, appropriations for these projects have been made by Congress in annual appropriations bills (see next section, " Inland Waterways Trust Fund: Trends and Issues Since 1986 ," for additional information on funding trends). As previously mentioned, WRDA 1986 retained the policy of 100% federal funding for inland waterway costs besides construction and major maintenance (i.e., expenditures for studies and operations and maintenance costs less than $8 million). While not technically part of the IWTF, the amount of federal dollars spent on O&M typically exceeds the amount spent on construction and major rehabilitation by a significant amount, and is often part of policy discussions related to inland waterways. WRDA 1986 also established the Inland Waterways Users Board (IWUB), a federal advisory committee subject to the Federal Advisory Committees Act. Section 302 of WRDA 1986 stipulates that the board be made up of 11 members representing shipping interests on the primary geographical areas served by inland waterways, with due consideration given to tonnage shipped on the respective waterways. The board was established to give commercial users an opportunity to inform the priorities for federal decision-making on IWTF projects. It meets regularly three times a year to develop and make recommendations to the Secretary of the Army and Congress regarding these investments. Between 1986 and 2011, the IWTF balance has varied considerably. Beginning in 1992, balances increased, reaching their highest level, $413 million, in 2002. On multiple occasions, the executive branch (through the Clinton Administration in 1996 and the Bush Administration in 2004) proposed to further increase fees on the user industry and require the IWTF to also fund some portion of operations and maintenance expenditures (in addition to the construction and major rehabilitation requirements). These proposals were not enacted by Congress. Beginning in FY2005, appropriations from the IWTF increased significantly as the Bush Administration requested and Congress appropriated greater investments in IWTF-funded projects. These increasing expenditures significantly exceeded annual fuel tax collections going into the IWTF and interest on the IWTF balance. (See Figure 3 .) Additionally, some projects significantly exceeded their original cost estimates, further stressing the trust fund. As a result, balances fell sharply from 2005 to 2010. In an effort to reduce stress on the IWTF and prevent the balance from falling to unsustainable levels, Congress has taken a number of "stopgap" measures in previous years. For instance, Congress exempted major rehabilitation projects from their usual cost-sharing requirements in the continuing resolution for FY2009 ( P.L. 110-329 ) and limited the projects with access to the IWTF in regular appropriations for FY2009 ( P.L. 111-8 ). Congress also provided inland waterway projects with more than $400 million in construction funding under the American Recovery and Reinvestment Act (ARRA, P.L. 111-5 ), and exempted this funding from IWTF cost-share requirements. These measures limited the costs to the IWTF for ongoing projects, while also allowing for the completion of these projects. More recently, Congress prohibited the Corps from entering into new contracts requiring IWTF funding since FY2009, and has limited enacted appropriations from the IWTF to expected fuel tax revenues for the coming year. Due in part to these stopgap measures, the trust fund balance appears to have stabilized. A summary of these trends is provided in Figure 3 . Without changes to IWTF financing, funding for new projects is expected to be extremely limited in the foreseeable future, with most of the funding expected to go to one project, Olmsted Locks and Dam on the Ohio River. Such a scenario would likely increase the current project backlog for Corps inland waterways projects. Long-term options and proposals to address this situation are discussed in the section below, " Inland Waterway Financing Proposals ." In addition to problems with the IWTF financing system, other concerns have been raised in recent years. Specifically, fuel tax payers (represented by the IWUB) have registered complaints related to structural inefficiencies and inequities in the Corps project planning process for inland waterways investments. Many users note that in the past, decisions within the executive branch have led to what some consider inefficient project implementation and use of tax dollars (in the form of cost escalation and schedule delays on some IWTF projects). As a partial response to these concerns, in FY2006 the Corps implemented several reforms to its project delivery process, including implementation of risk-based cost estimates and prioritized funding for projects with a high risk of cost overruns. While the IWUB generally recognized these changes as improvements, many continue to advocate for additional structural reforms to the planning process (see below section, " Inland Waterways Users Board Proposal "). Some highlight cost overruns and project planning issues at one project in particular, the Olmsted Locks and Dam project, as evidencing ongoing needs for reform associated with planning and oversight of the IWTF. The estimated cost for the Olmsted project has increased significantly over time, in part due to major changes to the project's design and method of construction. The previously authorized cost of $775 billion (authorized in P.L. 100-676 in 1988) was increased to $2.9 billion in the FY2014 continuing resolution enacted on October 16, 2013. As of January 1, 2013, the project was 49% complete. As of 2013, the lock components of the project were complete. The dam and demolition components of this project are expected to be completed in 2020 and 2024, respectively. Concerns related to the solvency of the IWTF and the equity of the financing system for fuel-taxed inland waterways have led to a number of recent proposals, first by the Bush Administration in 2008, then by the Obama Administration in 2009 and 2010. While these proposals were rejected by Congress, the Administration has recently presented Congress with a new recommendation that would raise revenues for the IWTF. The user industry, represented by the IWUB, recently adopted its own proposal, which differs significantly from the Administration's proposal. The user proposal would implement an increase to the current fuel tax, while also requiring an increased federal share for some inland waterway investments (e.g., dams). Past Administrations, including both the Bush and Obama Administrations, have submitted various proposals to increase commercial user fees on inland waterways. The most recent of these proposals are discussed below. In response to concerns regarding a potential IWTF shortfall, the Bush Administration in 2008 submitted a legislative proposal to Congress that would have instituted a lock usage fee to replace the fuel tax and generate additional revenue for the IWTF beginning in FY2009. The fee proposed to phase in charges to commercial barges of $50-$80 per lockage through the end of calendar year 2012 for lock chambers greater than 600 feet in length, and $30-$48 for chambers less than 600 feet. (See Table 2 .) Additionally, it proposed to tie IWTF balances to this user fee after the end of 2012 by raising lockage fees when the IWTF balance fell below $25 million, and lowering fees when the balance rose above $75 million. At the time, the Bush Administration argued that an approach which shifted the focus of user fees toward lock users would improve equity in waterborne commerce investments, since locks account for most IWS capital construction expenditures. Both the House and Senate appropriations committees rejected this approach, noting that a lock fee would pose an unacceptable burden on lock users, who would pay considerably more under the Bush proposal than they currently pay. Congress instead provided temporary relief through stopgap measures (as previously mentioned) and requested that the executive branch revisit its approach. The Obama Administration's budget requests to Congress have each proposed some form of new user fee for inland waterways. The FY2010 budget included a proposal similar to the aforementioned Bush Administration proposal, with the only major change being an option for the Corps to further increase fees at high-traffic locks. The Administration argued that such a fee would increase both efficiency (by reducing traffic at these locks) and revenues. In its consideration of FY2010 appropriations, Congress rejected the proposal. More recent Obama Administration budgets have continued to propose user fees to replace or supplement the fuel tax, while at the same time requesting an appropriation level based only on current-year expected fuel tax revenues ($75 million-$95 million in recent years). Congress has generally rejected the user fee proposals, but has agreed with the Administration's approach of limiting revenues in lieu of a long-term solution for inland waterways financing. Most recently, the FY2013 and FY2014 budgets each assumed approximately $80 million in new revenues resulting from an unspecified inland waterway user fee (potentially similar to the system described below). To date, none of these proposals have been enacted. In addition to the aforementioned budget proposals, the 2011 Obama Administration plan for deficit reduction included a new inland waterway financing structure among its recommendations to Congress. The proposal was notable for its specificity, as it included more detail than most of the aforementioned budget proposals. The Administration proposed to maintain the existing fuel tax and institute a "two-tier" annual fee for commercial shippers that would be set by the Corps to achieve a revenue target. Under the proposed structure, all inland waterway shippers would be subject to a new annual fee in addition to the existing fuel tax. Vessels using inland waterway locks would pay a higher fee than those not using locks. In its proposed legislation that would have instituted this fee, the Administration did not specify an amount for the fee, but instead stipulated revenue targets to be achieved, which are shown in Table 3 . The Obama Administration estimated that the 2011 proposal would result in approximately $1 billion in additional revenues for the IWTF over 10 years. While the balance of IWTF receipts available for appropriation would increase under this plan, the overall cost share between the General Revenue Fund of the Treasury and the IWTF would not change. The Obama Administration proposal included several other changes associated with the IWS, including the addition of 39 individual segments of varying lengths to the existing inland waterway system. Most of these proposed new segments are contiguous with the current system of inland waterways, but are not likely to achieve significant new revenues. As was the case with the aforementioned budget proposals, this fee was opposed by the user industry and was not enacted. In 2010, the Inland Waterways Users Board (IWUB) adopted and transmitted to Congress a proposal of its own. The report of its Inland Marine Transportation Systems Capital Investment Strategy Team, Inland Marine Transportation Systems Capital Projects Business Model (hereinafter referred to as the IWUB report), has come to represent the preferred alternative of the inland waterway user industry and has been introduced as legislation in the 112 th and 113 th Congress (see below section, " Issues for Congress "). Although the report was prepared at the request of the IWUB and credited participation by some Corps employees, it was not formally endorsed by the Corps or the Administration, and many of its primary recommendations have been opposed by the Obama Administration. Based on its own research and analysis and input by some Corps employees, the IWUB report recommended a new financing system and a number of other proposed changes for inland waterways. The report's primary recommendations can generally be divided into four categories: Increase User Fees . Increase the existing IWTF fuel tax by $0.06-$0.09 per gallon (30% to 45% above the current tax of $0.20 per gallon). The exact increase would depend on future fuel tax revenues. Increase the Federal Share of Inland Waterway Costs . Modify the subset of inland waterway investments subject to IWTF cost-share requirements (see Table 4 ) and make a corresponding overall shift to a larger portion of IWTF projects being funded solely by the General Revenue fund. Increase Overall Spending on Inland Waterways . Increase the overall investment on inland waterways. Other R ecommendations . Increase IWUB involvement in project planning and construction, and other recommendations, including the promulgation of regulations that would formally adopt the report's prioritization criteria. The most prominent component of the IWUB report is a proposed increase to the inland waterway fuel tax rate (currently $0.20 per gallon) of between $0.06-$0.09 per gallon. The increase would depend on actual fuel tax collections over the next several years (i.e., if collections are below recent averages, the tax would be higher). Overall, the report projects that the new tax level would generate approximately $112 million per year in fuel tax revenues for the IWTF, an increase over revenues from the last 10 years (approximately $85 million annually). Despite this increase, most of the new revenue would not be spent until future years, which would allow the IWTF to replenish its balances. As was the case with the original tax of $0.20 per gallon, the proposed increase to the fuel tax would not be indexed for inflation and would not include a capital recovery mechanism linking future taxes to expenditures. The IWUB report also proposes to shift more of the cost for inland waterway projects toward the federal government by increasing the number of investments on inland waterways that are funded solely by the federal government and decreasing the projects that are subject to 50/50 cost-sharing. Under the report's recommendations, all dam-related expenses (construction and rehabilitation), as well as rehabilitation projects on locks with costs less than $100 million, would be exempt from WRDA 1986 cost-sharing requirements. The IWUB report also proposes to establish a "cap" on the use of IWTF funds at authorized levels to discourage construction cost overruns. Critics point out that this is an additional hidden cost, as currently all cost overruns are funded equally between the federal government and the IWTF. Cumulatively, these changes would affect the overall cost-share for IWTF projects. The subset of projects no longer requiring cost sharing under the proposal would in effect increase the overall federal share for new and major rehabilitation investments over the next 25 years from current levels (50%) to approximately 70% for the same subset of projects. Differences between the current arrangement and the report's proposals are outlined by project type in Table 4 . The IWUB report proposes an overall increase in funding for inland waterways, including increases in funding both from the IWTF and the General Revenue fund. As proposed in the IWUB report, full funding for this suite of investments requires that annual expenditures (from the GR fund and the IWTF) average approximately $380 million, a significant increase over historical averages. This would necessitate an increase above average total expenditures since 1994, which have been approximately $234 million annually, and a significant increase over FY2011 expenditures, which were estimated to be approximately $170 million under the aforementioned "stopgap" measures. In the immediate future, most of the increase needed to fund the proposed portfolio of $380 million per year would be derived from the GR fund (in order to allow the trust fund balance to rebuild). For instance, to meet the IWUB proposal's requirements over the first five years, federal funding would need to be $1.33 billion, or 74% of the total funding required for the report's proposed projects over this time period. Around 2020, the proportion of funds derived from the trust fund would gradually increase, although federal requirements would still exceed 50% of the required investments. Although the report calls for an increased investment from both sources, on the whole, more new funding would be required from the federal government (through the GR fund) than the IWTF. Expected trends under the user proposal are shown in Figure 4 . The report proposed several reforms for improving cost-effectiveness of IWTF projects overseen by the Corps. These recommendations would increase the involvement of the IWUB in the Corps project delivery process for IWTF investments, thereby expanding the board's current roles and responsibilities. The report recommends appointing IWUB representatives to the project design teams for individual projects, where they would oversee planning for IWTF investments and report back to the IWUB. The report also recommends obtaining sign-off from the IWUB on plans for projects funded by the IWTF, as well as providing the IWUB with status updates on all relevant project planning documents. The IWUB seeks these changes as representatives of the nonfederal cost-sharers. However, the degree of involvement by nonfederal entities in development of studies by a federal agency could raise concerns related to conflicts of interest and whether the federal government may lose control of the planning process. The IWUB report also delineated a list of specific projects to receive funding once its proposed changes to the IWTF financing system are made. According to the report, projects were prioritized for selection based on a number of factors, including asset condition, likelihood of diminished performance, consequence of diminished performance, and the degree to which new projects would improve system performance. The report did not propose mandatory funding for these projects. That is, the final decision on whether projects in the list would receive funding would still need to be made by Congress in the annual appropriations process (or by the Corps when it allocates discretionary appropriations for a given year that are not specified at the project level by Congress). The proposal attempts to render selection of these projects more likely by recommending that the Corps promulgate selection criteria for inland waterway projects that are similar to those used in the report. In the past, some have advocated for changes that would shift costs away from the federal government and increase the user-financed share of inland waterway costs, by decreasing the federal share of either O&M (currently 100% federal) or construction (currently 50% federal). These groups have pointed to inequalities in spending relative to the value of certain segments of the inland waterway system. An analysis by the Congressional Budget Office (CBO) in the early 1990s found that the current uniform tax throughout the inland waterway system failed to cover fixed operational costs and thus distorted the actual costs of maintaining the system. CBO concluded that a user fee structure that recovered the true costs for inland waterway operations would increase economic efficiency of the system. Such a fee would result in increased costs for waterways with low traffic-to-expense ratios, since federal costs for maintaining these waterways are greater than fuel tax receipts currently generated. Figure 5 shows estimated fuel tax revenues on major inland waterway segments relative to O&M costs and ton-miles. Several entities have pushed for significant increases to inland waterway fees as a means to achieve savings to the federal government. Recent proposals include the following: A coalition of taxpayer watchdog and environmental nongovernmental organizations recommended in its 2011 "Green Scissors" report that Congress increase user contributions for inland waterway expenditures. The report estimated savings from this proposal to be $1 billion over the next five years. The National Commission on Fiscal Responsibility and Reform included in its initial list of illustrative savings a proposal to make the inland waterways "self-funding." The commission estimated $500 million in savings from this proposal over the next five years. In its 2011 budget options report, CBO included a proposal to increase user fees on inland waterways to a level sufficient to cover the costs of construction, operations, and maintenance. CBO projected that such a change would save approximately $4 billion over a 10-year horizon. These proposals, which would all institute significant increases in the user share of inland waterways financing, have generally stopped short of providing specific recommendations regarding the exact structure of the user fees that would raise new revenues. The aforementioned 1992 CBO report noted that new user fees could take a variety of forms beyond an increase to the fuel tax, but should better reflect the price to operate individual segments of inland waterways. Such a fee could take one or more forms, including annual licensing fees, congestion pricing, tolls, and/or lockage fees. The proposals discussed above differ in important ways and bring up a number of issues for Congress. Each proposal claims to resolve ongoing issues associated with the IWTF by proposing new investment levels and revenue sources that would fundamentally alter the current financing system for inland waterways. An overarching question for Congress is what level of new and ongoing investment is warranted (or desired) for the inland waterway system. Other questions include whether to change the current fuel tax (either in the form of an increase or decrease of the fuel tax, or incorporating a new fee) and whether to alter the cost-share arrangements for inland waterways projects. Changes to inland waterways financing have been enacted in the 113th Congress. Specifically, the Water Resources Reform and Development Act of 2014 ( P.L. 113-121 ) made limited changes to inland waterways. It authorized the project delivery recommendations of the IWUB proposal, made the federal government responsible for paying all rehabilitation costs less than $20 million out of the General Revenue fund (previously the General Fund only covered costs less than $8 million), and reduced the cost-sharing requirement for the Olmsted Locks and Dam Project from 50% from the IWTF to 15% from the IWTF (thereby increasing the proportion of project funding from the General Fund, and theoretically freeing up IWTF monies for other projects). It did not alter the inland waterways fuel tax. The bill also authorized efforts to provide more information about inland waterways policy options, including a study of the efficiency of revenue collection on the inland waterways system, a study on the potential use of bonds and/or new fees to finance the IWTF, and the convening of a stakeholder roundtable to review and evaluate alternatives related to the future of inland waterways. The House and Senate have also included changes related to inland waterways in recent appropriations bills. In its recommendation for FY2015, the House Appropriations Committee funded the Olmsted Project under the newly enacted WRRDA cost-sharing requirement of 15% (rather than 50%) from the IWTF. The reduced cost-sharing requirements for the Olmsted Project allowed the House to provide significant funding for other inland waterways construction projects (at the traditional 50/50 cost-share level) for the first time in five years. Most observers agree that the changes enacted in WRRDA will be insufficient to finance all of the needed waterway upgrades in the long-term. Therefore, some continue to support enactment of part or all of the aforementioned user proposals to address the long-term solvency of the IWTF. Stand-alone legislation of this type has been proposed in the 113 th Congress, including: H.R. 1149 (the Waterways Are Vital for the Economy, Energy, Efficiency, and Environment Act of 2013, also known as the WAVE4 Act), would authorize the primary recommendations of the IWUB proposal, including its project delivery recommendations and a $0.06 per gallon increase to the fuel tax. The bill would also authorize alterations to IWTF cost-sharing that would make the federal government responsible for 100% of dam construction and any rehabilitation expenditure less than $100 million. S. 407 , the Reinvesting in Vital Economic Rivers and Waterways Act of 2013 (RIVER Act) would, similar to H.R. 1149 , authorize the primary recommendations of the IWUB proposal, except the fuel tax increase would be $0.09 per gallon. Under this bill, the federal government would be responsible for 100% of dam construction and any rehabilitation expenditure less than $50 million. Some of the issues for Congress posed by these and other inland waterways proposals that could be considered by Congress are discussed below. A central issue for Congress is the level and urgency of infrastructure investments on federal waterways. Commercial users, including shippers and some agricultural interests, have argued that additional investment is justified because of aging infrastructure, the need for expanded capacity, and positive environmental externalities associated with inland waterway shipping compared to other forms of shipping. These users argue that the benefits of inland waterways are widespread. Their claims are countered by a number of other groups, including taxpayer and environmental advocacy groups, who argue against increased federal funding for inland waterways. These groups contend that the shipping industry often misrepresents or overstates the benefits of these investments and that major funding increases for inland waterway projects are not warranted. Despite these disagreements, most entities agree that the current system of financing inland waterways is inadequate to address future needs (regardless of the precise level of those needs). As a result of the recent funding drawdown, the Corps is expected to have appropriations for just one ongoing lock replacement project (Olmstead Lock on the Ohio River) through at least FY2016 under its current baseline for IWTF revenues. Barring a new source of revenue or supplemental federal appropriations by Congress, new or ongoing IWTF construction projects may be put on hold by the Corps, regardless of their urgency. The condition of Corps inland waterway facilities has been a primary driver behind the call for increased investment on inland waterways. The Institute for Water Resources (part of the Corps of Engineers) notes that the majority of locks in the United States are now past their intended design age of 50 years. The Corps has connected this aging infrastructure to an overall decline in the efficiency of its assets on inland waterways, noting that overall lock unavailability (both scheduled and unscheduled) has increased in recent years. In some cases, the user industry favors new lock construction and expanded capacity over ongoing maintenance for a number of reasons. Other groups argue against significant new investments for inland waterway projects. In arguing against new locks on the Upper Mississippi River, a coalition of environmental groups noted that while the design life of new investments is usually only 50 years, regular maintenance can extend the life of existing locks for an additional 50 years at a considerably lesser cost than that for new construction. These groups generally argue that the costs of new lock construction greatly exceed the benefits of reduced waiting time and lock unavailability, and point out that issues associated with most aging inland waterways infrastructure can be overcome by improved small-scale and nonstructural improvements. The Corps has in the past noted that the justification for most new navigation alternatives depends greatly on traffic forecasts from future trade scenarios, which can themselves be difficult to predict. These forecasts often depend on a number of interrelated variables, such as commodity prices, the overall price sensitivity of shippers, and outside factors such as increases or decreases in the efficiency of other modes of freight transit. The Corps has noted that total domestic freight traffic is expected to increase by approximately 70% by 2020, but recently has avoided projections specific to inland waterway freight traffic. The Department of Transportation projects that the majority of this increase in freight traffic will be on freight rail and highway traffic, with annual waterway traffic projected to increase 2% per year between 2010 and 2035. Shipping interests point out that an overall increase in the efficiency of inland waterways could lessen anticipated pressure on highway and rail shipments, or at least maintain viability of inland waterways compared to these other forms of freight shipping. Future lock upgrades or new construction would likely increase demand for inland waterways. However, the extent to which these upgrades would have an effect on demand would likely also depend on a number of other external factors. Some groups have countered industry requests for new lock construction based on traffic projections by noting that traffic has been flat or decreasing at some individual locks on high-traffic portions of the inland waterway system. Observers, including former Corps employees, have also criticized previous projections of traffic increases by the Corps and as overly optimistic. To date, the Corps has avoided use of projected future traffic increases as a basis for changes to the overall level of investments on inland waterways. Shipping interests also argue for increased investment in inland waterways because of the overall value of inland waterways compared to other modes of shipping. They point to studies that have concluded that barge shipping in particular constitutes a transportation alternative that is more efficient and environmentally friendly than other forms of shipping, such as highway and rail. For example, previous industry studies have calculated that railroads are 28.3% less fuel-efficient than inland waterways. Additionally, they argue that inland waterways contribute significantly fewer greenhouse gas emissions per mile than other forms of freight transportation. Studies have also noted other benefits, including reduced highway congestion and noise reduction. Taxpayer and environmental groups have questioned studies citing environmental benefits as a basis for new investments in barge shipping. For instance, groups have disagreed with industry fuel-efficiency calculations, noting that many industry studies have not taken into account technical factors such as the directional constraints of river flow, or "circuity." They argue that the use of a conversion factor to account for circuity creates a more accurate picture of fuel efficiency among various modes. They have also noted that using the fuel efficiency for "unit grain trains" instead of an average for all rail shipping would allow for a more accurate comparison of fuel efficiency between barge and rail shipping. Environmental groups also note that inland waterway projects can negatively affect riparian habitat and species by altering natural flows. Structural changes to rivers such as locks and dams (which can create sedimentation, increase turbidity, and lead to other reservoir-like effects) and levees (which separate rivers from flood plains) affect the natural state of these bodies of water. Additionally, waterway traffic may also cause bank erosion through wave action. Thus, increased construction and expansion of inland waterways can have negative environmental effects. In addition to deciding whether additional investment is needed, Congress may also consider changes to the system that finances these investments, including options for additional revenue that were recently proposed to Congress. These options are the IWUB's proposal (an increase to the fuel tax), the White House's proposal to the Joint Committee on Deficit Reduction (new annual fees in addition to the current fuel tax), or other options such as a lock usage fee or some kind of toll system. The IWUB-proposed increase to the existing fuel tax would be somewhat in keeping with the current system for user fees and revenue collection. Combined with increased federal responsibility for some inland waterway costs, the IWUB argues, this proposal would rebuild the trust fund balance and also fund new investments. While the tax would generate additional revenue, some taxpayer and environmental groups argue that the associated increases to federal cost share responsibilities tied to this proposal are unacceptable. The user industry has not indicated whether it would accept increases to the fuel tax without the proposed changes to cost-sharing arrangements. The user fees proposed by the Obama Administration in 2011 would address the issue of inadequate revenues by raising new fees from commercial users operating on the inland waterway system. Under the proposed new system of fees, all commercial users would continue to pay costs to utilize the inland waterway system in the form of fuel taxes and new fees for non-lock users, while lock users would also continue to pay the fuel tax, but would pay an even greater fee. The Administration also proposes to add new waterway segments to the list of fuel-taxed waterways on the inland waterway system, further raising revenues. The Administration argues that since commercial shippers are the primary beneficiary of waterway investments, they should continue to pay the costs for new capital investments. Furthermore, since lock users benefit the most, they should pay the most. The IWUB and Congress have previously rejected lock usage fees and similar proposals as posing unfair burdens on a subset of waterway users, and have opposed the new Administration proposal. The IWUB argues that targeting users of individual segments runs counter to the idea of the inland waterways as a whole "system" whose interconnectivity benefits the nation. Additionally, users note that major fee increases will significantly affect shippers operating within the system. Finally, the user industry has also argued against the proposed new fee because it delegates the authority to set fees to the Secretary of the Army, with certain restrictions. Previously, other means to raise revenue have also been considered by Congress. Early forms of the Inland Waterways Revenue Act of 1978 proposed a lock usage fee in lieu of the fuel tax included in the final bill, and other fees have subsequently been proposed as replacements or supplements to the fuel tax. In addition to lock usage fees, options such as annual licensing fees, systemwide and segment-specific tolls, ton-mile charges, and lock charges for the most congested portions of the system have previously been discussed as a potential means to raise revenues on inland waterways. Theoretically, some of these items could also be combined with the current fuel tax or other proposals. A separate financing concept, known as "capital recovery," was represented in the original 1978 legislation but was not enacted in the final bill. Under this framework, user fees would automatically adjust to recover capital investments by the government. For instance, user fees might increase when the IWTF balance drops below a certain level. Alternatively, annualized or per-use fees could be structured to recover capital costs at individual facilities over time. Such a fee could render less likely future shortfalls in the trust fund. It might also force users to narrow those projects pursued to only the most vital authorizations. The concept appears to be represented in the Obama Administration proposal, in which user fees would be tied to trust fund balances after FY2022. Users have previously argued against capital recovery, noting that it is difficult to plan for a tax that is constantly changing, and that such an increase could create an "upward spiral" of cost increases in which a shrinking user base is responsible for more and more costs. Congress could also consider additional means to increase the reliability of the revenue stream for inland waterways. An automatic adjustment for inflation has previously been discussed and could be incorporated into either a fuel tax increase or a new lockage fee. An inflation adjustment could provide additional future revenues and increase the real purchasing power of IWTF funds, which has decreased substantially since 1994. Some argue that such an automatic adjustment amounts to hidden (and therefore unacceptable) tax increases in the future. (See box above.) If no long-term solution is enacted to address the IWTF revenue shortfall, Congress may again be forced to take measures to ensure the solvency of the trust fund. Previously, some of these options have included capping IWTF withdrawals at the level of current year fuel tax revenues or putting a temporary hold on all new contracts and focusing on ongoing work. Both of these options would curtail investments on the inland waterway system to some extent. Congress might also stipulate that some or all of the subset of IWTF investments be exempted from WRDA 1986 cost-sharing requirements (similar to the exemption provided by Congress in FY2009 enacted appropriations). However, an exemption such as this would have an additional cost to taxpayers in the form of funds from the General Revenue account. A related question before Congress is whether the current cost-share arrangement for inland waterway projects is adequately balanced. As previously mentioned, WRDA 1986 established cost-sharing requirements for construction and major lock rehabilitation projects. Under WRDA 1986, construction and major rehabilitation were cost-shared, while "routine" operations and maintenance was a 100% federal cost. Several years later, WRDA 1992 ( P.L. 102-580 ) established that "major rehabilitation" should be defined as any upgrade requiring more than $8 million in total funding (among other requirements). The IWUB proposal would significantly modify current cost-sharing arrangements. As previously mentioned, it would change the existing cost-share arrangement to exclude dams and minor rehabilitation from cost-share requirements, shifting funding for these types of projects to 100% federal funding from the General Revenue stream. Notably, the IWUB reasons that costs for dams should be a federal responsibility because significant segments of the U.S. population benefit from these structures. The IWUB also proposes a new threshold for what it considers to be major lock rehabilitation, specifying $100 million as the new cut-off between routine operations and maintenance and major rehabilitation. In short, the IWUB proposes to redefine the $8 million threshold established for projects in WRDA 1992, and replace it with a threshold of $100 million. This would in effect greatly increase the number of maintenance and rehabilitation projects that are federally funded. Additionally, the report proposes to make all cost overruns for IWTF construction projects a 100% federal responsibility. While some note that this provides project managers within the Corps an added incentive to keep projects within budget, critics note that the change represents an additional hidden cost to the federal government that is not reflected in the IWUB report's estimates. The overall effect of the IWUB's proposed changes would be to shift the overall costs for inland waterway projects toward the federal government. Assuming the proposed project list in the IWUB report, CRS calculates that the cost-share arrangement for IWTF construction projects would shift from the current 50/50 arrangement to approximately 68% federal, 32% non-federal. While commercial waterway users and the IWUB favor this shift in order to distribute the cost-share burden, taxpayer and environmental groups note that the IWTF already benefits from significant federal support in the form of 100% federal funding for investigations (studies) and operations and maintenance. In recent years, this support has represented an additional $500 million-$650 million annually of federal expenses with no cost-sharing requirements. Assuming existing funding trends for other Corps work supporting inland waterways (e.g., operations & maintenance and investigations), CRS calculates that federal costs for inland waterways under the proposal could rise to more than 90% of the total costs for the system. Currently, the federal government is responsible for about 80%-85% of these costs annually, with some variation. As noted above, the Obama Administration's proposals have all recommended alteration of the type and amount of user fees levied but not the overall cost-share between the federal and nonfederal expenditures. Thus, although these proposals would require new revenues from users, appropriations from the IWTF would still need to be matched with funds from the General Revenue fund, and the cost-share structure for the IWTF system would remain at 50/50. As previously noted, some have argued in favor of shifting cost shares away from the federal government and increasing user responsibility not only for construction, but also for operations and maintenance of inland waterways. These groups, including some of the aforementioned environmental and taxpayer interest groups, have argued that waterway users should not only pay for 50% of construction and major rehabilitation costs, but also pay for some or all operations and maintenance costs, which are currently fully funded by the general treasury revenues. While Congress has in the past rejected these proposals, they may once again be considered in the context of overall government cost-cutting efforts. The IWUB has also asked Congress to weigh in to provide reforms to Corps IWTF planning processes. Among other things, the IWUB proposed a number of reforms to increase its involvement and improve project prioritization. Industry users argue that many of these reforms will decrease the likelihood of cost overruns, which have in the past been a problem for IWTF projects. A previous study by the Corps concluded that in several cases, a number of factors contributed to cost overruns, including inaccurate construction schedules and costs, general cost escalation, and non-optimal funding. However, the degree of involvement by a non-federal entity in the planning and decision-making process could raise concerns related to conflicts of interest. A related item that may receive congressional attention is the Corps' method for prioritization of all inland waterway projects. As noted in the IWUB report, IWTF investments to date have usually been considered in isolation; that is, there is no formal set of criteria used to make decisions among investments competing for IWTF funds. Instead, these decisions are largely left to the Corps and the Administration (in the annual budget formulation process) and Congress (in the appropriations process). The IWUB proposes to alter this practice by adopting a priority ranking system, which is described in detail in the IWUB report. Significantly, the IWUB report recommends that this system be promulgated as a regulation. This could fundamentally affect the role of Congress in the project selection and funding process. Currently, Congress decides on project-specific authorizations and appropriations for Corps inland waterway projects. If a system for prioritizing investments, such as that recommended in the IWUB report, is promulgated as a regulation, the Corps would utilize these criteria to select projects for funding, and the role of Congress could be limited to providing project authorizations and overall funding levels. Such a role would be a departure from Congress's previous role in directing Corps projects, although some might argue that it is consistent with the federal approach to project allocations for other agency programs, such as the Environmental Protection Agency's state revolving fund programs for drinking water and wastewater.

Inland waterways are a significant part of the nation's transportation system. Because of the national economic benefits of maritime transport, the federal government has invested in navigation infrastructure for two centuries. Commercial barge shippers and other waterway users receive significant support through federal funding for operational costs, capital expenditures, and major rehabilitation on inland waterways. Since the Water Resources Development Act of 1986, expenditures for construction and major rehabilitation projects on inland waterways have been cost-shared on a 50/50 basis between the federal government and commercial users through the Inland Waterways Trust Fund (IWTF). Operations and maintenance costs for inland waterways (which typically exceed construction and major rehabilitation costs) are a 100% federal responsibility. Future financing for the inland waterway system is uncertain. The IWTF is supported by a $0.20 per gallon tax on commercial barge fuel, but its balance has declined significantly since 2005 due to a combination of increased appropriations, cost overruns, and decreased revenues. Without changes to the current financing system, IWTF spending is likely to be limited. The Obama Administration recommends replacing the fuel tax with user fees that would increase revenues and potentially allow for more spending on inland waterways projects. Similar to prior administrations, the Obama Administration has regularly submitted proposals to Congress to raise inland waterways user fees. Congress and industry interests have rejected these proposals. In 2010, the Inland Waterways Users Board (IWUB), a federal advisory committee advising the U.S. Army Corps of Engineers on inland waterways, endorsed an alternative proposal that is supported by many barge industry interests. The proposal would increase the fuel tax by $0.06-$0.09 per gallon, but would require the federal government to cover all project costs for dams and rehabilitation that are currently shared with the IWTF. To date, no major changes to the inland waterway financing system have been enacted. The user industry (including the barge industry and agricultural groups) argues that its recommended changes are necessary to shore up the trust fund, improve deteriorating infrastructure, and distribute costs equitably among beneficiaries (e.g., more funding for dams by federal taxpayer beneficiaries). The Obama Administration agrees that infrastructure upgrades are needed, but argues against shifting these costs to the federal government and instead proposes higher user fees. Some taxpayer and environmental groups favor increasing nonfederal costs not just for construction, but also for operation and maintenance expenses that are not cost-shared. Changes to inland waterways financing have been enacted in the 113th Congress. The Water Resources Reform and Development Act of 2014 (WRRDA, P.L. 113-121), enacted in June 2014, authorized changes to the project delivery process, altered cost-sharing requirements for some rehabilitation projects, and partially exempted from IWTF cost-sharing requirements a project (the Olmsted Locks and Dam) that has required the majority of IWTF appropriations in recent years. It did not alter the fuel tax or IWTF requirements for other projects. Two other bills in the 113th Congress, S. 407 and H.R. 1149, would attempt to address long-term issues with the IWTF by enacting much of the user proposal, including fuel tax increases of $0.09 and $0.06 per gallon, respectively. In considering legislation related to inland waterways, Congress may consider the appropriate cost share between the federal government and users, the appropriate type of user fee to fund the nonfederal share, preferred funding levels, and other related questions.

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Since its inception, Congress has used commemoratives to express public gratitude for distinguished contributions; dramatize the virtues of individuals, groups, and causes; and perpetuate the remembrance of significant events. The first commemoratives were primarily in the form of individually struck medals. During the 19 th century, Congress gradually broadened the scope of commemoratives by recommending special days for national observance; funding monuments and memorials; creating federal holidays; authorizing the minting of commemorative coins; and establishing commissions to celebrate important anniversaries. In the 20 th century, it became increasingly commonplace for Congress to use commemorative legislation to name buildings and other public works, scholarships, endowments, fellowships, and historic sites. This report provides a discussion of commemorative options available to Congress. These commemorative options are divided into those that require legislation and those that do not. Types of commemoratives requiring legislative action include naming federal buildings, including post offices; creating postage stamps; minting commemorative coins; awarding of Congressional Gold Medals; authorizing monuments and memorials, both in the District of Columbia and on federal land in other parts of the United States; establishing commemorative commissions; authorizing commemorative observances and federal holidays; and requesting presidential proclamations. Nonlegislative options include sending certificates of recognition, making floor speeches, and sending flags flown over the Capitol Building to constituents. Beginning in the 1960s, several initiatives were undertaken to reduce the number of commemoratives proposed through legislation. These initiatives were in response to concern that the legislative time spent on commemorative measures was excessive. Efforts to curb commemoratives can be divided into two categories: creating an advisory commission to recommend appropriate commemorations and amending congressional rules on the introduction and consideration of commemorative legislation. Between the 89 th Congress (1965-1966) and the 104 th Congress (1995-1996), several proposals were introduced to shift the responsibility of recommending commemorative celebrations to a presidential commission. First introduced in 1966, the proposed Commission on National Observances and Holidays would have served to review proposals for national observances and "report to the President with respect to any proposal for a national observance which, in the opinion of the Commission, is of national significance." In both the 89 th Congress and the 90 th Congress (1967-1968), measures were passed by the House, but no further action was taken by the Senate. In the 104 th Congress (1995-1996), the House adopted a new rule to reduce the number of commemorative bills and resolutions introduced and considered by the chamber. House Rule XII, clause 5, prohibits the introduction and consideration of date-specific commemorative legislation. Additionally, Republican Conference Rule 28 generally prohibits the Republican leader from scheduling honorific legislation, including commemoratives under suspension of the rules , a practice also addressed in a committee rule of the House Oversight and Government Reform Committee. As part of the rules adopted by the 104 th Congress, House Rule XII was amended to preclude the introduction or consideration of any bill, resolution, or amendment that "establishes or expresses a commemoration." The rule, which is still in effect, defines a commemoration as any "remembrance, celebration, or recognition for any purpose through the designation of a specified period of time." Further, in the House Rules Committee's section-by-section analysis of the House Rules resolution ( H.Res. 6 , 104 th Congress), the following explanation was provided of the rule's intent: The new ban on date-specific commemorative measures or amendments applies to both the introduction and consideration of any measure containing such a commemorative. This is intended to include measures in which such a commemorative may only be incidental to the overall purpose of the measure. Such measures will be returned to the sponsor if they are dropped in the legislative hopper. The prohibition against consideration also extends to any measures received from the Senate which contain date-specific commemorative [sic]. While it does not block their receipt from the other body, it is intended that such measures would not be referred to the appropriate committee of the House or be considered by the House. Instead, they would simply be held at the desk without further action. Should such a commemorative be included in a conference report or Senate amendment to a House bill, the entire conference report or Senate amendment would be subject to a point of order. While the ban does not apply to commemorative [sic] which do not set aside a specified period of time, and instead simply call for some form of national recognition, it is not the intent of the rule that such alternative forms should become a new outlet for the consideration of such measures. Thus, while they could be referred to an appropriate committee, it is not expected that such committees should feel obligated or pressured to establish special rules for their release to the House floor. Nor should it be expected that the Rule [sic] Committee should become the new avenue for regular waivers of the rule against date specific commemorative [sic]. Such exceptions should be limited to those rare situations warranting special national recognition as determined by the Leadership. In relation to the current operation of House Rule XII, clause 5, the House Republican Conference adopted a rule (Rule 28 (6)) that generally prohibits the Republican leader from scheduling "any bill or resolution for consideration under suspension of the Rules which ... expresses appreciation, commends, congratulates, celebrates, recognizes the accomplishments of, or celebrates the anniversary of, an entity, event, group, individual, institution, team or government program; or acknowledges or recognizes a period of time for such purposes.... " Additionally, the House majority party leadership has issued protocols "intended to guide the majority leadership in the scheduling and consideration of legislation on the House floor." Included in the protocols is guidance on possible exemptions to Conference Rule 28. A resolution of bereavement, or condemnation, or which calls on others (such as a foreign government) to take a particular action, but which does not otherwise violate the provisions of Rule 28 is eligible to be scheduled under suspension of the Rules. Party conference rules and protocols, however, are not enforceable by points of order on the House floor, although they may reflect a general reluctance on the part of the majority party to schedule any legislation with commemorative intent. In addition, in the 114 th Congress, the House Committee on Oversight and Government Reform (which has jurisdiction over holidays and celebrations) adopted a new committee provision (which was retained in the 115 th Congress). Its Rule 13(c) states, The Chairman shall not request to have scheduled any resolution for consideration under suspension of the Rules, which expresses appreciation, commends, congratulates, celebrates, recognizes the accomplishments of, or celebrates the anniversary of, an entity, event, group, individual, institution, team or government program; or acknowledges or recognizes a period of time for such purposes. The committee has issued additional guidance that "in accordance with the intent of this rule, it will be the policy of the Committee that resolutions deemed to fit these criteria shall not be considered by the Committee." Since House Rule XII, clause 5, was adopted in the 104 th Congress, it has been waived by unanimous consent on at least one occasion. Specifically, the "House by unanimous consent waived the prohibition against introduction of a certain joint resolution specified by sponsor and title proposing a commemoration," to allow for the consideration of H.J.Res. 71 (107 th Congress, 2001-2002), legislation establishing Patriot Day as a day of remembrance for September 11, 2001. Congress's commemorative options fall into two general categories: legislative options and nonlegislative options. All legislative options require passage of a bill or resolution by the House, the Senate, or both chambers, while nonlegislative options can be accomplished by individual offices without legislative approval. Legislative options include naming federal buildings, designing postage stamps, minting commemorative coins, awarding congressional gold medals, creating monuments and memorials, designating commemorative observances, establishing federal holidays, and requesting presidential proclamations. Nonlegislative options include creating individual office awards, giving floor speeches, sending official letters, and ordering flags. Since House Rule XII, clause 5, was adopted in the 104 th Congress, it has been waived by unanimous consent on at least one occasion. Specifically, the "House by unanimous consent waived the prohibition against introduction of a certain joint resolution specified by sponsor and title proposing a commemoration," to allow for the consideration of H.J.Res. 71 (107 th Congress, 2001-2002), legislation establishing Patriot Day as a day of remembrance for September 11, 2001. Several legislative options exist to honor individuals, groups, and historic events. For each of these commemoratives, action requires passage of a bill or resolution by the House, the Senate, or both chambers. In some cases, House and Senate committees, or the majority party, have specific rules or guidance associated with commemoratives. These include requiring a minimum number of cosponsors before the bill can be considered by the relevant committee, prohibitions against commemorating sitting Members of Congress, and some restrictions on commemorating living persons. In each Congress, many bills are introduced to name a post office or other federal building in honor or in memory of locally esteemed individuals, deceased elected officials, fallen military personnel, and celebrities. To name a post office or other federal building after an individual an act of Congress is required. This section details congressional involvement in the naming of post offices and other federal buildings. Legislation naming post offices for persons has become a very common practice. Between the 110 th Congress (2007-2008) and the 114 th Congress (2015-2016), almost 18% of all statutes enacted were post office naming acts. Legislation has named post offices for a variety of persons, including locally esteemed individuals (e.g., Sister Ann Keefe), deceased elected officials (e.g., President Ronald Reagan), fallen Armed Forces personnel (e.g., Army Specialist Matthew Troy Morris), and celebrities (e.g., Bob Hope). Post office naming statutes commonly identify the address of the postal facility and provide for naming ("designating") the facility. Renaming a post office through legislation, however, does not result in the new name being etched or painted on the facade of the building or signs. Further, for operational and logistical reasons, a post office that has been dedicated or renamed will keep its original name and geographical designation within USPS's addressing system. Instead, to commemorate the designation, a small plaque noting the designee and designation is installed within the post office. Over the years, both the House and Senate have adopted policies and practices for considering and enacting post office naming bills. These policies and practices, sometimes expressed in "Dear Colleague" letters or committee rules, have varied from Congress to Congress. Currently, the House Oversight and Government Reform Committee has adopted a policy that the committee will not consider legislation designating post office buildings for living persons, expect: bills naming facilities after former U.S. Presidents or Vice Presidents, former Members of Congress over 70 years of age, former state or local elected officials over 70 years of age, former judges over 70 years of age, or a wounded veteran of any age. will not consider legislation designating post office buildings for a person for whom Congress already named a post office building. Postal facility naming bills should have the co-sponsorship of the entire state delegation wherein the post office is located. Members sponsoring postal facility naming bills must provide to the Committee documentation summarizing the designee's background. Postal facility naming bills will be considered by the Committee only after the required criteria are met in full. Similarly, the Senate Homeland Security and Governmental Affairs Committee (HSGAC) adopted practices for considering and reporting post office naming legislation. For example, under its current rules, HSGAC [will] not consider any legislation that would name a postal facility for a living person with the exception of bills naming facilities after former Presidents and Vice Presidents of the United States, former Members of Congress over 70 years of age, former State or local elected officials over 70 years of age, former judges over 70 years of age, or wounded veterans. Once post office naming legislation is reported by the House and Senate Committees, the legislation, if considered on the floor, tends to pass the House under suspension of the rules and the Senate via unanimous consent. For more information on naming post offices, including sample legislation, see CRS Report RS21562, Naming Post Offices Through Legislation , by [author name scrubbed]. Bills to name other federal buildings or facilities may be considered and reported in any committee, typically in relation to the agencies under each committee's jurisdiction. Legislation naming a veterans medical facility, for example, would normally originate in the Veterans' Affairs (VA) committees in the House and the Senate. Legislation naming courthouses—which are constructed and maintained by the General Services Administration (GSA)—is considered by the committees with jurisdiction over GSA, the House Transportation and Infrastructure Committee (T&I) and the Senate Environment and Public Works Committee (EPW). Historically, the large majority of nonpostal facilities are named through legislation originating in these four committees: VA and T&I in the House, and VA and EPW in the Senate. Occasionally, legislation is introduced to name buildings held by other agencies, such as National Aeronautical and Space Administration (NASA) training facilities. NASA is under the jurisdiction of the Science, Space and Technology Committee in the House (SST) and the Commerce, Science, and Transportation Committee in the Senate (CST), so naming legislation for NASA facilities is considered by these committees. Committees vary as to whether they have specific rules regarding the introduction of naming legislation. Some have written naming rules. In the 115 th Congress, for example, the Senate and House Veterans' Affairs committees have adopted identical language in their committee rules that identifies specific criteria for naming legislation. These rules prohibit naming a VA facility after an individual unless the individual is deceased and is a veteran who (i) was instrumental in the construction of the facility to be named, or (ii) was a recipient of the Medal of Honor, or, as determined by the chairman and ranking minority member, otherwise performed military service of an extraordinarily distinguished character; a Member of the U.S. House of Representatives or Senate who had a direct association with such facility; an Administrator of Veterans Affairs, a Secretary of Veterans Affairs, a Secretary of Defense or of a service branch, or a military or other federal civilian official of comparable or higher rank; or an individual who, as determined by the chairman and ranking minority member, performed outstanding service for veterans. In addition, each Member of the congressional delegation representing the state in which the designated facility is located must indicate, in writing, his or her support of the bill. Finally, the pertinent state department or chapter of each congressionally chartered veteran's organization with a national membership of at least 500,000 must indicate, in writing, its support of the bill. By contrast, the committees with jurisdiction over courthouse naming in the 115 th Congress—T&I in the House and EPW in the Senate—do not have identical written rules. Currently, T&I does not have a formal rule pertaining to naming legislation, although it did have written policies regarding naming legislation in previous Congresses. While no longer part of the committee's written rules, some or all of these requirements may still be in place—albeit informally—and enforced. Contacting the committee is the only way to determine what informal rules are in place, if any. EPW, on the other hand, has its requirements in committee rules. According to Rule 7(d) the committee may not name a building for any living person, except a former President or Vice President of the United States; a former Member of Congress over 70 years of age; a former Supreme Court Justice over 70 years of age; a federal judge who is fully retired and over 75 years of age; or a federal judge who has taken senior status and is over 75 years of age. As with T&I, neither SST in the House nor CST in the Senate has written rules pertaining to naming legislation. Each year, the U.S. Postal Service (USPS) issues commemorative stamps to celebrate persons, anniversaries, and historical and cultural phenomena. For example, USPS has issued stamps for Lena Horne, President John F. Kennedy, the Chinese Lunar New Year, and Star Trek. The USPS issues these stamps at its own statutory discretion and operates the program as a profit-making enterprise. Legislation to direct USPS to issue a stamp to commemorate persons, historical occurrences, and groups is occasionally introduced. CRS has been able to identify one instance when a special series commemorative stamp was issued pursuant to legislation. In 1947, Congress directed the Postmaster General to issue a special series of commemorative stamps in honor of Gold Star Mothers. Additionally, on selected occasions Congress has enacted legislation directing USPS to issue a semipostal stamp, which is a stamp sold at a premium to raise funds for a particular cause. For example, the Save the Vanishing Species Semipostal Stamp was created pursuant to H.R. 1454 , Multinational Species Conservation Funds Semipostal Stamp Act of 2010 . The House Committee on Oversight and Government Reform has a rule against considering legislation that proposes the issuance of commemorative stamps. Committee Rule 13 states, in part, "[t]he determination of the subject matter of commemorative stamps and new semi-postal issues is properly for consideration by the Postmaster General." Recently, the Postmaster General used his discretionary authority to create a semipostal stamp to help raise funds to fight Alzheimer's disease. For more information on commemorative postage stamps, see CRS Report RS22611, Common Questions About Postage and Stamps , by [author name scrubbed]. Commemorative coins are produced by the U.S. Mint pursuant to an act of Congress. These coins celebrate and honor American people, events, and institutions. The first commemorative coin was authorized in 1892 for the Columbia Exposition in Chicago. Since 1892, Congress has authorized more than 140 new commemorative coins. Between 1954 and 1981, no new commemorative coins were authorized. In 1982, Congress restarted the commemorative coin program when it authorized a commemorative half dollar to recognize George Washington's 250 th Birthday. In 1996, the Commemorative Coin Reform Act (CCRA) was enacted to (1) limit the maximum number of different coin programs minted per year; (2) limit the maximum number of coins minted per commemorative coin program; and (3) clarify the law with respect to the recovery of Mint expenses before surcharges are disbursed and to conditions of payment of surcharges to recipient groups. The CCRA restrictions took effect in 1998. In past Congresses, the House Committee on Financial Services has adopted a committee rule to prohibit (1) the scheduling of a subcommittee hearing on commemorative coin legislation unless it was "cosponsored by at least two-thirds of the Members of the House," or (2) reporting a "bill or measure authorizing commemorative coins which does not conform with the minting regulations under 31 U.S.C. § 5112." This rule was not adopted as part of the committee rules for the 115 th Congress. In the 115 th Congress, the Senate Banking, Housing, and Urban Affairs Committee rules require that a commemorative coin bill or resolution have at least 67 Senators as cosponsors before being considered by the committee. For more information on commemorative coins, see CRS In Focus IF10262, Commemorative Coins: An Overview , by [author name scrubbed], and CRS Report R44623, Commemorative Coins: Background, Legislative Process, and Issues for Congress , by [author name scrubbed]. Although Congress has approved legislation stipulating requirements for numerous other awards and decorations, there are no permanent statutory provisions specifically relating to the creation of Congressional Gold Medals. When a Congressional Gold Medal has been deemed appropriate, Congress has, by legislative action, provided for the creation of a medal on an ad hoc basis. In the 115 th Congress, Rule 28(a)(7) of the House Republican Conference, however, generally prohibits the Republican leader from scheduling any bill or resolution for consideration under suspension of the rules which directs the Secretary of the Treasury to strike a Congressional Gold Medal unless the recipient is a natural person; the recipient has performed an achievement that has an impact on American history and culture that is likely to be recognized as a major achievement in the recipient's field long after the achievement; the recipient has not have received a medal previously for the same or substantially the same achievement; the recipient is living or, if deceased, has not been deceased for less than 5 years or more than 25 years; and the achievements were performed in the recipient's field of endeavor, and represent either a lifetime of continuous superior achievements or a single achievement so significant that the recipient is recognized and acclaimed by others in the same field, as evidenced by the recipient having received the highest honors in the field. The rules of the House Republican Conference may also place an indirect restriction on the number of gold medals that may be awarded annually. Rule 28(a)(7) prohibits the Republican leader from scheduling, or requesting to have scheduled, any bill for consideration under suspension of the rules which "directs the Secretary of the Treasury to strike a Congressional Gold Medal ... [that causes] the total number of measures authorizing the striking of such medals in that Congress to substantially exceed the average number of such measures enacted in prior Congresses." A waiver on the restriction can be granted by the majority of the elected leadership of the conference. In addition, because the restriction only applies to bills considered under suspension of the rules, it appears that an otherwise-prohibited bill could be brought to the floor under an alternative procedure, such as a special rule. In the Senate, the Banking, Housing, and Urban Affairs Committee in the 115 th Congress requires that at least 67 Senators must cosponsor any Congressional Gold Medal bill before being considered by the committee. For more information on Congressional Gold Medals, see CRS Report R45101, Congressional Gold Medals: Background, Legislative Process, and Issues for Congress , by [author name scrubbed]. On many occasions, Congress has authorized the creation of monuments and memorials to commemorate historic figures, events, and movements. Whether the monument or memorial is intended to be built in the District of Columbia determines the process for placement, design, and approval of the commemorative work. In 1986, the Commemorative Works Act (CWA) was enacted to provide standards for the consideration and placement of monuments and memorials in areas administered by the National Park Service (NPS) and the General Services Administration (GSA) in the District of Columbia. The CWA provides that no "commemorative work may be established in the District of Columbia unless specifically authorized by Congress." Legislation proposing a new commemorative work in the District of Columbia generally consists of three main sections: a short title, definitions, and authorization for establishing the memorial. First, most authorizing legislation has a short title. This is the name of the authorizing legislation, which often includes the name of the memorial. Second, the definitions section contains terms used in further sections of the legislation. These can include "memorial," "association," "foundation," or other relevant terms. Finally, the authorization generally consists of four parts: 1. Authorization to establish a commemorative work. This designates a specific third party entity as the "sponsor group," which is the party responsible for the establishment of the new monument or memorial. 2. Compliance with the Commemorative Works Act. This applies the CWA to the monument or memorial or exempts the monument and memorial from the CWA or certain CWA provisions. 3. Prohibition of Federal Funds. This section generally prohibits the designated sponsor group from using federal funds on the monument or memorial. 4. Deposit of excess funds. This provision specifies the use of funds raised by the sponsor group in excess of those necessary for the design, construction, and dedication of the monument or memorial. Following introduction, CWA-related legislation is generally referred to the House Committee on Natural Resources and the Subcommittee on Public Lands and Environmental Policy, and the Senate Committee on Energy and Natural Resources. Either one or both of the committees (or subcommittees) will hold hearings on the proposal, inviting testimony from representatives of the National Park Service and the organization seeking approval for the monument or memorial. Important considerations will include historical importance of the commemorative work, estimated cost, and how private funds needed for construction are to be raised. Additionally, the National Capital Memorial Advisory Commission will often provide advice to the committees on the proposed memorial. For more information on the process after a commemorative work is authorized by Congress, see CRS Report R41658, Commemorative Works in the District of Columbia: Background and Practice , by [author name scrubbed]. For a list of commemorative works authorized since the enactment of the CWA in 1986, see CRS Report R43743, Monuments and Memorials Authorized and Completed Under the Commemorative Works Act in the District of Columbia , by [author name scrubbed]; and CRS Report R43744, Monuments and Memorials Authorized Under the Commemorative Works Act in the District of Columbia: Current Development of In-Progress and Lapsed Works , by [author name scrubbed]. Congressional involvement in monuments and memorials outside of the District of Columbia is not governed by the Commemorative Works Act. Instead, the process for creating the monument or memorial is determined based on whether the work will be placed on existing federal land. Recently, Congress has handled the creation of monuments and memorials outside the District of Columbia in two ways: by directly authorizing a new commemorative or by making an existing commemorative a "national" monument or memorial. New Commemorative . Periodically, Congress authorizes a new memorial outside of the District of Columbia. On these occasions, legislation is required to statutorily authorize a group—either federal or nonfederal—to design, construct, and maintain the memorial. For example, during the 107 th Congress (2001-2002), legislation was enacted to authorize a memorial at the crash site in Shanksville, PA, for "a national memorial to commemorate the passengers and crew of Flight 93 who, on September 11, 2001, courageously gave their lives thereby thwarting a planned attack on our Nation's Capital." During debate on the bill ( H.R. 3917 ), Representative William Shuster summarized the importance of Congress creating a national memorial and making it part of the National Park Service. As we debate this measure, in this most revered of halls, I cannot help but contemplate the possibility that Flight 93 was headed to a target here in the Nation's Capitol—quite possibly right here to the Capitol itself. We will, however, never know for sure where that doomed flight was headed. We will never know, because men and women, put love of country ahead of self preservation. These were not super heros [sic], but individuals just like you and me. Individuals with families and loved ones anxiously awaiting their return, who put aside their own desirers [sic] and stood up to combat terrorism and save countless lives.... The legislation before us today lays out a fair and balanced approach for construction of a memorial for these brave individuals. The legislation calls for the creation of the Flight 93 Advisory Commission which would be composed of representatives from the families of victims, the local community, the state of Pennsylvania and the United States Government. The Commission would then submit their recommendations to the Secretary of the Interior. In authorizing the Flight 93 Memorial, Congress also created an advisory committee to make recommendations to the Secretary of the Interior and Congress on the design, construction, and management of the memorial. Creation of such a commission is not uncommon and can aid government agencies with the planning and execution of commemorations. Official Recognition of Existing Commemoratives . Instead of authorizing the creation of a completely new memorial, Congress has also considered legislation to recognize existing works as national monuments or memorials. Enacting legislation to provide national recognition of a monument or memorial, but maintaining local operation and maintenance, generally requires no federal oversight or funds. For example, P.L. 113-132 designated a memorial in Riverside, CA, as the "Distinguished Flying Cross National Memorial." The memorial honors military aviators who have received the "Distinguished Flying Cross [which] is the oldest military award for aviation" with a national memorial, which does not already exist. Commemorative commissions are entities established to oversee the commemoration of a person or event. These commissions typically coordinate celebrations, scholarly events, public gatherings, and other activities, often to coincide with a milestone anniversary. For example, the Christopher Columbus Quincentenary Jubilee Commission was created "to prepare a comprehensive program for commemorating the quincentennial of the voyages of discovery of Christopher Columbus, and to plan, encourage, coordinate, and conduct observances and activities commemorating the historic events associated with those voyages." Bills creating commemorative commissions are introduced regularly in Congress. For example, in the 114 th Congress (2015-2016), multiple bills were introduced to establish commemorative commissions. Most of these bills, however, were not enacted. A statute establishing a commemorative commission generally includes the commission's mandate, provides a membership and appointment structure, outlines the commission's duties and powers, and sets a termination date. A variety of options are available for each of these organizational choices, and legislators can tailor the composition, organization, and working arrangements of a commission, based on the particular goals of Congress. As a result, the organizational structure and powers of individual commissions are often unique. In fulfilling their duties, most commemorative commissions have encouraged, worked closely with, and provided coordination for private groups, state and local governments, and other federal government entities taking part in the general commemoration of the person or event. Because of these cooperative efforts, federally created commissions are often only a portion of planned celebratory events. Therefore, federal funds appropriated to a commemorative commission are generally only a portion of the total funding ultimately expended nationwide for commemorative activities and events. Commemorative commissions have been funded in two ways: through appropriations or through solicitation of nonfederal money. At times, commissions are authorized both for appropriations and to fundraise or accept donations. In addition, some commemorative commissions are not provided with explicit authorization to solicit funds or accept donations. Commissions without the statutory authority to solicit funds or accept donations are generally prohibited from engaging in those activities. For more information on commemorative commissions, see CRS Report R41425, Commemorative Commissions: Overview, Structure, and Funding , by [author name scrubbed]. As discussed above in the section " House Ban on Commemorative Legislation ," House Rule XII, clause 5 prohibits the introduction or consideration of commemorative legislation that includes a "remembrance, celebration or recognition for any purpose through the designation of a specified period of time." Additionally, House Republican Conference rules, as well as House Oversight and Government Reform Committee rules, restrict the scheduling of such bills under suspension of the rules in the House. Consequently, the number of commemorative observances and days designated by bills, concurrent resolutions, joint resolutions, and House resolutions is small. The House prohibition on commemorative observances and days, however, does not preclude the Senate from using Senate measures to honor individuals, groups, and events. In the past, the Senate Judiciary Committee has had unpublished guidelines on the consideration of commemorative legislation. These guidelines were not officially part of the committee's rules and may not be currently applicable. Past guidance restricted consideration of commemorative legislation without a minimum number of bipartisan cosponsors and prohibited commemoration of specific categories. For more information on commemorative observances and days, see CRS Report R44431, Commemorative Days, Weeks, and Months: Background and Current Practice , by [author name scrubbed] and [author name scrubbed]. The United States has established 11 permanent federal holidays. They are, in the order they appear in the calendar: New Year's Day, Martin Luther King Jr.'s Birthday, Inauguration Day (every four years following a presidential election), George Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. Although frequently called public or national days, these celebrations are only legally applicable to federal employees and the District of Columbia, as the states individually decide their own legal holidays. To create a new federal holiday, legislation is required. In recent Congresses, legislation has been introduced to create holidays such as "Cesar E. Chavez Day," or to formally establish Election Day as such. Recent legislation to create a new federal holiday has suggested adding the day to the list of holidays at 5 U.S.C. §6103. For more information on federal holidays, see CRS Report R41990, Federal Holidays: Evolution and Current Practices , by [author name scrubbed]. On many occasions, Congress has requested that the President issue a proclamation recognizing an event or individual. Usually associated with the creation of a patriotic and national observance, statutory language requests that the President issue a proclamation each year to commemorate an event or group. For example, the National Pearl Harbor Remembrance Day statute requests that the President issue a yearly proclamation "calling on ... the people of the United States to observe National Pearl Harbor Remembrance Day with appropriate ceremonies and activities.... " Commemorative proclamations can also be issued by Presidents without any congressional action, and have been regularly issued throughout American history. Since 1789, when President George Washington issued the first proclamation declaring November 26 of that year a National Day of Thanksgiving, there have been hundreds of such designations. In addition to the legislative options for commemoration listed above, several nonlegislative options exist to commemorate individuals, groups, and events. These include certificates of recognition, floor speeches, and the purchasing of American flags. Certificates of Recognition are "awards" given by individual Member offices to constituents or groups to acknowledge accomplishments. Members are generally free to create and distribute certificates of recognition to individuals or groups to constituents. In the House, official funds can be used for the creation and distribution of certificates that recognize "a person who has achieved some public distinction" provided that the certificates comply with Franking Regulations and do not contain political or partisan references, solicit support of a Member's position on an issue, or advertise or endorse benefits not available to all constituents. Additionally, the House Ethics Manual reminds Members that all constituents are to be treated equally, regardless of "political support, party affiliation, or campaign contributions ..." when deciding to provide assistance to constituents. This would likely extend to the sending of certificates of recognition as well. In the Senate, the Standing Orders of the Senate place restrictions on reimbursable expenses payable from a Senator's Official Office Account. S.Res. 294 (96 th Congress) and S.Res. 176 (104 th Congress) specifically prohibit the use of official funds for "expenses incurred for the purchase of holiday greeting cards, flowers, trophies, awards, and certificates " (emphasis added). Further, pursuant to 39 U.S.C. §3210(a)(3)(F), the Senate Ethics Manual provides guidance that "[m]ail expressing congratulations to a person who achieved some public distinction may be franked only when the occasion involves a public distinction, rather than a personal distinction." Many Members have honored individuals and groups of constituents by giving a floor speech, and then sending copies of the Congressional Record to the individual or group that was honored. This activity can include a single Member or a group of Members that want to jointly honor constituent(s) either with a group of special order speeches or a series of individual—perhaps one minute—speeches. To inquire about floor time for a commemorative speech, Members may contact their party's leadership. In 1937, a Member of Congress made the first request to fly a U.S. flag over the U.S. Capitol building. Since that time, the Architect of the Capitol (AOC) has managed the flag program for the House and Senate. Generally, U.S. flags flown over the Capitol can be purchased by a constituent through his or her Representative's or Senator's offices. In both the House and Senate, the Member office collects flag requests from constituents and facilitates the purchase of flags from the House or Senate office supply store and coordinates with the Architect of the Capitol for the flying of flags over the Capitol building. For more information on the Architect of the Capitol's flag program, see http://www.aoc.gov/trades-and-areas-practice/capitol-flag-program . Members may obtain flags from the Office Supply Service (OSS). "Initially, the costs of the flags will be charged to the [Member Representational Allowance] MRA. "Once payment for a flag is received by the Member office, the office may submit the check to OSS. OSS will credit the MRA. If a request is made to have a U.S. flag flown over the Capitol, an additional flag flying fee must be paid by the individual purchasing the flag." Additionally, Members may use official funds to pay for a flag flown over the Capitol that will be used for an official gift. For more information on the House of Representatives flag program, see https://housenet.house.gov/campus/service-providers/aoc-flag-office. Senators may obtain flags from the Senate Stationary Room. Senators collect the cost of the flag, shipping fees, and flag flying and certification fees from the constituent, obtain the flag from the stationary room, and then work with the Packaging and Flags division of the Printing, Graphics, and Direct Mail (PG&DM) office to arrange for the flag to be flown over the Capitol. Additionally, pursuant to S.Res. 294 (96 th Congress), "Senate offices can use official funds to purchase flags. The legislation limits the groups to which a gift of a flag may be made to public organizations only, such as churches, schools, and patriotic service groups." For more information on the Senate flag program, see http://webster.senate.gov/pdgm/flag-packaging-services .

Since its inception, Congress has used commemorative legislation to express public gratitude for distinguished contributions; dramatize the virtues of individuals, groups, and causes; and perpetuate the remembrance of significant events. During the past two centuries, commemoratives have become an integral part of the American political tradition. They have been used to authorize the minting of commemorative coins and Congressional Gold Medals; fund monuments and memorials; create federal holidays; establish commissions to celebrate important anniversaries; and name public works, scholarships, endowments, fellowships, and historic sites. Current congressional practice for commemoratives includes a House Rule (Rule XII, clause 5, initially adopted during the 104th Congress [1995-1996]) that precludes the introduction or consideration of legislation that commemorates a "remembrance, celebration, or recognition for any purpose through the designation of a specified period of time." Such a rule does not exist in the Senate. This House Rule, together with the passage of more restrictive laws, rules, and procedures governing the enactment of several other types of commemoratives, has substantially reduced the time Congress spends considering and adopting such measures. This report summarizes the evolution of commemorative legislation as well as the laws, rules, and procedures that have been adopted to control the types of commemoratives considered and enacted. Included in the discussion of commemorative options for Congress are those that require legislation, such as naming federal buildings, including post offices and other federal structures; postage stamps; commemorative coins; Congressional Gold Medals; monuments and memorials, both in the District of Columbia and elsewhere; commemorative commissions; commemorative observances; federal holidays; and requesting presidential proclamations. Also included are commemorative options that do not require legislation. These include certificates of recognition; floor speeches; and flags flown over the U.S. Capitol.

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On January 4, 2011, President Obama signed P.L. 111-358 , the America COMPETES Reauthorization Act of 2010. The law responds to concerns about U.S. competitiveness by increasing funding for research in the physical sciences and engineering; authorizing certain federal science, technology, engineering, and mathematics (STEM) education programs and policies; as well as addressing other related issues. COMPETES 2010 reauthorized selected provisions of the 2007 America COMPETES Act ( P.L. 110-69 ). The purpose of this report is to provide information on the President's FY2013 budget request—and the status of FY2013 congressional appropriations—for the agencies, programs, and activities authorized by COMPETES 2010. For a broader treatment of the America COMPETES Reauthorization Act of 2010, see CRS Report R41819, Reauthorization of the America COMPETES Act: Selected Policy Provisions, Funding, and Implementation Issues , by [author name scrubbed]. For information about prior year funding for both COMPETES acts, see CRS Report R42779, America COMPETES Acts: FY2008-FY2013 Funding Tables , by [author name scrubbed]. COMPETES 2010—like COMPETES 2007—was designed to "invest in innovation through research and development, to improve the competitiveness of the United States, and for other purposes." In total, COMPETES 2010 authorized approximately $45.5 billion in funding between FY2010 and FY2013 for federal research in the physical sciences and engineering, STEM education, and other related programs. Certain provisions of the law, including many funding authorizations, expired at the end of FY2013. Among other things, COMPETES 2010 increased funding authorizations for the National Science Foundation (NSF), the National Institute of Standards and Technology (NIST) core laboratories and construction accounts, and the Department of Energy (DOE) Office of Science. It also authorized new technology transfer and commercialization activities at these agencies. In addition, COMPETES 2010 authorized inducement prizes at federal agencies, established a loan guarantee program for manufacturers, and established a Regional Innovation Program (RIP). In STEM education, COMPETES 2010 sought to provide greater coordination of federal STEM education programs, authorized support for academic programs that provide teacher certification concurrent with a bachelor's degree in a STEM field, and repealed certain unfunded STEM education programs authorized by COMPETES 2007. Like its predecessor, COMPETES 2007, the central policy contributions of COMPETES 2010 were the "doubling path" policy for the NSF, NIST core laboratories and construction accounts, and the DOE Office of Science, as well as the authorization of STEM education activities at various federal agencies. The President's FY2013 budget requested increased funding for the doubling path accounts (albeit at levels below those authorized) but included support for few COMPETES 2010 authorized STEM education programs. In this regard the President's FY2013 budget request was generally consistent with prior year Obama Administration requests and appropriations activity for both COMPETES acts. Of the new programs with defined funding authorizations in COMPETES 2010, only the Regional Innovation Program (RIP) at the Department of Commerce (DOC) was specifically included in the Administration's FY2013 budget request. The Administration's budget request did not seek funding for the NIST Green Jobs Act, Federal Loan Guarantees for Innovative Technologies in Manufacturing, or the STEM-Training Grant program. COMPETES 2010 also authorized new programs without providing a defined funding amount. One example of this type of authorization was the Green Chemistry Basic Research program at NSF. The FY2013 budget request included funding for a green chemistry program at NSF. The following sections discuss in greater detail the President's FY2013 budget request for selected programs and agencies authorized by COMPETES 2010. Where possible, this report has been updated to reflect FY2012 actual funding. Earlier versions of this report used FY2012 enacted, estimated, or current plan funding levels. This change provides a more accurate view of the difference between FY2012 funding levels and the President's FY2013 request. Table A-1 summarizes the FY2013 funding status of selected COMPETES 2010 provisions, including the President's FY2013 requests for these accounts. This section highlights the Administration's FY2013 budget request for selected research programs and accounts included in COMPETES 2010, including the doubling path accounts. At NIST, the President sought a total of $857.0 million in FY2013. This funding level was $106.2 million (14.1%) more than the FY2012 enacted level of $750.8 million and $182.7 million (17.6%) less than the authorized level of $1.040 billion. Within the NIST total, the President requested $648.0 million, or $81.0 million (14.3%) more than the FY2012 enacted level of $567.0 million and $28.7 million (4.2%) less than the authorized level of $676.7 million, for the core laboratories account. The President also sought $60.0 million, or $4.6 million (8.3%) more than the FY2012 enacted level of $55.4 million and $61.3 million (50.5%) less than the authorized amount of $121.3 million, for the construction account. The President's FY2013 request for NIST's Industrial Technology Services (ITS) account was $149.0 million, including $128.0 million for the Hollings Manufacturing Extension Partnership (MEP). The FY2013 Administration request for MEP was $400,000 less than the FY2012 enacted amount. The President did not seek funding for the Baldrige Performance Excellence Program in FY2013. The President did not specifically request FY2013 funds for activities authorized by the NIST Green Jobs Act. President Obama's FY2013 budget request for the NSF's Research and Related Activities (R&RA) account—which is the primary source of research funding at the foundation—was $5.983 billion. This amount was $225.0 million (3.9%) more than the FY2012 actual level of $5.758 billion and $654.5 million (9.9%) less than the COMPETES 2010 authorized amount of $6.638 billion. The President's FY2013 budget request for R&RA included specific funding for two COMPETES 2010 programs—the Experimental Program to Stimulate Competitive Research (EPSCoR) and Partnerships for Innovation (PFI). COMPETES 2010 reauthorized but did not specify funding levels for these programs. The President requested $158.2 million for EPSCoR in FY2013, $7.3 million (4.9%) more than the FY2012 actual funding level of $150.9 million. The FY2013 NSF budget request stated that the National Academy of Sciences was studying NSF's EPSCoR programs in accordance with Section 517 of COMPETES 2010. This report was published in 2013. The FY2013 request for PFI was $8.2 million, $200,000 more than the FY2012 estimate of $8.0 million. NSF FY2013 budget documents indicate that the foundation would dedicate the requested $200,000 increase to the Building Innovation Capacity track, which funds partnerships between academic researchers and small businesses. Section 509 of COMPETES 2010 directed NSF to establish a Green Chemistry Basic Research program. In response to these provisions, the FY2013 NSF budget request included funding for a new Sustainable Chemistry, Engineering and Materials (SusCHEM) program as part of NSF's Science, Engineering, and Education for Sustainability (SEES) portfolio. The President sought $76.7 million in FY2013 for SusCHEM and four other new related SEES programs. The FY2013 NSF budget request emphasized the "OneNSF Framework," which sought to enable "seamless operations across organizational and disciplinary boundaries." Although the OneNSF Framework applied across all NSF directorates, most of the OneNSF Framework priorities were funded in the R&RA account. Other NSF-wide priorities included clean energy, advanced manufacturing, multidisciplinary research, and STEM education and workforce. The FY2013 NSF budget proposed $67.0 million in research program terminations, including reductions in Computer and Information Science and Engineering (CISE), Cyber-enabled Discovery and Innovation (CDI), Mathematics and Physical Sciences (MPS), Nanoscale Science & Engineering Centers (NSECs), and public outreach. The NSF FY2013 budget request described these programs as either duplicative or obsolete (either because the program had achieved its original goals or as a result of maturation in the field). In September 2012, NSF announced its intention to realign some of its research-related programs beginning in FY2013. The foundation moved two programs from the Office of the Director to the research directorates. The Office of Cyberinfrastructure became a division within the Directorate for Computer and Information Sciences, and the Office of Polar Programs became a division within the Directorate for Geosciences. The NSF also merged two other offices, the Office of International Science and Engineering and the Office of Integrative Activities, into the Office of International and Integrative Activities. It is not yet clear how or if these changes will affect foundation activities in these fields. NSF's FY2013 budget request to Congress did not reflect these consolidations. The foundation's FY2013 current plan does. The President's FY2013 budget request for the DOE Office of Science was $4.992 billion. This funding level was $57.0 million (1.2%) more than the FY2012 current plan funding level of $4.935 billion and $1.009 billion (16.8%) less than the authorized level in COMPETES 2010 ($6.001 billion). The President also sought $350.0 million for the ARPA-E account at DOE, which was $75.0 million (27.3%) more than the FY2012 current plan level of $275.0 million and $38.0 million (12.2%) more than the amount authorized in COMPETES 2010 ($312.0 million). Many federal policymakers have sought to increase federal funding for research in the physical sciences and engineering—and thereby, advocates assert, improve U.S. global economic competitiveness. Congress and the Bush and Obama Administrations have sought to double funding for the NSF, Department of Energy's Office of Science, and National Institute of Standards and Technology's core laboratory and construction accounts (collectively "the targeted accounts") from their FY2006 levels. To date, the main legislative acts authorizing the doubling path policy for the targeted accounts have been the COMPETES acts. Under COMPETES 2010, targeted account funding was authorized to increase at a compound annual growth rate of 6.3%. This growth rate was similar to the growth rate in actual appropriations for the targeted accounts during the COMPETES 2007 authorization period (6.4%). At the COMPETES 2010 authorized rate, it would have taken approximately 11 years to double funding for the targeted accounts. The President's FY2013 budget request re-asserted the Administration's ongoing support for the doubling path policy, but sought an overall increase of 4.1% for the targeted accounts. This increase was equal to the FY2012 enacted appropriations growth rate for the targeted accounts and, and if maintained, would have resulted in an 18-year doubling. The President's FY2013 STEM education request focused primarily on two groups: STEM graduates and STEM teachers. Specifically, the FY2013 budget request established a new "government-wide goal to increase, over the next decade, the number of well-prepared college graduates with STEM degrees by one-third, or one million" and continued the Administration's previous commitment to prepare 100,000 STEM teachers over the next decade (the "100Kin10" initiative). To achieve these goals, the President's FY2013 budget request sought program and funding changes to some existing COMPETES 2010 authorized programs and agencies. The President's FY2013 budget did not include specific requests for new STEM education programs authorized by COMPETES 2010, such as the STEM-Training Grant Program. The President's FY2013 budget request for the Department of Education (ED) proposed to reorganize the department (as it had previously proposed in the FY2011 and FY2012 requests). The proposed reorganization would have eliminated and consolidated certain programs, including COMPETES 2010 programs. For example, under the reorganization plan, both the Teachers for a Competitive Tomorrow (TCT) and Advanced Placement (AP) programs would have been eliminated and their program functions absorbed into the newly created Teacher and Leader Pathways (TLP) and College Pathways and Accelerated Learning (CPAL) programs, respectively. The status of both the TCT and AP programs, as authorized by the COMPETES acts, is unclear. Congress has not funded the TCT program since FY2010 and the President's FY2013 ED budget request did not specify funding for the program. Although ED operates an AP program, it typically does so under the authority of the Elementary and Secondary Education Act of 1965, as amended by No Child Left Behind (ESEA, P.L. 107-110 ), not under the authority of either COMPETES Act. The AP programs authorized by ESEA and COMPETES are substantively different, though they share some features. It is unclear if the AP program at ED complies with the AP program authorized by the COMPETES acts. The FY2013 ED request for CPAL, including the AP program authorized by ESEA, was $81.0 million. Of this amount, $24.1 million was dedicated to the advanced course test fee component of the AP program. The FY2012 enacted appropriation for the ESEA authorized AP program was $30.1 million. DOE does not typically request funding for COMPETES-acts-authorized STEM education programs. However, the department asserts that it operates programs that correspond with its responsibilities under the law. Among these is the DOE Office of Science's Science Graduate Fellowship (SCGF) program, which the department asserts is one of two fellowships that correspond with the Protecting America's Competitive Edge (PACE) graduate fellowship program. The President's FY2013 request for DOE included no funding for SCGF. This was consistent with FY2012 congressional appropriations actions. For example, House Committee on Appropriations FY2012 DOE appropriations report language directed the Office of Science to "justify to the Committee why fellowships should be funded within the Office of Science when other agencies, in particular the National Science Foundation, are the primary federal entities for such purposes." Current plan funding for SCGF in FY2012 was $5.0 million, which was to support a third year of funding for the FY2010 cohort of fellows. DOE also asserts that the Academies Creating Teacher Scientists (DOE ACTS) program corresponds with the Summer Institutes program and that the Office of Science Early Career Research Program corresponds with the Early Career Awards program. (COMPETES 2010 reauthorized both the Summer Institutes and Early Career Awards programs.) Based on the recommendation of a 2010 DOE Committee of Visitors report, DOE terminated DOE ACTS in FY2012. Accordingly, the President did not seek funding for DOE ACTS in FY2013. According to the DOE, each of the six Office of Science research programs supports Early Career Research Program awards out of their core research program offices. However, these research programs do not typically specify funding for Early Career Research program awards. DOE representatives state that, "Office of Science support for Early Career Research awards is approximately $16.0 million per year." CRS identified one specific request for the Early Career Research Program in the FY2013 Office of Science budget request. That specific request was in the Fusion Energy Sciences budget in the "Other" activity. In FY2012, enacted funding for the Fusion Energy Sciences "Other" activity was $11.9 million. These funds supported the Office of Science Early Career Research, Historically Black Colleges and Universities (HBCU), and summer internships for undergraduates programs. The FY2013 request for the Fusion Energy Sciences "Other" activity was $9.2 million. This amount was $2.7 million, or 22.7%, less than the FY2012 enacted amount. In FY2012 the Senate Committee on Appropriations urged Office of Science to consider redirecting funds from terminated education programs to the Distinguished Scientist Program authorized by the COMPETES acts. The President's FY2013 request for Office of Science did not include funding for this program, which DOE had not initiated. The primary source of funding for STEM education activities at NSF is the Education and Human Resources (E&HR) account. The President sought $875.6 million for E&HR in FY2013. This amount was $45.1 million (5.4%) more than the FY2012 actual level of $830.5 million and $166.2 million (15.9%) less than the COMPETES 2010 authorized level of $1.042 billion. The FY2013 NSF budget request highlighted certain NSF-wide and E&HR-specific proposals for STEM education. NSF-wide efforts centered on the planned new Expeditions in Education (E 2 ) initiative, which sought to "address a challenge in STEM learning or education using current or emerging areas of science." E 2 was a $49.0 million co-funded initiative that was to be supported through contributions from various Research and Related Activities (R&RA) accounts ($28.5 million) and from E&HR ($20.5 million). The FY2013 NSF request also sought increased co-funding for the Graduate Research Fellowship (GRF) program. The FY2013 request for the GRF was $243.0 million, which was $45.1 million (22.8%) more than FY2012 actual. About half of FY2013 funding for the GRF was to come from R&RA, up from 7.4% in FY2009. NSF's FY2013 budget request stated that the increased funding would provide for 2,000 new fellows in FY2013 (8,900 total) at a cost of education (COE) level of $12,000 per fellow. NSF's FY2013 budget request asserted that the FY2013 COE level was consistent with COMPETES 2010. Other major E&HR initiatives in FY2013 included increased coordination with the Department of Education (ED) on the Mathematics and Science Partnership (MSP) program, on STEM education research, and on a proposed K-16 mathematics education program. E&HR and ED proposed a jointly funded, new $60.0 million K-16 mathematics program. E&HR contributions to the program were to come from the Discovery Research K-12 (DR-K12) program and from the Transforming Undergraduate Education in STEM (TUES) program. Finally, the FY2013 request for E&HR sought to "reframe" E&HR programs and activities such that each division's programs and activities would align with one of three new categories of activity (e.g., core research and development investments, leadership investments, and expedition investments). The Administration sought $20.0 million in new funding ($5.0 million for each E&HR division) for a "Core Launch Fund" to support the reframing. The FY2013 NSF budget request included funding for existing STEM education programs authorized under COMPETES 2010, but for which the act does not specify funding levels. These include the Integrative Graduate Education and Research Traineeship (IGERT), the Robert Noyce Teacher Scholarship (Noyce) program, Research Experiences for Undergraduates (REU), and the STEM Talent Expansion Program (STEP), among others. The Administration's FY2013 requests for these programs were $51.7 million for IGERT ($8.1 million below the FY2012 estimate), $54.9 million for Noyce (same as FY2012 actual), $68.4 million for REU ($11.2 million below FY2012 actual), and $17.3 million for STEP ($7.0 million below FY2012 actual). Both America COMPETES acts authorized an NSF program to support Hispanic-serving institutions (HSIs). Section 7033 of COMPETES 2007 directed NSF to establish a program for HSIs. Section 512 of COMPETES 2010 directed the NSF to maintain its HSI program—and all other minority-serving institution (MSI) programs, such as the Historically Black Colleges and Universities Undergraduate Program (HBCU-UP)—as separate programs. Although NSF's FY2013 budget request maintained existing MSI programs separately, NSF has not established an HSI-specific program. The FY2013 request listed "research to examine the particular STEM student and institutional capacity needs in Hispanic-serving institutions" as one of the emphases of the Division of Human Research Development within E&HR, but did not otherwise specifically mention HSIs. The President's FY2013 budget requested funding for other COMPETES 2010 provisions as well. These include $25.0 million for the new RIP program at the DOC's Economic Development Administration (EDA). Of this amount, the President sought $7.0 million for the Science Park Infrastructure Loan Guarantee program, which COMPETES 2010 authorized as a separate component of the RIP program. The Administration's FY2013 budget request did not include specific funding for the new Federal Loan Guarantees for Innovative Technologies in Manufacturing program at the DOC or for the activities authorized by the NIST Green Jobs Act of 2010, both of which were authorized by COMPETES 2010. FY2012 funding for the DOC included $5.0 million each for the science park and manufacturing loan guarantee programs and encouraged EDA to support RIP activities through the Economic Adjustment Assistance account. Funding for COMPETES 2010 programs and agencies is typically included in three appropriations acts: Commerce, Justice, Science, and Related Agencies (CJS), for NSF, NIST, and other Department of Commerce programs; Energy and Water Development (Energy-Water), for DOE programs; and Labor, Health and Human Services, Education, and Related Agencies (Labor-HHS-Education), for ED programs. As appropriations measures often include a variety of provisions and programs, this section focuses on funding provisions that relate most closely to policies, programs, agencies, and activities specifically authorized by COMPETES 2010. Table A-1 summarizes the FY2013 funding status of these selected provisions, including House-passed, Senate Committee on Appropriations recommended, and final (post-rescission, post-sequestration) FY2013 appropriations to these accounts. Congressional appropriations for COMPETES 2010-related agencies in FY2013 were provided in two sequential acts. On September 28, 2013, the President signed P.L. 112-175 (Continuing Appropriations Resolution, 2013). Among other things, this law provided continuing appropriations to federal agencies at FY2012 levels with an across-the-board increase of 0.612% through March 27, 2013. On March 26, 2013, the President signed P.L. 113-6 (FY2013 Consolidated and Further Continuing Appropriations Act, H.R. 933 ), which provided regular appropriations for some federal agencies and continuing appropriations for others. P.L. 113-6 also included certain rescissions that applied to COMPETES 2010 accounts. In lieu of a conference report on H.R. 933 , the Chairwoman of the Senate Committee on Appropriations published an explanatory statement in the March 11, 2013, Congressional Record . Among other things, the explanatory statement sought to resolve conflicts between certain House and Senate FY2013 appropriations committee report recommendations. Of the COMPETES 2010-related agencies, those that received funding through CJS provisions (Division B) were provided with regular appropriations while those that received funding through Energy-Water and Labor-HHS-Education (both in Division F) were provided with continuing appropriations. This distinction is important for congressional policymakers who may assess the status of proposed changes to agency activities included in the President's FY2013 budget request. Agencies that received regular appropriations would typically be allowed to make Administration-requested changes within the constraints of existing federal law and direction from congressional appropriators. On the other hand, agencies that received continuing appropriations would not typically have the authority to make requested changes. The topic of across-the-board federal budget cuts (known as "sequestration") required under the Budget Control Act of 2011 ( P.L. 112-25 ) dominated much of the FY2013 congressional budget and appropriations debate. COMPETES 2010-related accounts were generally subject to sequestration. Where possible, the following sections include FY2013 funding levels that include the effects of sequestration, as well as any applicable rescissions in P.L. 113-6 . The House passed H.R. 5326 (Commerce, Justice, Science, and Related Agencies Appropriations Act, 2013) by a vote of 247-163 on May 10, 2012. The act would have provided FY2013 appropriations for the Department of Commerce (including NIST), NSF, and other CJS agencies. H.R. 5326 was accompanied by H.Rept. 112-463 when it was reported from the House Committee on Appropriations. The Senate Committee on Appropriations reported a bill to provide FY2013 CJS appropriations on April 19, 2012 ( S. 2323 ). The full Senate did not consider that measure. S.Rept. 112-158 accompanied S. 2323 when it was reported from committee. This section compares FY2013 post-rescission, post-sequestration CJS funding levels (where available) for selected COMPETES 2010 accounts with enacted, current, or actual FY2012 funding levels (as noted), and FY2013 COMPETES 2010 authorized funding levels. This section also compares FY2013 House-passed funding levels for selected COMPETES 2010 accounts with Senate Committee on Appropriations recommendations and Administration budget requests. (See Table A-1 for details.) Selected COMPETES 2010-related policy provisions from H.Rept. 112-463 , S.Rept. 112-158 , and the March 11, 2013, explanatory statement are also noted herein. The following sections describe the FY2013 funding status for COMPETES-related provisions at the DOC. These include "top line," or full agency funding, for NIST programs and accounts, as well as provisions for various economic development programs. Top line Allocations . FY2013 post-rescission, post-sequestration funding for NIST was $769.4 million. This amount was $18.6 million (2.5%) more than the FY2012 enacted funding level of $750.8 million and was $270.3 million (26.0%) less than the COMPETES 2010 authorized funding level of $1.040 billion. H.R. 5326 , as passed by the House, would have provided a total of $830.6 million to NIST in FY2013. This amount was $4.6 million (0.6%) more than the Senate Committee on Appropriations recommendation of $826.0 million and $26.4 million (3.1%) less than the Administration's request for $857.0 million. STRS (core laboratories) . FY2013 post-rescission, post-sequestration funding for STRS was $579.8 million. This amount was $12.8 million (2.3%) more than the FY2012 enacted funding level of $567.0 million and was $96.9 million (14.3%) less than the COMPETES 2010 authorized funding level of $676.7 million. H.R. 5326 , as passed by the House, would have provided $621.2 million to STRS in FY2013. This amount was $1.8 million (0.3%) less than the Senate Committee on Appropriations recommendation of $623.0 million and $26.8 million (4.1%) less than the Administration's request for $648.0 million. The March 11, 2013, explanatory statement included language allowing NIST to locally transport Summer Undergraduate Research Fellowship (SURF) participants. CRF (construction) . FY2013 post-rescission, post-sequestration funding for CRF was $56.0 million. This amount was $4.6 million (8.3%) more than the FY2012 enacted funding level of $55.4 million and was $61.3 million (50.5%) less than the COMPETES 2010 authorized funding level of $121.3 million. H.R. 5326 (as passed by the House), S. 2323 (as recommended by the Senate Committee on Appropriations), and the March 11, 2013, explanatory statement would have provided $60.0 million to CRF in FY2013. This amount was equal to the Administration's request. MEP . FY2013 post-rescission, post-sequestration funding for the MEP program was $119.4 million. This amount was $9.0 million (7.0%) less than the FY2012 enacted funding level of $128.4 million and $45.7 million (27.7%) less than the authorized funding level of $165.1 billion. H.R. 5326 would have provided $128.4 million to the MEP in FY2013. This amount was about the same as the Senate Committee on Appropriations recommendation of $128.5 million and $400,000 more than the Administration's request for $128.0 million. Regional Innovation Program (RIP) and Innovative Technologies in Manufacturing. COMPETES 2010 authorized two regional economic development programs at the EDA: RIP, which included funding for loan guarantees for science parks, and the Federal Loan Guarantees for Innovative Technologies in Manufacturing program. P.L. 113-6 provided $5.0 million each (pre-rescission, pre-sequestration) for the loan guarantee programs. These amounts were equal to FY2012 enacted funding levels and were, respectively, $15.0 million and $2.0 million less than COMPETES 2010 authorized funding levels of $20.0 million for manufacturing loan guarantees and $7.0 million for science park loan guarantees. The DOC's FY2014 budget request states that the department anticipates initial execution of loan guarantees (from both programs) in FY2015. H.R. 5326 would have authorized unspecified funding for the RIP and would have provided up to $5.0 million for the manufacturing loan guarantee program in FY2013. S. 2323 and S.Rept. 112-158 would have provided $25.0 million for RIP, and up to $7.0 million for loan guarantees for science parks, but did not specify funding for the manufacturing loan guarantee program. Senate provisions were consistent with the President's FY2013 request. Provisions in the House committee report directed EDA to provide details of its efforts to implement the manufacturing loan guarantee program with its FY2014 budget request. Provisions in the Senate committee report directed EDA to continue providing grants and technical assistance to entities supporting clean energy technology commercialization; to consider new competitions in industries not previously targeted; and to consider geographic equity when making award decisions. Top Line Allocations. FY2013 post-rescission, post-sequestration funding for NSF was $6.884 billion. This amount was $220.6 million (3.1%) less than the FY2012 actual funding level of $7.105 billion and $1.416 billion (17.1%) less than the COMPETES 2010 authorized funding level of $8.300 billion. FY2013 funding levels in H.R. 5326 and S. 2323 were identical for five of NSF's six major accounts. A $59.4 million difference in funding for the main research account (Research and Related Activities, or R&RA) led to an equivalent difference between the two top lines, which were $7.333 billion (House) and $7.273 billion (Senate Committee on Appropriations). Other than this difference, the House and the Senate Committee on Appropriations agreed on major funding levels for the NSF in FY2013. At the top line, both the full House and Senate committee-proposed funding levels for NSF were between $40.6 and $100.0 million less than the President's request for $7.373 billion. The Senate report directed NSF to report on its progress implementing and responding to various Office of the Inspector General reports and recommendations. An amendment ( H.Amdt. 1088 ) adopted during House floor debate on H.R. 5326 would have eliminated funding for NSF's Climate Change Education program. A second amendment to H.R. 5326 that was adopted during House floor debate ( H.Amdt. 1094 ) would have eliminated funding for political science research at NSF. Research Funding. FY2013 post-rescission, post-sequestration funding for R&RA was $5.544 billion. This amount was $214.6 million (3.7%) less than the FY2012 actual funding level of $5.758 billion and was $1.094 billion (16.5%) less than the COMPETES 2010 authorized funding level of $6.638 billion. H.R. 5326 would have provided $5.943 billion for R&RA in FY2013. This amount was $59.4 million (1.0%) more than the Senate Committee on Appropriations recommendation of $5.883 million and $40.6 million (0.7%) less than the President's FY2013 request for $5.983 billion. Research provisions in the House committee report directed NSF to give priority to research in the following fields: cybersecurity; advanced manufacturing; materials research; and research in the natural and physical sciences, mathematics, and engineering. Other provisions from the House committee report directed I-Corps participants to commit to the domestic production of goods or services commercialized with NSF assistance, encouraged the foundation to establish neuroscience as a cross-cutting budget theme, required NSF to report on plans to recompete certain major facilities awards, and required NSF to report on interdisciplinary activities at NSF-funded research facilities. Research provisions in the Senate committee report directed NSF to reduce funding for new OneNSF activities and to focus on core programs and infrastructure. Other research provisions in the Senate committee report provided the full request—$244.6 million ($161.9 of which was reserved for infrastructure)—for astronomical sciences; provided funding for the Large Synoptic Survey Telescope; and encouraged NSF to allocate adequate funding for domestic radio astronomy facilities while the Atacama Large Millimeter Array transitions to full operation. The Senate committee report also provided funding for cybersecurity security research ($161.0 million) and the Academic Research Fleet ($927.8 million), and supported full funding for scientific facilities and instrumentation. EPSCoR, which was reauthorized by COMPETES 2010, would have received $158.0 million under the Senate committee proposal. (This amount is slightly less than the FY2013 request for $158.2 million and $7.1 million more than the FY2012 actual funding level of $150.9 million.) Provisions in the March 11, 2013, explanatory statement incorporated NSF's proposed R&RA terminations; adopted by reference House report language relating to advanced manufacturing; adopted by reference Senate report language on cybersecurity research; and adopted by reference House report language regarding I-Corps, with the stipulation that if NSF determines that there are practical considerations that prevent implementation, then the foundation was to report those concerns to the appropriations committees immediately. Other R&RA provisions in the explanatory statement rejected Senate report limitations on OneNSF initiatives, but stated that future growth should not come at the expense of core functions and encouraged NSF to refine the balance between core functions and OneNSF initiatives in its FY2014 and future budget requests. The explanatory statement provided $247.6 million (pre-rescission, pre-sequestration) for astronomical sciences, including $164.9 million for infrastructure, and provided $158.2 million (pre-sequester, pre-rescission) for EPSCoR. STEM Education. FY2013 post-rescission, post-sequestration funding for NSF's main education account, Education and Human Resources (E&HR), was $833.3 million. This amount was $2.8 million (0.3%) more than the FY2012 actual funding level of $830.5 million and was $208.5 million (20.0%) less than the COMPETES 2010 authorized funding level of $1.041 billion. The full House and the Senate Committee on Appropriations agreed on E&HR funding levels in FY2013. Both legislative bodies proposed $875.6 million for E&HR in FY2013. This amount was equal to the President's budget request. STEM education provisions in the House committee report incorporated NSF's proposed program reductions; directed the foundation to continue work on a tracking and evaluation system to assess implementation of the National Research Council (NRC) report on best practices in STEM education; and accepted proposed changes to the Informal Science Education (ISE) program, but encouraged NSF to work with stakeholders as it transitions ISE toward activities intended to increase focus on innovative learning and engagement strategies. The House committee report also encouraged NSF to use existing resources to promote collaboration between research institutions and STEM-focused K-12 schools. The Senate committee report encouraged NSF to continue support for undergraduate science and engineering education; rejected the Administration's proposed cuts to the ISE program; urged NSF to ensure that GRF applications are reviewed on their merit, and not rejected for reasons other than the quality of the proposal; and directed NSF to fund the Research in Disabilities Education and Research on Gender in Science and Engineering programs at FY2012 levels (and to maintain these two programs as separate programs). S.Rept. 112-158 also provided: the full requests for the Advanced Technological Education ($64.0 million) and Noyce ($54.9 million) programs, as well as $45.0 million ($20.0 million more than the request) for the Federal Cyber Service: Scholarships for Service program. Provisions in the March 11, 2013, explanatory statement incorporated most of NSF's proposed reductions, with the exception of the reductions in the ISE (now renamed Advancing Informal Science Learning or AISL). The explanatory statement directed NSF to fund AISL as described in the Senate report; provided $69.0 million for ATE; adopted by reference House report language on tracking implementation of the recommendations contained in the NRC report on best practices in STEM education; and adopted by reference Senate report language on the Federal Cyber Service: Scholarships for Service program. Broadening Participation. NSF had not published, as of the date of this report, post-rescission, post-sequestration FY2013 funding levels for all its various broadening participation programs. Total FY2012 actual funding for programs that NSF identifies as broadening participation programs was $761.1 million. Although FY2013 funding information for all NSF broadening participation programs was not yet available as of the date of this report, the NSF supplied CRS with current plan funding levels for some COMPETES 2010-related broadening participation programs. In particular, FY2013 current plan funding for the Historically Black Colleges and Universities Undergraduate Program (HBCU-UP) was $30.3 million, compared to $31.9 million in FY2012 actual. The Tribal Colleges and Universities Program (TCUP) received $12.3 million, compared to $13.4 million in FY2012 actual. The Louis Stokes Alliances for Minority Participation (Stokes) program received $42.1 million, compared to $45.5 million in FY2012 actual; and the Centers for Research Excellence in Science and Technology (CREST) program received $23.0 million, compared to $24.2 million in FY2012 actual. The House committee report provided the FY2013 request for HBCU-UP ($31.9 million), Stokes ($45.6 million), and T-CUP ($13.3 million). The Senate committee report provided $33.0 million for HBCU-UP, $47.8 million for Stokes, and $13.4 million for TCUP. Additionally, the Senate committee report provided $25.0 million for the Centers for Research Excellence in Science and Technology (CREST) program. The March 11, 2013, explanatory statement incorporated Senate report funding levels for these programs. Provisions in the House committee report also directed NSF to report on how the needs of Hispanic Serving Institutions (HSIs) would be addressed in FY2013 and on any plans to establish an HSI-focused program in FY2014. Provisions in the Senate committee report encouraged NSF to prioritize proposals that have "demonstrated maturity, including previous partnerships with other federal agencies." The House passed H.R. 5325 (Energy and Water Development Appropriations Bill, 2013) by a vote of 255-165 on June 6, 2012. Among other things, the act provided FY2013 appropriations for the Department of Energy's Office of Science and the Advanced Research Projects Agency–Energy (ARPA-E). COMPETES 2010 provided authorizations for both the Office of Science and ARPA-E. The Senate Committee on Appropriations reported an FY2013 Energy and Water Development appropriations bill on April 26, 2012 ( S.Rept. 112-164 , S. 2465 ). The full Senate did not consider that measure. As previously noted, P.L. 112-175 provided continuing appropriations to Energy-Water agencies through March 26, 2013. P.L. 113-6 provided continuing appropriations to Energy-Water agencies from March 27, 2013, through the end of the fiscal year. This section compares FY2013 post-rescission, post-sequestration Energy-Water funding levels (where available) for selected COMPETES 2010 accounts with enacted, current, or actual FY2012 funding levels (as noted), and FY2013 COMPETES 2010 authorized funding levels. This section also compares House-passed FY2013 funding levels for selected COMPETES 2010 accounts with Senate Committee on Appropriations FY2013 recommendations and FY2013 Administration budget requests. (See Table A-1 for details.) Selected COMPETES 2010-related policy provisions in H.Rept. 112-463 and S.Rept. 112-158 are also noted herein. Office of Science . FY2013 post-rescission, post-sequestration funding for the Office of Science was $4.621 billion. This amount was $313.9 million (6.4%) less than FY2012 current funding level of $4.935 billion and $1.380 billion (23.0%) less than the COMPETES 2010 authorized funding level of $6.001 billion. H.R. 5325 would have provided $4.801 billion for the Office of Science in FY2013. This amount was $107.6 million (2.2%) less than the Senate Committee on Appropriations' recommendation of $4.909 billion and $190.6 million (3.8%) less than the President's FY2013 request for $4.992 billion. Office of Science provisions in the House committee report included the expectation that the office would continue to support minority serving institutions. Office of Science provisions in the Senate committee report expressed continued support for research priorities in new materials, biofuels, and computing. However, the Senate committee report also expressed concerns about how the office manages lower priority research activities. In particular, the Senate committee report noted that the office has not provided sufficient strategic guidance on how lower priority research areas may or should adjust their scope of work in response to decreasing budgets. Both House and Senate committee reports also contained specific provisions for Office of Science research programs. STEM Education. Although not the only source of funding for STEM education at the Department of Energy, the Office of Science's Workforce Development for Teachers and Scientists (WDTS) account provides funding for internships, fellowships, and the National Science Bowl (among other activities). FY2013 post-rescission, post-sequestration funding for WDTS was $17.5 million. This amount was $1.0 million (5.5%) less than the FY2012 current funding level of $18.5 million. The House committee report would have provided $14.5 million for the WDTS account in FY2013. This amount was the same as both the Senate committee recommendation and the FY2013 request. H.Rept. 112-462 provided no funds for the Office of Science Graduate Fellowship (SCGF). This was consistent with the Office of Science FY2013 budget request. The Senate committee report commended the Office of Science for its efforts to evaluate its science workforce development programs. The House committee report included educational activities on its list of "major committee concerns" about DOE (in general, not just in the Office of Science account). Other major committee concerns with a potential COMPETES Act nexus included competitiveness and intellectual property. (See section titled "Other DOE-wide Issues and Competitiveness.") H.Rept. 112-462 prohibited DOE from funding fellowship and scholarship programs in FY2013 unless (1) those programs were specifically requested in FY2013 DOE budget justification and (2) the program was not otherwise excluded from receiving funding. The House committee report also directed DOE to provide the committee with a comprehensive listing of all FY2012 funded educational activities. ARPA-E. FY2013 post-rescission, post-sequestration funding for ARPA-E was $250.6 million. This amount was $24.4 million (8.9%) less than FY2012 current funding level of $275.0 million and was $61.4 million (19.7%) less than the COMPETES 2010 authorized funding level of $312.0 million. H.R. 5325 would have provided $200.0 million for ARPA-E in FY2013. This amount was $112.0 million (35.9%) less than the Senate Committee on Appropriations' recommendation of $312.0 million and $150.0 million (42.9%) less than the President's FY2013 request for $350.0 million. COMPETES 2010 authorized $312.0 million for ARPA-E in FY2013. ARPA-E provisions in the House committee report expressed support for the program's increased focus on transportation technologies. An amendment added during House floor debate would have prohibited ARPA-E awardees from using federal funds to raise private capital or advertise. ARPA-E provisions in S.Rept. 112-164 encouraged DOE "to continue tracking projects to demonstrate how federal investments have developed more energy efficient technologies and potentially new industries." Other DOE-wide Issues and Competitiveness. H.Rept. 112-462 expressed a number of general concerns about the DOE, including concerns that the agency has failed to produce committee-requested reports on certain Office of Science activities (e.g., Energy Innovation Hubs, exascale computing, future year funding levels for Office of Science accounts) in a timely manner. The House committee report also encouraged DOE to consider aspects of the ARPA-E project and program management model for application elsewhere in the department and raised general competitiveness concerns about the possibility that foreign manufacturers may be capitalizing on ideas developed in DOE labs. In response to competitiveness concerns, H.Rept. 112-462 directed DOE to report on existing authorities to control intellectual property and help retain domestic manufacturing and to make recommendations for improving domestic intellectual property transfer and retention. S.Rept. 112-164 also expressed a number of general concerns about DOE. For example, the Senate committee report raised concerns about contractor support at the Office of Science (and elsewhere in the department), noting that the cost of contractor support functions at the office increased by 10% between FY2007 and FY2009. The Senate committee report also directed DOE to maintain existing small business contracting practices at the national laboratories—which the committee report stated the department had considered changing—and directed DOE to consult with Congress, including the Committee on Small Business and Entrepreneurship, before making any changes. Neither chamber considered a regular Labor-HHS-Education appropriations measure in FY2013. However, the Senate Committee on Appropriations reported S. 3295 (Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act, 2013) on June 14, 2012. (See S.Rept. 112-176 .) The Senate committee report did not specify funding amounts for COMPETES acts-related Department of Education (ED) programs. As previously noted, P.L. 112-175 provided continuing appropriations to Labor-HHS-Education agencies through March 26, 2013. P.L. 113-6 provided continuing appropriations to Labor-HHS-Education agencies from March 27, 2013, through the end of the fiscal year. Neither act made specific provisions for COMPETES 2010 authorizations at ED. Under COMPETES 2010, targeted account funding was set to increase at a compound annual growth rate of 6.3%, close to the 6.4% growth rate in actual appropriations for the targeted accounts during the COMPETES 2007 authorization period (FY2008 to FY2010). At the 6.3% COMPETES 2010 authorized rate, it would have taken approximately 11 years to double funding for the targeted accounts. However, growth in actual appropriations to the targeted accounts during the COMPETES 2010 authorization period—FY2011 to FY2013—slowed in comparison to growth in actual appropriations during the COMPETES 2007 authorization period. As a result, FY2013 post-rescission, post-sequestration appropriations for the targeted accounts represent a growth rate of about 3.0% since the FY2006 baseline. Further, FY2013 funding levels for the targeted accounts—separately and combined—were generally below FY2010 levels. Only the NIST core laboratory account was higher in FY2013 than in FY2010. The COMPETES acts were designed to improve the competitive position of the United States by fostering scientific and technological innovation. The primary policy devices that the acts employed—to this end—were increases in authorized funding for physical sciences and engineering research (e.g., the doubling path policy) and STEM education program authorizations. The specific debate about FY2013 funding for COMPETES 2010 provisions occurred within the broader conversation about these policy choices. This section briefly summarizes this policy context. Few analysts dispute the contention that the path to global competitiveness in the 21 st century runs through the twin pillars of scientific and technological advancement. The policy question, then, is what should the federal government do (if anything) to encourage scientific and technological innovation and (thereby) national competitiveness? A broad coalition of business, academic, and government leaders has concluded that at least part of the answer to this question is that the federal government should encourage innovation by increasing support for physical sciences and engineering research and by increasing the number of U.S. students graduating with STEM degrees and skills. Supporters of this general consensus assert that a combination of external pressures and internal weaknesses threatens the United States' innovation advantage. For example, supporters note that changes in the industrial bases and educational attainment rates of rapidly developing countries like China and India mean that these countries are able to compete for a growing percentage of the world's high-value jobs and industry. Further, these advocates assert that signs of potential weakness in areas that have long been U.S. strengths—such as the U.S. STEM workforce and leading-edge research—appear to accompany these global changes. In particular, COMPETES acts proponents raise concerns about funding for research in the physical sciences and engineering and the U.S. supply of scientists, engineers, and technicians. Although support for the innovation policy approach embodied in the COMPETES acts is widespread, it is not uniform. Opposition has tended to fall into three broad categories: (1) questions about fundamental assumptions, (2) preferences for alternative policies or approaches, and (3) cost. For example, some analysts dispute fundamental assumptions behind policies designed to increase the supply of STEM workers, arguing that there is no evidence of broad shortages of STEM workers and that the bigger challenge is on the demand side. Another fundamental assumption that some analysts have called into question is whether increased investment in publically funded research will increase U.S. competiveness given that such research is typically publically available. Other analysts prefer other policy tools—such as regulatory changes and tax policy—arguing that direct federal investment in research in the physical sciences and engineering and in STEM education can distort markets. Opponents have also raised concerns about cost, arguing that authorized funding increases are too expensive in light of the federal fiscal condition, deficit, and debt. FY2013 was the third and final year for most of COMPETES 2010's major funding authorizations. Although the full House, Senate Committee on Appropriations, and the President all initially sought increases over FY2012 levels for many (not all) key COMPETES 2010 accounts in FY2013; the combined effects of sequestration, as well as rescissions and funding levels in the final FY2013 appropriations act ( P.L. 113-6 ) decreased funding levels for many (not all) of these accounts below FY2010 actual levels. Further, although there has always been a gap between COMPETES act authorizations (total, defined) and appropriations (total, defined), that gap widened in FY2013 and was larger than in all previous authorized years. It remains to be seen whether and how the FY2013 funding status of COMPETES accounts will factor in future congressional conversations about reauthorization of COMPETES 2010 and future appropriations for these accounts.

Signed on January 4, 2011, the America COMPETES Reauthorization Act of 2010 (COMPETES 2010, P.L. 111-358) sought to improve U.S. competitiveness and innovation by authorizing, among other things, increased federal support for research in the physical sciences and engineering, as well as science, technology, engineering, and mathematics (STEM) education. Certain provisions of the law, including major funding authorizations, expired in FY2013. This report describes the President's FY2013 budget request for selected COMPETES 2010 provisions and tracks the status of FY2013 funding for these appropriations accounts. The President's FY2013 budget requested an increase of 4.1% for the "doubling path" accounts at the National Science Foundation (NSF), Department of Energy's Office of Science, and National Institute of Standards and Technology's (NIST's) core laboratory and construction. This growth rate was less than the COMPETES 2010 authorized rate of 6.3% and equal to the FY2012 enacted appropriations rate. At the end of the COMPETES 2010 authorization period in FY2013, the growth rate in the targeted accounts was 3.0% (from the FY2006 baseline). Funding levels for the targeted accounts—individually and combined—were generally below FY2010 levels. The sole exception was the NIST core laboratory account, which was higher in FY2013 than in FY2010. For FY2013, Congress provided both regular and continuing appropriations to COMPETES 2010 agencies. NSF and NIST received regular appropriations, while the Office of Science and Department of Education received continuing funding. The combined effects of sequestration and rescissions in P.L. 113-6 (FY2013 Consolidated and Further Continuing Appropriations Act) resulted in year-over-year reductions for the Office of Science, the Advanced Research Projects Agency-Energy (ARPA-E), and most NSF accounts. FY2013 funding for most NIST accounts increased slightly over FY2012 enacted levels. All of the selected COMPETES 2010 accounts were funded below authorized levels. Table A-1 contains information about the FY2013 funding status of selected provisions from COMPETES 2010. Both the House and the Senate Committee on Appropriations approved FY2013 appropriations bills for the NSF, NIST, and Office of Science before Congress enacted P.L. 113-6. As initially proposed, differences between House and Senate top line funding levels for NSF and NIST were less than 1%, while the difference in funding for the Office of Science was 2.2%. Proposed FY2013 funding for ARPA-E revealed larger differences between the chambers. The House would have provided $200 million while the Senate Committee on Appropriations sought the authorized amount ($312.0 million). FY2013 funding for COMPETES 2010's STEM education provisions were largely consistent with previous appropriations cycles, which have not typically included specific funding levels for these activities. A notable exception to this rule is the main education account at NSF. As initially requested, passed, and recommended, the President's, House, and Senate Committee on Appropriations each provided $875.6 million for this account in FY2013. Post-rescission, post-sequestration FY2013 funding for this account was $833.3 million.

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The Lacey Act was enacted in 1900 to address game poaching and wildlife laundering, among other things. The Lacey Act regulates the trade of wildlife and plants and creates penalties for a broad spectrum of violations. Violations addressed by the Lacey Act involve domestic and international illegal trade of plants and wildlife. Before the enactment of amendments in 2008, the Lacey Act addressed these issues by making it unlawful for any person to: "import, export, transport, sell, receive, acquire, or purchase any fish or wildlife or plant taken, possessed, transported, or sold in violation of any law, treaty, or regulation of the United States or in violation of any Indian tribal law"; or to "import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any fish or wildlife taken, possessed, transported, or sold in violation of any law or regulation of any state, or in violation of any foreign law;" and any plant taken, possessed, transported, or sold in violation of any state law or regulation. In 2008, the Lacey Act was amended to include nonindigenous plants and violations of foreign laws pertaining to certain conservation actions and other activities involving plants and plant products. Based in part on these amendments, the Lacey Act now makes it unlawful for any person to import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any plant taken, possessed, transported, or sold in violation of any law or regulation of any state, or any foreign law, that protects plants or that regulates taking or exporting plants and plant products in certain situations. This includes plants taken, possessed, transported, or sold without the payment of appropriate royalties, taxes, or stumpage fees; and plants exported in violation of state or foreign law. Further, in reference to plants, it is unlawful to import, export, transport, sell, receive, acquire, or purchase any plant or plant product taken, possessed, transported, or sold in violation of any law, treaty, or regulation of the United States or in violation of any Indian tribal law. In addition, the Lacey Act makes it unlawful to falsify or submit falsified documents related to any plant or plant product covered by the act, and to import certain plants and plant products without an import declaration. The provisions related to fish, wildlife, and plants in reference to laws, treaties, and regulations of the United States and any Indian tribal law were unchanged (although the definition of plants was expanded to include nonindigenous plants). The 2008 amendments to the Lacey Act (2008 amendments) also expand the definition of a plant to include any plants (including foreign plants), whereas before it referred only to plants indigenous to any state or associated commonwealths, territories, or possessions of the United States. A plant is specifically defined as "any wild member of the plant kingdom, including roots, seeds, parts, or products thereof, and including trees from either natural or planted forest stands." There are certain exclusions to this definition of plants, including common cultivars (except trees), common food crops, scientific specimens of plant genetic material to be used for laboratory or field research, and any plant that is to remain planted or be planted or replanted. The 2008 amendments also require importers of all covered plants and plant products to submit an import declaration to U.S. Customs and Border Protection (CBP) at the time of importation. The law requires that the declaration contain certain information, such as identification of the species and genus of plants or plants used in a product, and country of origin of plants, among other things. The declaration appears to apply to all plants and plant products, including those plants harvested or plant products made before the enactment of 2008 amendments. The primary aims of the 2008 amendments were to reduce illegal logging and to increase the value of U.S. wood exports. International illegal logging is a pervasive problem affecting several countries that produce, export, and import wood and wood products. Estimates of the extent of illegal logging vary and may not be completely accurate due to the clandestine nature of the activity. Some have estimated that 15% to 30% of the volume of all forestry is attributable to illegal logging. In tropical countries, some estimate that between 50% and 90% of all logging is illegal. Illegal logging is a concern to many because of its economic implications as well as its environmental, social, and political impacts. The economic value of global illegal logging is estimated to be between $50 billion and $100 billion of the global wood trade. An analysis by the World Bank estimates that illegal logging costs governments approximately $5 billion annually in lost royalties and an additional $10 billion in lost revenue. Some are concerned that high U.S. demand for tropical timber from countries in Latin America and Southeast Asia may exacerbate illegal logging. The United States is the world's largest wood products consumer and one of the top importers of tropical hardwoods. For example, the United States is the largest importer of Peruvian mahogany, which some estimate to be 80% illegally logged. Global illegal logging activities can devalue U.S. exports of timber. Illegally logged wood generally costs less to bring to market than legally logged wood due to nonpayment of fees or taxes, and avoidance of costs related to laws that govern harvesting. This lowers the market price of wood, potentially harming timber operations that operate legally. According to a 2004 report issued by the American Forest and Paper Association, it is estimated that illegal logging of roundwood for wood products depresses world wood prices on average by 7%-16% annually. This affects U.S. producers of wood and their exports. If there were no illegally logged wood in the global market, it has been projected that the value of U.S. exports of roundwood, sawnwood, and panels could increase by an average of approximately $460 million each year. Further, if increases in value for domestic wood production if illegal logging is halted are taken into account, then the increase in value of wood products in the United States each year could be approximately $1.0 billion, according to the study. Other countries and entities have adopted measures similar to the Lacey Act. The European Union (EU), for example, has a regulation that prohibits the placement of illegally harvested timber and timber products on the EU market and requires entities to establish due diligence schemes. Australia passed a similar law that prohibits the import of wood or wood products that were illegally logged or contain illegally logged timber. The requirements established in the Lacey Act are administered by the Departments of the Interior, Commerce, and Agriculture through their respective agencies. These include the U.S. Fish and Wildlife Service (FWS), National Marine Fisheries Service (NMFS), and Animal and Plant Health Inspection Service (APHIS). This report summarizes the implementation of the 2008 amendments to the Lacey Act and discusses policy issues related to the amendments. A raid on Gibson Guitar Corporation (see box below) brought to light several existing policy and legal issues related to the 2008 amendments to the Lacey Act. In broad terms, some question why U.S. importers should be held responsible for violations of foreign law potentially committed by foreign entities (i.e., not U.S. importers). They claim that it is difficult to monitor the harvesting and processing of plants and plant products in foreign countries to make sure that no foreign laws are being violated. Other concerns address specific provisions of the 2008 amendments such as the declaration requirements for plants and plant products imported into the United States. Several businesses have suggested that the declaration requirements for importing plants and plant products are cumbersome and in some cases, not possible to meet. For example, some claim that identifying species for the declaration can be difficult for composite wood materials or some finished products where the wood has been modified from its natural state. Compliance with other requirements in the act is another issue. Some contend that plants and plant products imported before 2008 should be exempt from the law. They note that getting declaration information about these products, sometimes years after importation, can be difficult. To temper these criticisms of the 2008 amendments of the Lacey Act, some are reiterating the intended positive effects of the amendments, such as the potential economic benefits of reducing illegal logging and the potential environmental benefits of reducing deforestation and corruption associated with the illegal timber trade. Congressional interest in this issue stems in part from the wide-reaching applicability of the Lacey Act for U.S. industries and consumers and the environmental and economic benefits of reducing illegal logging. The 2008 amendments to the Lacey Act affect all industries that import plant and plant products, including musical instrument makers, furniture manufacturers, flooring companies, toy manufacturers, the auto industry, and some textile manufacturers that use fabrics that contain plant fibers. The 2008 amendments are expected to reduce illegal logging, which will reduce corrupt practices and increase biodiversity and conservation in timber-supplying countries, and increase revenues for foreign and domestic companies that sell and process wood. The 113 th Congress has addressed the 2008 amendments with proposed legislation. H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility for specifying the applicability of declaration requirements. H.R. 3280 would amend the Lacey Act to exempt plants and plant products imported before May 22, 2008, from the Lacey Act. This section reviews the implementation of declaration requirements, enforcement, and funding under the 2008 amendments. Policy issues associated with implementation are discussed below in " Issues and Legislative Options ." Under the Lacey Act, all plants or plant products being imported into the country must be declared, with some exceptions that include common cultivars, packaging material, and scientific specimens, among other things. The declaration is to be made by the importer at the time of import. According to APHIS, the declaration requirements in the 2008 amendments are expected to facilitate accountability and improve data collection on plant imports. Similar declaration requirements are used for the import of wildlife to the United States. The declaration for plants and plant products is to provide: the scientific name of any plant (genus and species) contained in the importation; the value of the plant or plant product; the quantity of the plants or plant products (including the unit of measure); and the country of origin of where the plant was taken. In cases where multiple species are found in a product, there are some variations to the declaration. If a product contains material from several different plants, of which the names of the species are uncertain, the law states that the declaration should contain the names of all plant species that could have been used to create the product. Furthermore, if the exact country of origin is not known, the declaration must contain the names of all of the countries from where the plant species could have come. Information from submitted declarations is entered into a database, maintained by APHIS. It is unclear if this information will be openly available to the public. The declaration does not require information on the chain of custody of the product or its parts. For example, if a chair was fabricated in China with wood that was harvested and shipped from Indonesia, via Singapore, a full record of transactions throughout its fabrication process would not be necessary. The declaration will require the species of plant(s) used in the making of the chair (i.e., product imported), and the origin of each plant species used (e.g., Indonesia), and the value and quantity of the plant used. In some cases, the country of harvest for the declared plant material will be different from the country of export. APHIS has also developed a series of special use designations (SUDs) to ease some burdens of declarations. A SUD is an entered code that would substitute for certain required information. SUDs apply to specific products under designation regulations and are organized into three categories: The use of shorthand names for common trade groupings of species. (APHIS has a list of acceptable names.) The use of a special code to identify composite woods or recycled and reclaimed products if species and genus cannot be determined through a process of due care. Items manufactured prior to May 22, 2008, whose sources or species cannot be identified through a process of due care could be given a SUD. The declaration requirements were to be implemented by December 2008; however, APHIS delayed implementation due to concerns about the complexity of the requirements. Consequently, the declaration requirements on certain items were implemented on a delayed schedule between April 2009 and April 2010. The implementation of the declaration requirements is related to the Harmonized Tariff Schedule (HTS) of the United States, which classifies plants and plant products under certain codes in trade for duty, quota, and statistical purposes. Implementation is based on HTS codes and follows a schedule. Some more complex plant products (e.g., those containing specialty wood) were declared by April 2010 (e.g., musical instruments). Only items classified in the current implementation schedule are subject to enforcement for compliance with the declaration schedule, according to APHIS. Several other products containing wood parts, such as some firearms, furniture, and some toys, are being considered for phased-in implementation. APHIS has stated that it is not enforcing the declaration requirement for informal entries such as personal shipments. It is uncertain when or if these types of products will have to be declared. Any additions to the items requiring a declaration are expected to be reported in the Federal Register , according to APHIS. The 2008 amendments required a review of the declaration requirements and the effects of certain exclusions to the declaration requirements not more than two years after the enactment of the amendments (by May 22, 2010). APHIS published a notice in 2011 stating that it is initiating this review and seeking comments on the implementation of the declaration requirements. Further, 180 days after the review is complete, a report reviewing the implementation of declaration requirements is to be submitted to appropriate congressional committees. The report is to contain: an evaluation of the effectiveness of the declaration requirements in assisting enforcement of the requirements and efforts to integrate the requirements with other import regulations; recommendations for legislation that would assist in the identification of plants that are imported into the United States illegally; and an analysis of the effect of prohibitions and declaration requirements on the cost of legal plant imports and the effect on illegal logging practices and trafficking. A report was completed in May 2013 and sent to Congress. The report discusses some statistics of declaration requirements. For example, APHIS is receiving approximately 40,000 declarations per month (5,000 per month on paper, the rest electronically), and, of the declarations sent, approximately 32% are missing some aspect of the declaration. The report also mentions some of the issues associated with declarations. These range from importers not being able to identify species and genus of plants in products to mislabeling the country of harvest of the species. Further, the report discusses difficulties in processing the magnitude of paper declarations and the unsuccessful pilot program to create and implement blanket declarations. The report did not suggest recommendations for creating legislation to ease declaration requirements, but did emphasize the use of SUDs to ease the burden of declaring goods for importers. Regulations to reflect the study's findings may be promulgated 180 days after the review discussed above. The 2008 amendments authorize the regulations to include limits on the applicability of the declaration requirements to specific plant products; modifications to the requirements based on the review; and limits to the scope of the exclusions to the declaration requirement if they are warranted according to the review. No recommendations for changing the regulations of the 2008 amendments have been promulgated, although SUDs are in place to address some issues. The Lacey Act states that the provisions and subsequent regulations under the act are to be enforced by the Secretaries of the Interior and Commerce, and in the case of plants, also the Secretary of Agriculture. Agencies—for example, CBP, the U.S. Coast Guard (e.g., for fisheries violations), the National Marine Fisheries Service, the Federal Bureau of Investigation, the U.S. Forest Service, the Office of the Inspector General, and U.S. Immigration and Customs Enforcement—also can enforce the Lacey Act through inspection or monitoring activities. The Lacey Act can be enforced at the border or through investigations. Agents at ports of entry inspect imports and monitor the declaration process. Inspectors can initiate and conduct investigations into violations of the Lacey Act. The FWS Office of Law Enforcement reported 2,474 investigations related to the Lacey Act in 2012. Enforcement of the Lacey Act sometimes depends on an understanding of what foreign laws might have been violated. There is no federal database of foreign wildlife and plant laws, thus making enforcement of the law challenging. However, to facilitate investigations, officials might use information gained from foreign governments, nongovernmental organizations, private citizens, anonymous tips, declarations, industry, and border agents, among others, during the investigation. Officials are also authorized to provide rewards to informants that lead to the arrest, conviction, or assessment of fines to a violator. A Lacey Act violation requires two actions to be taken. If a person violates a U.S. or tribal law by taking, possessing, transporting, or selling any fish, wildlife, or plant (or plant product), the Lacey Act is violated if that fish, wildlife, or plant is then imported, exported, transported, sold, received, acquired, or purchased. It is slightly different for violations of state or foreign laws, which require that the import, export, transport, sale, receipt, acquisition, or purchase of the fish, wildlife, or plant be in interstate or foreign commerce before there can be a violation. A Lacey Act violation can result in civil penalties that could involve fines and forfeiture of wildlife, plants, and products, and criminal penalties that could involve fines, forfeiture, and incarceration. The Lacey Act does not authorize funding to implement the act or enforce provisions within the act. However, funding for implementing the act could come from discretionary appropriations. The Secretary is directed to identify funds used to enforce the Lacey Act and any regulations as a special appropriations item in the Department of the Interior appropriations budget proposal to Congress. Funds for implementing the act could come from other accounts in federal agencies. For example, funds for FWS investigators to enforce laws that address fish, wildlife, and plant resources are provided under the Office of Law Enforcement line item for FWS. This program received $62.3 million for FY2013. This office also funds law enforcement officials to monitor and investigate the wildlife trade. The office has 219 agents and 143 inspectors on staff for FY2012. In FY2012, investigators conducted 12,996 investigations, of which 2,474 involved the Lacey Act. FWS also has an international wildlife trade program that implements domestic laws and international treaties that address the wildlife trade. APHIS also funds the implementation of the Lacey Act. Money taken from penalties and fines under the Lacey Act can be deposited into the Lacey Act Reward Fund. Money in this fund can be used to provide rewards to people who provide information that leads to an arrest, criminal conviction, and other things. Money can also be used to reimburse costs to those providing temporary care to fish, wildlife, or plants while a case is ongoing. Several policy issues are associated with the 2008 amendments, ranging from questions about the overall purpose and function of the Lacey Act to issues about specific provisions in the act such as the declaration requirements. Several environmental, trade, and industry groups have formed coalitions to identify issues and suggest solutions. Some coalitions who primarily have issues with the declaration requirements have proposed solutions that they contend could be addressed by regulations. Others contend that the regulatory process has not worked and congressional action is needed. This section discusses selected policy issues associated with the 2008 amendments and summarizes proposed and potential legislative and regulatory options. Under the Lacey Act, the importer is responsible for making sure that imported plants and plant products are legally harvested, processed, and imported. This could involve monitoring the production of plant products and verifying that plants and plant products are being harvested, processed, and imported legally under foreign laws. This requirement has been interpreted by some as requiring the United States to enforce foreign laws, which some contend should be the responsibility of the country who established the laws. Others contend that the United States contributes to illegal trade by being one of the largest consumers of plant and plant product imports, and therefore is in a special position to apply demand-side pressure to ensure legally sourced plants and plant products for export. Some might argue that there is limited potential to lower the level of illegal trade of plants and wildlife, since the illegal trade could shift away from responsible importers (i.e., U.S. importers following the Lacey Act) to those in countries with fewer restrictions. In the case of illegal logging, however, this argument is waning since other countries or blocks of countries are adopting regulations similar to the Lacey Act. For example, the European Union (EU) has adopted a regulation that prohibits the entry of illegally harvested timber into the European market. The responsibility for regulating timber falls on those who put plants and plant products in the market (e.g., importers and producers). Illegally harvested is defined under the regulation as "harvested in contravention of the applicable legislation in the country of harvest." The regulation applies to both timber imported into the EU and timber produced within the EU. The regulation requires that those placing timber or timber products into the market practice due diligence. Further, the regulation will require that those who buy and sell timber or timber products on the market be able to identify their suppliers and customers so that the timber and timber products can be traced. Australia has also passed a law similar to the Lacey Act and the EU regulation. This law prohibits the import of timber products that contain illegally logged timber; requires importers to undertake due diligence to mitigate the risk of products containing illegally logged timber; and establishes a monitoring, enforcement, and investigation regime. If a large portion of the world market for timber adopts regulations similar to the 2008 amendments, such as the EU regulations, the market for illegally harvested or processed plants and plant products would be expected to decrease because the consumer base addressing illegal logging would presumably increase. There is no proposed legislation in the 113 th Congress that attempts to remove foreign laws from the coverage of the Lacey Act. Some contend that the 2008 amendments of the Lacey Act overreach the original intent of their proponents by addressing laws that are not related to conservation. For example, the act makes it unlawful to possess any plant that was processed illegally according to a foreign law. As discussed in the Gibson guitar case, exporting unfinished wood conforming to HS 4407 from India is a violation of Indian law governing exports and hence a potential violation of the Lacey Act. Some could contend that illegally processing wood might not have a direct effect on conservation. Indeed, under the 2008 amendments, harvesting and exporting wood where applicable conservation laws and payment of fees and taxes are followed could still violate a country's export law (e.g., due to restrictions on unfinished wood exports) and therefore would be prohibited under the Lacey Act if the plant or plant products are imported into the United States. Counter to the argument that the Lacey Act overreaches its intent, others defend the legitimacy of the Lacey Act as a conservation tool. They contend that all areas covered by the Lacey Act, including export laws, have some connection to conservation. Enforcing payments of stumpage fees and taxes, for example, takes away the financial benefits of illegal logging and could provide revenue for conservation activities (e.g., more law enforcement officers). They also contend that enforcing export laws lowers the influx of illegal plants and plant products onto the market. For example, legally required processing or finishing of wood could provide another layer of oversight on the trade of plants and plant products, and could also increase the transparency of the supply chain of the plants and plant products, making enforcement of foreign laws easier. Removing violations of foreign laws from the Lacey Act would address this issue, yet would narrow the scope of the act significantly. Another alternative, as discussed above, would be to limit the applicability of foreign laws to those laws that directly address the protection, conservation, and management of plants. This would also narrow the scope of the law, but would keep it focused on addressing conservation. However, some might contend that violations not related to conservation might lead to charges that ultimately might address conservation. The enactment and implementation of the 2008 amendments has led some to contend that the law increases costs for certain companies and could result in the loss of jobs. Others, in contrast, contend that the law increases revenue for certain companies and thus could lead to job creation. There has been no comprehensive analysis of the costs and benefits of the 2008 amendments for various types of plant and plant product industries. This section discusses the potential areas of costs and benefits of the 2008 amendments. The primary costs to comply with the 2008 amendments are attributable to exercising due care to ensure that imported plants and plant products are harvested and processed legally, and to comply with the declaration requirements. According to H.Rept. 112-604 , APHIS has stated that it is receiving approximately 40,000 declarations per month, at a cost of $56 million annually for regulated entities. This figure could be higher when the Lacey Act is fully implemented. The costs of compliance for regulated entities depend on the amount of due care conducted by the importer and the cost of declaration requirements. Larger companies might have more resources to exercise due care than smaller companies. Further, those importing large quantities of wood or products from single sources might have lower costs applying due care than those purchasing small quantities of specialized wood or products from several sources. In addition to costs of due care, other costs might come from complying with declaration requirements. Identifying the species and genus of wood products and filling out paperwork for declarations could require additional staff for companies importing wood and wood products. Indirect costs may result from changing trade partners that might not be able to verify the legality of their wood products. This might involve searching for new markets and establishing business with new companies. Last, there are costs associated with violations created by the 2008 amendments. Violations could result in penalties up to $500,000 for criminal violations and forfeitures of goods, which can be costly depending on the quantity and species of plants or plant products confiscated. One of the primary benefits of the 2008 amendments is based on the premise that reducing illegal logging would increase revenues for legal logging operations in the United States and other countries. As discussed before, illegally logged wood is cheaper to bring to market and likely depresses wood prices for both domestic and international markets. Based on this premise, if illegally logged wood were removed from the market, prices for legally harvested wood would probably increase. According to one study, this increase could be 7%-16% annually. Less illegally harvested wood in the market could lead to an increase in the demand for legally harvested wood, causing an upward pressure on prices. To illustrate the benefits of the 2008 amendments, several cite a trade report that estimated that illegal logging contributed approximately $1 billion annually in economic losses to the U.S. forest products industry in the form of lower exports and depressed wood prices. Some contend that the revenue gained from lowering the influx of illegally harvested wood into the market could lead to more domestic jobs. Another economic benefit of reducing illegal logging would be increasing revenues for governments in countries where wood is harvested. Studies have shown that illegal logging leads to corruption and evasion of paying fees and taxes for harvested and processed wood. The World Bank estimated that governments lose approximately $15 billion annually due to illegal logging, due primarily to lost revenue from taxes and fees. It is difficult to assess whether the 2008 amendments to the Lacey Act have been effective in reducing illegal logging around the world. There have been no comprehensive studies assessing the effect of the amendments on the logging industry. Some suggest anecdotally that foreign logging operations in China and Vietnam are paying closer attention to complying with local laws because of consumer-driven pressure. Others, however, might contend that restrictions on selling illegally harvested wood to U.S. companies might drive sales of illegally harvested wood higher to companies from countries that do not have restrictions on purchasing illegally harvested wood (i.e., leakage), potentially reducing the effect of the Lacey Act on illegal logging. The declaration requirements for plants and plant products under the 2008 amendments are controversial. Some contend that the declaration requirements are a burden and difficult to comply with under certain circumstances. For example, a case study of IKEA's procurement strategy noted that it would take 25 person-years annually to complete the declaration forms for IKEA's supply chain. Further, it notes that a single shipment might generate a 1,000-page document for a declaration because of all the products being shipped. Others are concerned with specific parts of the declaration requirements and have suggested modifications. Proponents of the declaration requirements, in general, contend that they are necessary to ensure compliance with the provisions of the Lacey Act and serve as an oversight mechanism for compliance. Some contend that wood in certain plant products is difficult to identify by genus and species. For example, for composite products and materials (i.e., products that contain more than one species of wood such as particleboard), it is difficult to identify the genus and species of all the component fibers because numerous species of wood can be used to make the products. Some have suggested that these types of wood products be excluded from the declaration requirements until it is feasible to identify various fibers by species. The law attempts to address complications with identifying several species of wood in products. For example, if the species of wood used in products is uncertain, one may declare all species of wood that the product could contain. Therefore, if a composite wood product is created from by-products from several species, listing the species that may have been used to create the product would satisfy the declaration requirement. However, APHIS has acknowledged that this might not be enough to facilitate the declaration of composite wood, and has asked for information on this issue to consider regulatory options. In the request for comments for potential changes in regulations, APHIS proposes a definition for composite wood and identifies two possible approaches for declaring composite wood through regulations. APHIS would define composite wood as consisting of plant material that has been chemically or mechanically broken down and reconstituted. The approaches to declaring composite wood would involve applying a type of de minimis standard to the wood. One approach is to identify the genus, species, and country of harvest for no less than a given percentage of the wood contained in the product. The percentage could be measured in terms of weight or volume. The second approach would be to declare the "average percent composite plant content" of the product, without regard for the species and country of harvest for the plant. Non-composite plant material would still need the genus, species, and country of harvest in the declaration. A de minimis standard has also been proposed for certain types of products that contain plant materials which are highly processed and are in small quantities. Some argue that identifying these plant materials is difficult due to the level of processing they have undergone and their small quantity in the product. Under this proposal, plant materials in certain products would be excluded from the declaration requirements. Product examples include cosmetics, personal care products, textiles, and rubber or cork products. Proponents of this proposal contend that federal agencies have rulemaking authority to make these exclusions, but that congressional action might be needed to clarify the agency's authority to establish exclusions to the declaration requirements. APHIS has addressed this issue, in part, with the use of SUDs. SUDs provide a special code to identify composite woods or recycled and reclaimed products if species and genus cannot be determined through a process of due care. Specific guidelines on using SUDs are provided. Some counter the need for modifications to the declaration requirements because they contend that knowing the type and source of wood is important for ensuring legal practices and countering the illegal trade. They specifically oppose suggestions to broaden the exemptions of plant products from declaration requirements, arguing that modifications proposed in H.R. 3210 would have excluded pulp and paper, which constitute a significant portion of the plant imports into the United States, from declaration requirements. Some contend that repeated or regular declarations of the same plant products add administrative burden and extra costs on industries without providing additional benefits for tracing the source of wood. A proposal to address this issue would allow for a blanket declaration. In a blanket declaration, importers would submit one declaration for similar products imported over a period of time, thus potentially saving the importer from submitting duplicate declarations for each product imported. APHIS has responded to this issue by initiating the Lacey Act Blanket Declaration Pilot Program in 2009 to test the feasibility of collecting information through a blanket declaration. Eligible importers can participate in the program. A blanket declaration will apply for one month, and a reconciliation report providing how much was actually imported during the month is due within 15 days after the end of the month. The report to Congress submitted by APHIS stated that this pilot project was not a success. Further, a survey revealed that users felt the program was duplicative of efforts related to declarations. The modification of declaration requirements can be done either through regulations or by law. Regulatory changes to the declaration requirements under the Lacey Act can be implemented from recommendations provided by certain reports and reviews. As discussed above, under the Lacey Act, the Secretary is required to review the declaration requirements and report findings to appropriate congressional committees. The report to Congress contains information on several factors, including an evaluation of the effectiveness of declaration requirements. The Secretary is authorized to promulgate regulations that could modify certain declaration requirements for plant products 180 days after the Secretary completes the review. For example, the Secretary could limit the applicability of declaration requirements to any plant product; make changes to declaration requirements for plant products that are suggested in the review; and limit the scope of exclusions if they are justified by the review. This could be an avenue for excluding products (e.g., composite wood products) that are difficult to declare. It is unclear, however, if these regulations could be used to exempt plant products made before 2008 from the declaration process. In the 113 th Congress, H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. This would lower the burden of processing declarations for APHIS, but would not lower the burden of creating declarations by the importers. Therefore, many of the issues associated with identifying species and genus, or country of origin, would remain. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility on the applicability of declaration requirements. Some contend that the 2008 amendments should not apply to plants imported or plant products created or imported before 2008. They note that declaration requirements under the act are difficult to complete for these plant products because the sources and species of plants used might not be known, since they were not required by law to be identified. In the 113 th Congress, H.R. 3280 proposes to exclude plants from the Lacey Act that were imported into the United States before May 22, 2008, or plant products created before May 22, 2008. The intent of this provision appeared to be to exclude plant products created and imported before 2008 from Lacey Act coverage and clarify any doubts or interpretations of the law. Note that this provision would not cover plants harvested before 2008 that were not imported before the act took effect, making them still subject to the Lacey Act. The primary method by which U.S. importers can protect themselves from criminal and certain civil penalties under the Lacey Act is to exercise due care in determining if the imported plants or plant products were legally harvested, processed, and exported. The exercise of due care refers to the amount of attention and effort that a reasonable person would expend in a similar situation to address an issue or conduct an activity. Some contend that the actions needed to demonstrate due care with respect to the Lacey Act are not sufficiently defined or clear. Some definitions of due care are found in S.Rept. 97-123, which accompanied the Lacey Act amendments of 1981, and in guidance provided by federal agencies. S.Rept. 97-123 states that "due care means that degree of care which a reasonably prudent person would exercise under the same or similar circumstances." Further, the Senate report notes that due care requires that a person under certain circumstances take steps that a reasonable person would take under similar circumstances to insure they are not violating the law. The exercise of due care is pivotal for determining penalties under the Lacey Act. Under the Lacey Act, certain civil and criminal violations and forfeitures can be imposed on persons if they engaged in conduct prohibited by the act. If they knowingly engaged in prohibited conduct, the penalties are steeper than if they unknowingly engaged in prohibited conduct. If they unknowingly committed a violation without exercising due care, their penalties are steeper than if they exercised due care and unknowingly committed a violation. (See Figure 1 .) Therefore, persons who exercise sufficient due care to determine if their plants or plant products were taken, possessed, transported, or sold in violation of laws, treaties, or regulations might not be held liable for certain violations under the act if a violation is committed unknowingly. However, exercising due care and unknowingly committing a violation could still result in penalties under the Lacey Act, such as forfeiting goods. The due care standard does not apply to marking or labeling violations, and is excluded from declaration requirements under the Lacey Act. According to S.Rept. 97-123, the intent behind incorporating a due care standard in the Lacey Act was to lower the potential for abusive and indiscriminate enforcement efforts. The Senate report also notes that the degree of due care is "applied differently to different categories of persons with varying degrees of knowledge and responsibility." For example, a horticulturalist in a professional capacity and with experience in the plant trade could be expected to apply greater knowledge toward correctly identifying plants and verifying permits than would be expected of an airline company that transported plants to the United States and has little knowledge of the plant trade and plant species. Some practical measures one could take to demonstrate due care are given by APHIS. For example, importers can ask questions about the chain of custody of the wood, implement compliance plans, abide by industry standards, record efforts at each stage of the supply chain, and change their practices in response to practical experiences. Some red flags that might indicate violations of logging or processing laws offered by APHIS include: goods trading significantly below their common market rate; cash transactions without paperwork; invalid or falsified documents or permits; and unusual sales practices or transactions. Some suggest that the Lacey Act Compliance Program described in the agreement with Gibson Guitar could be viewed as a guideline for how due care might be interpreted or applied to the 2008 amendments. The due care standard in the Compliance Program states that Gibson should follow a number of steps before buying wood or a wood product. They include: communicating with suppliers to determine any challenges they might have in implementing policies within the program; determining the origin of the wood from discussions with the supplier; conducting independent research to determine risky sources of wood or the potential for false documentation; requesting sample documentation to evaluate compliance and validity; making a determination of legality before purchasing wood and maintaining records of these effects; and declining to purchase wood if there is any uncertainty of illegality. Gibson is to supplement these requirements by continuing its own policies. Some policies include procuring wood sourced from forests where legal harvest and chain of custody can be certified by a third party, such as the Forest Stewardship Council. Further, when working with a new supplier, Gibson is to study foreign laws, verify certifications, and use watch lists to determine the risk of procuring illegal wood. This standard and compliance program is binding only to Gibson Guitar and is not intended to be a pronouncement of what DOJ intends due care to mean with respect to the 2008 amendments. Establishing a process for exercising due care under the Lacey Act when dealing with plants and plant products has been proposed for clarifying guidelines. Some suggest that a process for exercising due care should have steps a person or company can take to verify that their imported plants and plant products comply with the Lacey Act, ultimately leading to a type of certification for the plant or plant product. The process could consider certification of individual items as well as certification of manufacturers, importers, and retailers. Others are also considering a process for satisfying due care. A group of stakeholders associated with the trade of plants and plant products and conservation is creating a process that aims to define due care under the Lacey Act. Their standard centers on obtaining a type of forest certification that ensures the forest is protected and conducting risk, compliance, and legal audits related to potential illegal activities. A process for exercising due care has been adopted by the European Union (EU) in regulations that aim to curb illegal logging. The process has three primary elements that are to be provided: Information on the timber and timber products, including a description and scientific name of the timber, country of harvest, quantity of the timber or product, details on the supplier and purchaser, and documents indicating compliance with national legislation. A risk assessment of the timber being illegal throughout its supply chain based on information gathered and risk assessment criteria, which include compliance with applicable legislation, prevalence of illegal logging of specific species in the country of harvest, international sanctions on imports of timber, and complexity of the supply chain. Risk mitigation addressing the risks noted in the previous point, which can include gathering additional information and verification of legality from the supplier of the timber, including obtaining third party verification. The regulation also provides for monitoring organizations to be recognized. These organizations are expected to provide EU operators due care systems, which they can accept or refuse in lieu of creating their own system. The EU system for due diligence is similar to the 2008 amendments, but potentially more involved. Under the EU system, information on the chain of custody and a calculation for mitigating risks is required; this information is not required under the 2008 amendments. Clarity on how to exercise due care and a defense against charges when due care is exercised are two potential benefits of implementing a process for exercising due care. A process that specifies steps to ensure the legality of imported products would reduce confusion as to how due care is exercised, and provide consistent practices among importers, thus making it easier for them to coordinate efforts to verify the legality of their products. This could also lower the costs of compliance. Further, monitoring compliance according to a process could give law enforcement officials a benchmark for bringing charges against an importer who may not have taken sufficient steps to exercise due care. Potential drawbacks of establishing and implementing a process to exercise due care include determining the level of reliability for verifying timber practices in foreign countries and the potential for violations to go unnoticed when due care is applied. One component of a due care process might be employing third parties to verify timber operations in foreign countries (i.e., certification scheme). Third parties can invest resources in particular countries to monitor logging and processing operations for several importers, and provide a certificate to operations that comply with the law. For example, the Forest Stewardship Council (FSC) certifies timber operations to ensure legal, sustainable management of forested land and monitors the chain of custody to trace the life cycle of wood products originating in a certified forest. The effectiveness of third parties to monitor all aspects of plant harvesting and production, however, has been questioned by some. They claim that corruption and fraud can take place, thus undercutting the ability to certify legal wood. This would lower the credibility of the standard and lower its effect in curbing illegal logging. Further, some certification schemes might not cover all aspects of a due care process and the timber and timber products in question. FSC, for example, does not apply rigorous oversight to "FSC Controlled Wood," which is non-FSC-certified wood that is allowed to be mixed with FSC-certified wood. Further, certification schemes may not cover all steps in the succession from harvesting to importation. For example, FSC standards would not cover some laws dealing with the export or processing of wood after harvest that would be subject to the Lacey Act. Exercising due care for importing plants and plant products under the Lacey Act can be challenging for importers because it requires an understanding of foreign laws and practices, and possibly monitoring in the foreign country where plant and plant materials are being harvested. Some contend that exercising due care is complicated by the quantity of foreign laws related to plants and plant products. For example, Indonesia has more than 900 laws, regulations, and decrees that address timber harvesting and processing. There is no federal database that compiles and presents foreign laws that apply to plants and plant products. According to APHIS, importers are responsible for being aware of any foreign laws that apply to the plants and plant products they are importing. Some have suggested other options for reducing illegal logging that would help importers exercise due care. These options would be supply-side driven. One option is to encourage timber-producing countries to construct timber legality standards that could be implemented as voluntary guidelines or mandatory procedures for domestic timber operations. Supply-side guidelines were implemented in a trade agreement between the United States and Peru in 2006 to address illegal logging in Peru. For example, Peru is required to implement several measures to deter illegal logging within the country, such as increasing the number of enforcement personnel, imposing criminal and civil penalties under existing laws to deter illegal logging, monitoring endangered plant species, verifying and auditing exporters and producers of timber products, and developing tools that strengthen regulatory controls and verification systems related to the harvest and trade of timber products. Individual countries have also initiated legality standards to differentiate between legal and illegal sources of wood. Indonesia, for example, has a standard with several indicators that address timber operations and forest management. Independent auditors assess timber concessions and factories against the standard and award certificates for legal operations. Another option is to promote international cooperation and coordination to identify areas of legal and illegal logging practices. With the advent of the EU regulation, opportunities exist for coordination among a large range of importers spanning two of the largest markets for plant and plant product exports—Europe and North America. Efforts could be made to identify "hot spots" where illegal logging is common, as well as areas where legal practices prevail. This could create incentives for suppliers to be placed on the legal lists. Further, identifying areas where illegal logging or trade exists could warn importers of areas in their supply chains they should be wary about. This might also encourage importers to change their supply chains so as to avoid these areas. However, these lists could be subjectively created and generate controversy by countries that are on the list. For example, some might question how many infractions would cause a country to be listed, or how a country could come off the list. Legal operators in the listed country might also argue that they are being unfairly targeted because of the crimes of others in their country. Some have suggested strengthening existing federal programs aimed at reducing illegal logging in foreign countries as a mechanism to make compliance with the Lacey Act easier. Some examples include programs at the U.S. Agency of International Development and Department of State that aim to educate foreign companies about the Lacey Act and provide funds to improve forest governance and law enforcement in foreign countries. An example is the Tropical Forest Conservation Act. Under this program, debt restructured in eligible countries generates funds to support programs to conserve tropical forests within the debtor country. Some of the eligible activities include improving law enforcement capacity in reserves to address illegal logging. This helps importers by reducing illegal logging practices in countries that supply plants and plant products. Some aspects of the 2008 Lacey Act Amendments have been controversial, and several observers and stakeholders have suggested potential changes. Some contend that changes should be done through law; others argue that changes should be done through regulations. Some contend that efforts to change the implementation of the Lacey Act through regulations have stalled and not produced results. This is supported, in part, by the delay by APHIS in producing a review report of implementing declaration requirements under the act. Based on this report, the Secretary is authorized to make certain changes to the declaration requirements. Some take a broader look at the Lacey Act and contend that understanding and applying foreign laws to the processes of harvesting and producing plant and wildlife products is not feasible for the average person or corporation in the United States. Thus, some might consider removing violations of foreign laws from the Lacey Act. Proponents of making changes through regulations contend that amending the act could lead to additional changes in the law that are not contemplated or supported by various stakeholders. They also contend that amending the law is subverting the intended process of making changes through regulations.

The Lacey Act regulates the trade of wildlife and plants and creates penalties for a broad spectrum of violations. In 2008, the Lacey Act was amended to include protections for foreign plants and to require adherence to foreign laws as they pertain to certain conservation and other activities involving plants. Further, the 2008 amendments make it unlawful to submit falsified documents related to any plant or plant product covered by the act, and to import certain plants and plant products without an import declaration. The primary drivers behind the Lacey Act amendments of 2008 (2008 amendments) were to reduce illegal logging globally and increase the value of U.S. wood exports. Illegal logging is a pervasive problem with economic and environmental consequences. Some estimate that illegal logging accounts for 15%-30% of the volume of all forest extraction activities globally, and has an estimated worth of $30 billion-$100 billion of the global wood trade. Further, if there were no illegally logged wood in the global market, it has been projected that the value of U.S. exports of roundwood, sawnwood, and panels could increase by an average of approximately $460 million each year. A halt to illegal logging would also raise the value of domestic wood production. If this is added to exports, some estimate the increase in revenue for companies in the United States at approximately $1.0 billion annually. A highly publicized raid on Gibson Guitar Corporation brought to light several existing policy issues related to the 2008 amendments to the Lacey Act. Some issues are broad and address the intent of the act. For example, some question why U.S. importers should be held responsible for violations of foreign law or if the requirements under the Lacey Act actually reduce illegal logging. Other issues are narrow and address certain requirements in the act. For example, several suggest that the declaration requirements for importing plants and plant products are cumbersome and cannot be met in some cases. Further, some contend that the 2008 amendments should not apply to plants harvested or plant products fabricated before the 2008 amendments were enacted. In contrast, some reiterate the benefits of the 2008 amendments, primarily reducing illegal logging and increasing the value of legally obtained plants and plant products on the market. The 113th Congress is attempting to address some of these issues in proposed legislation. H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility for specifying the applicability of declaration requirements. H.R. 3280 would amend the Lacey Act to exempt plants and plant products imported before May 22, 2008, from the Lacey Act. Efforts to address implementation issues could also be pursued through regulations. The law requires a review of the implementation of the Lacey Act by the Animal and Plant Health Inspection Service and a report evaluating and analyzing some implementation requirements and providing recommendations to improve plant identification. Further, the Secretary (e.g., Secretary of Interior, Commerce, or Agriculture) may promulgate regulations that aim to improve implementation as discussed in the review.

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RS20913 -- Farm "Counter-Cyclical Assistance" Updated May 31, 2002 Farming often is characterized as a "cyclical" business with exaggerated price swings that are destabilizing. Farmersrespond to high prices by boosting output. However, when prices drop, farmers are not quick to cut backproduction. Theyare more likely to operate at a loss and draw down resources. Contributing to the unstable nature of the farmeconomy arethe weather, export demand, currency exchange rate fluctuations, and the farm support and export subsidy programsofforeign competitors. Typically, farmers do not view the eventual self-correcting character of commodity prices and production with the sameequanimity as economists. In fact, U.S. producers of the major crops have asked for and received federalintervention --including various forms of counter-cyclical assistance -- to support their commodity prices and incomes for nearlythe past70 years. Between 1973 and 1995, a prominent form of counter-cyclical aid was deficiency payments linked to target prices. Congress specified, for each major crop, an annual per-unit target price (e.g., $4 per bushel for wheat). If, as oftenoccurred, the market price was below the target price, eligible producers received a deficiency payment to make upthedifference. This aid was ended by the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 ( P.L.104-127 ). Under Title I of the 1996 Act, fixed production flexibility contract (PFC) payments replaced target price deficiencypayments. These payments were intended to provide, over 7 years, a total of about $36 billion to eligible producersorlandowners. The PFC payments were not linked to either current production or prices. By design, lawmakersintended thatthese fixed payments, along with the ability to make unconstrained planting decisions, would cause the marketplaceratherthan subsidies to guide farmers' production choices. However, the 1996 law did continue another form of counter-cyclical support: marketing assistance loans. Producers could(and, under the new 2002 law, continue to) pledge their stored grain, cotton, or oilseeds as collateral for a U.S.Departmentof Agriculture (USDA) nonrecourse commodity loan after harvest. These loans are based on a per-unit (bushel,pound)rate. In earlier years, these nonrecourse loans were set higher than market prices in order to support farm incomes, and farmersforfeited the commodities pledged as collateral at the end of the loan term (about 9 months). Under the more recentdesign,farmers can repay the nonrecourse "marketing assistance loans" at less than the original loan rate when market pricesarelower than that loan rate. The difference between the USDA loan rate and the lower repayment rate (times thenumber ofbushels under loan) constitutes the federal subsidy. In addition, those producers who choose not take out USDAcommodity loans can instead receive the equivalent subsidy as a direct payment, called a "loan deficiency payment"(LDP). The federal subsidy (either a loan gain or LDP) increases as market prices drop below the loan rate, and the subsidydiminishes as prices rise -- thus, the "counter-cyclical" nature of the marketing loan program. When the 1996 farm bill was passed, commodity prices were relatively high, and policymakers widely anticipated that thePFC payments, when combined with whatever was earned from the market, would provide sufficient income toproducers. Marketing loans were set at relatively low rates so that they only would be needed as a safety net if prices declinedrelatively steeply. However, by the late 1990s, major commodity prices declined even more than expected, andgenerallydid not recover to what farmers regarded as acceptable levels. As a result, they relied heavily on marketing loanbenefits,which went from zero in FY1996, to a high of over $8 billion in FY2000 (the cost has declined somewhat sincethen). Congress determined that the "safety net" provided by the 1996 FAIR Act (i.e., marketing assistance loans and fixed PFCpayments) was inadequate, and supplemented the benefits with additional, emergency "market loss payments." Thesepayments, mainly to PFC enrollees, added about $3 billion in FY1999, $11 billion in FY2000, and $5.5 billion inFY2001to program costs. These supplemental payments also can be characterized as counter-cyclical -- even though theyare adhoc and not "programmed" into standing law -- because they were made (according to the sponsors) inresponse to lowprices and incomes. Nearly all of the numerous farm and commodity organizations that testified before the House and Senate AgricultureCommittees in 2001 requested that additional counter-cyclical support be developed as a supplement to the currentmarketing assistance loans and fixed annual payments. In response, the separate farm bills passed in October 2001by theHouse and February 2002 by the Senate, incorporated new counter-cyclical measures into standing law. Thus,Congresspresumably would no longer have to debate and enact periodic emergency ad hoc assistance. The final farm bill, the Farm Security and Rural Investment Act (FSRIA) of 2002 ( H.R. 2646 , P.L. 107-171 ),provides new long-term counter-cyclical support for grains and cotton, by restoring target prices and deficiencypayments,similar in some respects to the program terminated by the 1996 Act. What are now called annual PFC paymentsarereplaced with fixed, "direct payments" to farmers. Both types of payments will be available to producers withannualagreements with USDA. In addition, the measure maintains marketing assistance loans and loan deficiencypayments asthey now function, with changes in most loan rates. The new law, which covers the 2002-2007 crop years, brings soybeans and the minor oilseeds (e.g., sunflowers, etc.) fullyunder the support program rules that apply to grains and cotton. In a major departure from the past, FSRIAredesignspeanut support to operate like that for grains, oilseeds, and cotton -- instead of the traditional system of peanutmarketingquotas and nonrecourse price support loans. Under the new law, fixed payments and target price deficiency payments will be paid on 85% of each farm's baseproduction (base acres times base yield of each commodity). A farmer may choose, as base production, either theacreageused for PFC payments, or average acres planted to eligible crops from 1998 through 2001. Yields effectively arethe1981-85 averages, except that, for counter-cyclical payments, yields also can be updated under astatutorily-prescribedformula. A key difference between the new target price payments and those made until 1995, is that the old payments were tied toannual planting rules (i.e., an acreage reduction program.) The new system is not contingent upon such rules:payments arebased upon historical, not current, production, and farmers can plant virtually any crops except most fruits andvegetables. Under the new counter-cyclical program, the deficiency payment rate will be calculated as the difference between the targetprice, and the lower average season market price (but not to exceed the difference between the target price and thesum ofthe loan rate and fixed payment). (See Table 1 for rates). An individual may receive no more than $130,000 peryear incounter-cyclical assistance. Milk support would continue under FSRIA through government purchases of nonfat dry milk, butter, and cheese. However, it has an added feature of counter-cyclical payments. Dairy farmers nationwide will be eligible for"nationaldairy market loss payments" whenever the minimum monthly market price for farm milk used for fluid consumptioninBoston falls below $16.94 per hundredweight (cwt.). In order to receive a payment, a dairy farmer must enter intoacontract with the Secretary of Agriculture. The value of the payment equals 45% of the difference between the$16.94 percwt. target price in any month that the Boston market price falls below $16.94. A producer can receive a paymenton allmilk production during that month, but no payments will be made on any annual production in excess of 2.4 millionpoundsper dairy operation. All contracts expire on September 30, 2005. (See Dairy Farmer Counter-Cyclical Assistance in theCRS electronic briefing book on AgriculturePolicy and the Farm Bill .) Table 1. Loan Rates, Fixed Payment Rates, and Target Prices * Reflects rates that change in some years. NA=not applicable. Whereas the final farm bill ties the availability of counter-cyclical assistance to target prices for specified commodities,other designs also were discussed. For example: One plan would have triggered payments in a state whenever state (as opposed to national) gross cash receipts for any of eight program or oilseed crops are forecast for the year to be less than 94% of that state's annualaveragecash receipts for the crop during 1996-1999. Cash receipts would be defined as the national average price timesstate-levelproduction. Those who produced the crop during 1998-2000 would be eligible for a share of total payments(AmericanFarm Bureau Federation). Another would have established a "national target income" for each major crop: that is, the national average annual market value of the crop during 1996-2000, plus the annual average of any marketing loan benefitsandmarket loss assistance payments made during those years. A further adjustment would be made to account for yieldincreases since then. Those who produced that crop during 1996-2000 would be eligible for a share of totalpaymentswhenever returns (defined as the crop's U.S. production times the average price for the first 3 months of themarketingyear) are below the national target income for the crop (National Corn Growers Association). The Congressional Budget Office (CBO) has estimated the commodity support provisions (Title I) of FSRIA at $98.9billion over 6 years (budget authority, March 2002 estimate, FY2002-2007). This is $37.6 billion more than thebaselinepolicy of simply extending current programs into the future. The new counter-cyclical payments for grains, cotton,andoilseeds account for $23.6 billion of the new costs (i.e., above baseline). The peanut and dairy counter-cyclicalpaymentsare projected to cost, respectively, another $904 million and $963 million. However, such cost estimates are speculative due to the extreme difficulty of predicting future market conditions, includingprices. If prices are lower than CBO's assumptions, then costs will be higher, and vice versa. Some other analystsalreadyhave differing projections. For example, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri estimates that thetotal cost of the dairy program alone could exceed $3.6 billion. That's mainly because FAPRI projects significantlylowermarket prices for milk than CBO over the 46-month life of the program. CBO estimates that the average monthlypaymentrate over the 46-month life of the program will be about $0.45 per cwt.; FAPRI estimates an average monthlypayment rateof $0.89 per cwt. (See also What Is the Cost of the 2002 Farm Bill? in the CRS electronic briefing book on Agriculture Policy and the FarmBill .) The 1994 Uruguay Round Agreement on Agriculture (URAA) obligates countries to discipline their agricultural subsidyprograms and reduce import barriers in order to promote more open trade. Under the URAA, the United States iscommitted to providing subsidies of no more than $19.1 billion per year through domestic farm policies with themostpotential to distort production and trade. The URAA contains detailed rules for how countries should determine which of their programs must be counted towardtheir assigned subsidy limits (e.g., $19.1 billion for the United States). Generally, however, programs that are tiedtocurrent prices or current production must be counted (these are called "amber box" policies). Thus, marketing loangains,which rise when crop prices decline and vice versa, are "amber" and must be counted (but only if their value, alongwithother subsidies, exceeds 5% of the value of annual production of that crop). On the other hand, subsidies that are not linked to prices or production, and/or meet other specified criteria, might beexempted as "green box" policies. The United States has classified its PFC payments as "green" because they aremadewithout regard to prices or current production. It is anticipated the fixed, decoupled payments in the new law alsowill fallwithin the green box. The new counter-cyclical assistance will be decoupled from current output because the producer would not have to produceany particular crop now to receive the payments. However, because (like marketing loan gains) the target pricedeficiencypayments would be triggered by current market prices , they are expected to be placed in the amber box. So, they conclude, if counter-cyclical payments, when added to other "amber" subsidies such as marketing loanbenefits,caused U.S. spending to exceed $19.1 billion, the United States could be in violation of its world tradecommitments. Whether that would happen is unclear, in part because of the difficulty of predicting future market prices, but alsobecauseof the technicalities involved in classifying and valuing subsidies under the WTO system. "Circuit breaker" language in FSRIA is intended to require USDA to keep trade-distorting farm subsidies at or below the$19.1 billion limit. Questions arise about the administrative, economic, and political implications of changing (i.e.,reducing) benefits, particularly after they are announced and/or awarded. (See CRS Report RL30612(pdf) , FarmSupportPrograms and World Trade Commitments .) Some groups had argued that their own counter-cyclical policies could be designed in a way that they would not have to becounted toward the $19.1 billion limit. For example, if payments to farmers were triggered by low income (asmeasured bygross receipts for one or more commodities) rather than by low prices, they would be exempt, it has been argued. Othersdispute this assertion, noting that it is usually low prices that cause low income. The new counter-cyclical aid in the 2002 law focuses on the "major" commodities -- grains, cotton, oilseeds, peanuts, andmilk. These generally are the most widely produced, but that still leaves much of U.S. agriculture ineligible for suchpayments, raising questions of equity among commodities, and of the potential for distorting production towarditems thatmight receive more support (contributing to surplus production). But extending such aid to more commodities, suchasfruits, vegetables, or livestock, also would have increased federal costs, or else reduced assistance levels for themajorcommodities. Also, not all commodity groups sought such aid. For example, the National Cattlemen's BeefAssociationwas among those that opposed most forms of direct assistance, counter-cyclical or otherwise. And, the UnitedFresh Fruitand Vegetable Association argued against any subsidies that would insulate fruit or vegetable producers from marketsignals or would sustain or encourage production. Another issue was whether a new counter-cyclical program should perpetuate past patterns that tie aid to output rather thaneconomic need. Farm programs, including direct payments, marketing loans and the ad hoc "marketloss payments," havebeen based on either past or current production by individual farmers, meaning that larger payments have trendedtowardlarger operations -- which do not or should not need them, critics argue. They add that if Congress intends to helpproducers in economic distress, then such recipients should have to document their need. Others counter that farmprograms are not "welfare" but rather part of a larger policy to ensure that U.S. agriculture remains competitive intheglobal economy (an assertion that critics challenge).

Congress has approved legislation (P.L. 107-171) reauthorizing major farmincome and commodity price support programs through crop year 2007. This legislation includes new"counter-cyclicalassistance" programs for grains, cotton, oilseeds, peanuts, and milk. The intent of counter-cyclical assistance is toprovidemore government support when farm prices and/or incomes decline, and less support when they improve. In fact,farmershave, for many years, been eligible for various forms of counter-cyclical assistance. At issue has been the need for,andpotential impacts of, another counter-cyclical program. This report will not be updated.

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Since the United States and Vietnam established diplomatic relations in 1995, the two countries have expanded relations and cooperation across a wide range of sectors. As U.S.-Vietnam bilateral economic, military, and diplomatic ties have grown, so has interest in strengthening cooperation in the nuclear energy sphere. A civilian nuclear cooperation agreement was initialed by the two countries in December 2013 and signed in May 2014 under Section 123 of the Atomic Energy Act of 1954 (as amended). Such "123 agreements" are necessary for the export of nuclear reactors and components and can help facilitate the transfer of nuclear energy technology. The U.S.-Vietnam 123 agreement was subject to congressional review. Congress received the agreement with the required supporting documents on May 8, 2014, for review. It may enter into force after the 90 th day of continuous session after its submittal to Congress (a period of 30 plus 60 days of review) unless a joint resolution disapproving the agreement is enacted. The congressional review period for this agreement was completed on September 9, 2014. At least four issues were prominent during the congressional review period: (1) whether the agreement should have included stronger nonproliferation commitments such as a legally binding commitment by Vietnam not to build uranium enrichment and reprocessing facilities; (2) the extent to which Vietnam's human rights record should affect the decision to enter into a nuclear energy agreement; (3) the weight that should be given to the growing strategic relationship between the United States and Vietnam; and (4) the extent to which U.S. companies would benefit from an agreement. Vietnam also has nuclear cooperation agreements with Russia, France, China, South Korea, Japan, and Canada. The U.S. nuclear industry contends that billions of dollars of exports could result from the Vietnam 123 agreement. While it is unclear what, if any, contracts the U.S. nuclear industry would conclude with Vietnam's nuclear energy sector, it is likely that U.S. companies would provide services as part of a reactor supply agreement that Vietnam signed with Japan in 2010. Such services would not necessarily require a U.S. 123 agreement, but transfers might be facilitated if one were in place. The first major step by the United States and Vietnam toward a 123 agreement was the signing of an agreement to strengthen nuclear safety and the nascent nuclear regulatory framework in Vietnam in 2008. Under that agreement, U.S. Nuclear Regulatory Commission experts have been advising the Vietnam Agency for Radiation and Nuclear Safety and Control (VARANS). The U.S. Department of Energy (DOE) and the Nuclear Regulatory Commission (NRC) train Vietnamese officials on nonproliferation and nuclear safety best practices related to power plant operation, and assisted with the drafting of Vietnam's Atomic Energy Law, passed by Vietnam's National Assembly in June 2008. Vietnamese technicians have also attended nonproliferation safeguards training programs at U.S. national laboratories. In March 2010, the United States and Vietnam signed a Memorandum of Understanding Concerning Cooperation in the Civil Nuclear Field that was designed to increase cooperation on nuclear safety and facilitate development of an independent regulatory agency. Then-U.S. Ambassador to Vietnam Michael Michalak said he anticipated the 2010 Memorandum would be a "stepping stone" to a bilateral nuclear energy cooperation (Section 123 agreement). Vietnam's current nuclear infrastructure consists of a research reactor and several research institutes. Under the Atoms for Peace program in the early 1960s, the United States provided South Vietnam with a 250 kilowatt (kw) pool-type TRIGA Mark-II research reactor. This research reactor, located at Dalat, used highly enriched uranium (HEU) fuel and went critical in 1963. It was used for training, research, and radioisotope production. The research reactor was shut down during the Vietnam War. After North Vietnam defeated the South in 1975 and reunified the country, the Vietnam Atomic Energy Commission (VAEC) was established in 1976 for civilian nuclear research. The International Atomic Energy Agency (IAEA) has provided technical cooperation (TC) assistance to Vietnam since it joined the Agency in 1978. In the early 1980s, the Soviet Union helped Vietnam restore and upgrade the research reactor to a 500 kw Russian VVR-M design. This research reactor was powered with highly enriched uranium, weapons-usable material which is considered to be a potential nuclear security risk. With U.S. assistance under the Department of Energy's Global Threat Reduction Initiative, since 2007, Vietnam has converted the Dalat research reactor from HEU to low enriched uranium (LEU) fuel, and returned the HEU fresh and spent fuel to Russia. The shipments, which removed a total of 11 kg of HEU, were completed in July 2013. This activity advanced U.S.-Vietnam cooperation in the nuclear nonproliferation sphere. As Vietnam's economy has grown, so have its energy demands, which, according to one source, grew by 15% annually in the first decade of the 2000s. To help keep pace, Vietnam plans to build its first nuclear power plants in the coming decades. Nuclear power is projected to provide 20%-30% of the country's electricity by 2050. Vietnam first began considering nuclear power as an option in a 1995 government study that recommended the introduction of nuclear energy by 2015. Feasibility studies were conducted in the late 1990s and early 2000s. In 2004, then-Prime Minister Phan Van Khai endorsed the "Strategy for Vietnam's Electricity Development 2004-2010." In 2006, the Prime Minister signed the "Strategy for Peaceful Uses of Atomic Energy up to 2020," which specified a nuclear power target of 2,000 megawatts of electric generating capacity (MWe) by 2020, and an eventual 20,000 MWe by 2040. The latter would represent 25%-30% of Vietnam's electricity production. Vietnam's National Assembly in November 2009 approved plans to build the first two 1,000 MWe reactors at Phuoc Dinh, Ninh Thuan province ( Ninh Thuan 1 plant) which were to come on-line by 2020. Two additional 1,000 MWe reactors are planned to be built in nearby Vinh Hai ( Ninh Thuan 2 plant) and be brought on-line by 2026 (see Figure 1 below). The country's nuclear energy plan envisioned a three-phase approach: Phase I, 2010-2015: training technical specialists, setting up regulatory frameworks and cooperation agreements, approval of licenses, etc. Phase II, 2015-2020: construction phase for first nuclear plants at Phuoc Dinh; beginning construction at Vinh Hai. Phase III, 2020-2030: additional reactor construction, up to an additional 6,000 MWe. The Vietnamese government issued a master plan in July 2011 that called for two additional reactors to be constructed at Phuoc Dinh by 2025 and two more at Vinh Hai by 2027, plus two larger reactors, possibly Korean, at another site to begin operating by 2029. Another 4,000 megawatts of planned capacity would bring the country's generating capacity to 14,800 megawatts by 2030. However, Vietnam's Prime Minister announced in January 2014 that it might delay construction of the first plant, at Phuoc Dinh, until 2020, potentially pushing back the planned completion of the first reactor to the mid-2020s. Difficulties in training staff for the planned nuclear power program have been mentioned by news reports as a possible reason for the delay. The Russian firm AtomStroyExport is to build two 1,200 MWe light-water reactors (standard commercial reactors) at the Ninh Thuan 1 power plant at Phuoc Dinh. They will be built on a turnkey basis, and will be operated by state-owned utility Electricity of Vietnam (EVN). As with other Russian-built nuclear power plants in non-nuclear weapon states, the contract includes a provision to both supply fuel and take back spent (used) fuel. The Russian atomic energy agency, Rosatom, will set up a training center in Vietnam to help prepare nuclear specialists. Cost estimates for the power plants vary; Rosatom reportedly has forecast the cost of the first two-reactor plants as up to $8 billion, but some press reports that included related infrastructure development estimate a total of $10 billion. Russia's Ministry of Finance is expected to finance the majority of these costs. Under the 2011 master plan, AtomStroyExport is to build two additional reactors at the site as well. Up to four light-water reactors at Ninh Thuan 2 are to be built by the Japanese consortium International Nuclear Energy Development of Japan Company (JINED). The Japanese government has offered low-interest and preferential loans for the project, as well as assistance in waste treatment and infrastructure support. According to the IAEA, Vietnam has no plans for developing a full fuel cycle capability. Current plans would store spent nuclear fuel on-site for at least 30 years, and studies on more permanent disposal are underway. As mentioned above, Russia will take back the spent fuel from the Russian-built plants. Other suppliers, such as Japan, do not usually do so, so Vietnam will need to explore spent fuel storage options. Vietnam is now exploring how to exploit its domestic uranium reserves in the north of the country, and is cooperating with Canadian and Japanese firms on initial exploration. Vietnam has signed a memorandum of understanding with India on uranium ore processing technologies. As of mid-2014, Vietnam's nuclear energy plans do not appear to have generated significant domestic opposition, though members of the Champa ethnic group, an ethnic minority in Vietnam, have said that the plants will infringe upon Champa villages and centers of worship in Ninh Tuan province and that the Vietnamese government has harassed individuals who have criticized the plants. It is unclear if the apparent absence of major opposition is due to widespread support for the government's energy vision, apathy or a lack of awareness, and/or a reluctance to challenge the government on one of its significant priorities. The U.S. nuclear industry may have a role in the reactor projects in Vietnam. The Japanese supply consortium, JINED, is offering boiling water reactor (BWR) and pressurized water reactor (PWR) designs for Ninh Thuan 2 , and Vietnam has not yet selected which type it will use. Japanese BWR designs are based on General Electric (GE) technology, while Japanese PWR designs originally came from Westinghouse (now mostly owned by Toshiba). Japan is largely self-sufficient in nuclear technology, but it is possible that some U.S. components and services would be used for the Vietnam project. JINED member Hitachi, for example, conducts nuclear business in Japan and around the world through joint ventures with GE. A U.S.-Vietnam 123 agreement would be helpful or even necessary for U.S. participation in Ninh Thuan 2 , depending on the types of components and services involved. This is because certain major reactor components would require Nuclear Regulatory Commission export licenses that cannot be approved without a 123 agreement, and approvals for other components and services that do not require export licenses could be more complicated without a 123 agreement. South Korea has also proposed building a nuclear power plant in Vietnam, for which the two countries are jointly preparing a feasibility study. The proposed South Korean reactors are based on designs licensed from the U.S. firm Combustion Engineering, which combined with Westinghouse in 2000. As a result, Westinghouse now controls the marketing of the design that South Korea plans to use in Vietnam. South Korea's only previous nuclear power plant export project, consisting of four reactors being built in the United Arab Emirates (UAE), is being implemented by a consortium that includes Westinghouse. Westinghouse and other U.S.-based firms are expected to receive 10% of the $20 billion UAE deal. If South Korea replicates that consortium for the proposed Vietnam project, a U.S.-Vietnam 123 agreement would probably be necessary. The UAE project also required a Part 810 technology transfer authorization by the Secretary of Energy. The number of potential U.S. jobs that may result from nuclear power projects in Vietnam is difficult to estimate, but the Barakah project now under construction by a Korean-led consortium in the UAE could provide a model. As noted above, Westinghouse and other U.S. companies are expected to carry out about 10% of the work on Barakah. The Export-Import Bank of the United States in September 2012 approved $2 billion in financing for U.S. equipment and services for Barakah, mostly to be provided by Westinghouse and its U.S. sub-suppliers. "The Barakah project will allow us to maintain about 600 U.S. jobs," Westinghouse said after the Ex-Im Bank financing approval. The Ex-Im Bank estimated that, overall, the $2 billion in financing would "support approximately 5,000 American jobs across 17 states." Items to be supplied by Westinghouse and other U.S. companies include reactor coolant pumps, reactor components, controls, engineering services, and training. The nuclear disaster at the Fukushima Daichi nuclear plant in Japan in March 2011 raised concerns around the globe about the readiness of new nuclear energy countries to have sufficient safety and regulatory infrastructure to prevent such disasters. The accident also raised worries about Vietnam's capacity to administer and regulate a nuclear energy sector. The authorities in Vietnam reacted to the Fukushima disaster by reaffirming Vietnam's commitment to pursuing nuclear power. In general, the situation sparked a global reexamination of emergency preparedness and risk assessment for nuclear power plants. Vietnam's coast has been subject to tsunamis in the past, and one study suggests more investigation is still needed on seismic conditions and tsunami risk.  Also, in climate modeling exercises, Vietnam is often listed as one of the world's most vulnerable countries to the possible effects of climate change, particularly to rising sea levels. The nuclear disaster in Japan also heightened concerns about how to ensure adequate infrastructure, planning, and technical expertise and personnel in new nuclear power states. Vietnam is working closely with the International Atomic Energy Agency to meet all international safety standards and regulatory practices. The IAEA's Integrated Nuclear Infrastructure Review (INIR) mission has visited Vietnam multiple times and has developed milestones on the basis of international standards and expert recommendations. After the latest visit in 2014, the Vietnamese government announced a delay in the estimated start-up date for the first reactors, which experts view as giving Vietnam more time to develop its nuclear regulatory infrastructure and train technical personnel. Vietnam would be the first country in Southeast Asia to operate a nuclear power plant. As of early 2014, it was unclear whether other countries in the region have expressed concerns about Vietnam's nuclear energy plans. It is also unclear to what extent Vietnamese nuclear power planners are considering the energy needs and infrastructure projects of Vietnam's neighbors. Laos, for instance, is building or proposing to build dams for generating hydroelectric power along tributaries and the main stem of the Mekong River, which terminates in Vietnam. Plants such as these could generate power that could be sold to other countries in the region. Vietnam generally has opposed these dams, in part because of their possible negative impacts on the ecology, economies, and food security of downstream communities. Obama Administration officials have stated that the prospect of concluding a nuclear cooperation agreement with the United States spurred Vietnam to strengthen its nonproliferation policies. Vietnam has been a vocal supporter of nuclear disarmament and nonproliferation in international fora, and as a member of the Non-Aligned Movement. Vietnam's Law on Atomic Energy passed in 2008 forbids the development of nuclear weapons and all forms of nuclear proliferation. Vietnam is party to the major nonproliferation treaties (see Table 1 ), including the Nuclear Non-Proliferation Treaty (NPT), which it joined in 1982 as a non-nuclear weapon state. It has been an IAEA member since 1978 and its comprehensive safeguards agreement has been in force since 1990. Vietnam signed the Additional Protocol to its safeguards agreement in 2007, and it entered into force in 2012. Also, in cooperation with the IAEA and South Korea, Vietnam is developing a real-time tracking system for the movement of radiological materials in the country. Vietnam is also a member of the U.S.-led Global Nuclear Energy Partnership (GNEP), now called the International Framework for Nuclear Energy Cooperation (IFNEC). Vietnam has also joined the U.S.-led Global Initiative to Combat Nuclear Terrorism. In a move related to the bilateral nuclear energy agreement signing, in May 2014 Vietnam's government announced that it would participate in the multinational Proliferation Security Initiative (PSI), a U.S.-led group of about 100 countries that was established in 2003 to increase international cooperation in interdicting shipments of weapons of mass destruction (WMD), their delivery systems, and related materials. In the past, Vietnamese officials said they would not join PSI because it operates outside the United Nations system. As part of Vietnam's pledges at Nuclear Security Summits, it has removed all weapons-usable nuclear material from the country. In December 2010, the United States and Vietnam established a legal framework for U.S.-Vietnam cooperation for full conversion of its HEU-fueled research reactor to LEU fuel, and the return of HEU spent fuel from Dalat to Russia under the Department of Energy's Global Threat Reduction Initiative (GTRI). As noted, fresh HEU fuel was removed in 2007. The research reactor has been converted to LEU fuel, and the last shipment of HEU was completed in July 2013. Vietnam continues to develop its export control system. The U.S. State Department's Export Control and Border Security Program provides assistance to Vietnam to strengthen export controls in the country. In 2010, Vietnam issued regulations that would make any trafficking of nuclear materials in the country illegal. When reviewing the proposed agreement with Vietnam, Congress may wish to examine the extent to which Vietnam's export control system can prevent illicit transfers of nuclear materials and technologies. Enrichment and reprocessing (ENR) technology can be used both to make fuel for nuclear reactors or material for nuclear weapons. For the past several years, there has been some debate over whether the United States should ask countries, including Vietnam, to explicitly renounce enrichment and reprocessing as part of a civilian nuclear cooperation agreement. In early August 2010, the Wall Street Journal reported that the United States and Vietnam had discussed a proposed nuclear cooperation agreement that would not specifically commit Vietnam to refrain from enriching uranium. Responding to the Wall Street Journal report, the State Department spokesman said that the United States would welcome a commitment by Vietnam to refrain from pursuing enrichment, but added that such a commitment would be Vietnam's decision. A senior DOE official said in September 2010 that it would be "inappropriate" at this stage to ask Vietnam to forswear its fuel cycle options as part of a nuclear energy cooperation agreement. Vietnamese Atomic Energy Institute Director Vuong Huu Tan has said that Vietnam does not plan to pursue uranium enrichment. A commitment to forgo enrichment is not required for bilateral nuclear cooperation agreements under U.S. law or the Non-Proliferation Treaty (NPT), and most past 123 agreements have not included such a pledge. The recent agreement with the United Arab Emirates included a provision that would preclude enrichment or reprocessing in the UAE, and the United States has pursued similar pledges from other states in the Middle East. However, whether this policy would apply to other regions of the world was the subject of an Obama Administration interagency review from 2010 to 2013. Some Members of Congress and outside experts have argued that including a promise not to build enrichment and reprocessing facilities should be emulated in other agreements. The U.S.-Taiwan 123 agreement submitted to Congress on January 7, 2014, includes such "gold standard" prohibitions on enrichment and reprocessing within Taiwanese territory. Administration officials announced in December 2013 that the internal review had been completed, and there would be no change to U.S. policy. In other words, renouncing a domestic fuel-making capability would not be a prerequisite to concluding a nuclear cooperation agreement for all countries, and each partner country would be considered individually. At the same time, U.S. officials emphasize that while civilian nuclear cooperation agreements are one possible way to discourage additional countries from developing their own fuel-making (enrichment or reprocessing) technology, the United States will continue to pursue other incentives such as multilateral fuel banks to bolster partner countries' confidence in fuel supply. The Nuclear Suppliers Group (NSG) has also tightened restrictions on transfers of these technologies. Assistant Secretary of State Thomas Countryman testified on January 30, 2014: Make no mistake, our policy is to pursue 123 agreements that minimize the further proliferation of ENR technologies worldwide. The United States wants all nations interested in developing civil nuclear power to rely on the international market for fuel services rather than seek indigenous ENR capabilities. These capabilities are expensive and unnecessary, and reliable supply alternatives are available in the global fuel cycle market. The preamble of the agreement with Vietnam includes a political commitment that says Vietnam intends to rely on international markets for its nuclear fuel supply, rather than acquiring sensitive nuclear technologies. In addition, the United States promises to support international markets to ensure a reliable nuclear fuel supply for Vietnam. Although Vietnam apparently does not make a binding legal commitment to forswear ENR in the text of its 123 agreement, neither does the United States grant advance consent for those activities. Article 6 of the agreement specifically prohibits Vietnam from enriching or reprocessing U.S.-obligated nuclear materials —for instance, materials that are transferred from the United States—without specific future U.S. consent. In recent years, overlapping strategic and economic interests have led the United States and Vietnam to improve relations across a wide spectrum of issues. Obama Administration officials identify Vietnam as one of the new strategic partners they are cultivating as part of their "rebalancing" of U.S. priorities toward the Asia-Pacific, a move commonly referred to as the United States' "pivot" to the Pacific. In July 2013, President Obama and his Vietnamese counterpart, President Truong Tan Sang, announced in Washington, DC, a bilateral "comprehensive partnership" that is to provide an "overarching framework" for moving the relationship to a "new phase" in many areas, including science and technology cooperation in the field of nuclear energy. The U.S. embassy statement on the day the nuclear cooperation agreement was signed says that the agreement "reflects the strength and breadth of the U.S.-Vietnam Comprehensive Partnership." The United States and Vietnam share a concern over the rising strength of China, and they have cooperated in opposing China's perceived attempts to assert its claims to disputed waters and islands in the South China Sea. In December 2013, Secretary of State John Kerry in Vietnam announced that the United States would be providing Vietnam with $18 million in assistance, including five fast patrol vessels, to enhance Vietnam's maritime security capacity. The rise in bilateral economic ties also has strengthened the countries' interests in each other. Bilateral trade in 2013 was over $29 billion, nearly a 20-fold increase since the United States extended "normal trade relations" (NTR) treatment to Vietnam in 2001. The United States and Vietnam are 2 of 12 countries negotiating a Trans-Pacific Partnership (TPP) trade agreement. In order for the TPP agreement to go into effect, both houses of Congress would have to pass implementing legislation. The Obama Administration has also increased the priority given to cleaning up sites contaminated by Agent Orange/dioxin used by U.S. troops during the Vietnam War, an issue that several Members of Congress have championed. The U.S.-Vietnam nuclear cooperation agreement has been the end-goal of engagement in the nuclear field since the 2010 Memorandum of Understanding and is seen by many as expanding another bridge in the growing network of links between the two countries. Thus, those who question the direction, extent, or pace of recent improvements in U.S.-Vietnam relations may oppose the 123 agreement. A rejection of the agreement by Congress could have an impact on future U.S.-Vietnamese cooperation, including in the nuclear area, and could be interpreted by the Vietnamese as a symbolic rebuke of the new U.S.-Vietnam comprehensive partnership. The biggest obstacle to the two countries taking a dramatic step forward in their relationship is disagreement over Vietnam's human rights record. For more than a decade and a half, the ruling Vietnamese Communist Party (VCP) appears to have followed a strategy of permitting most forms of personal and religious expression while selectively repressing individuals and organizations that it deems a threat to the party's monopoly on power. For the past several years, according to many observers, repression against dissenters and protestors has worsened. The government increasingly has targeted bloggers and lawyers who represent human rights and religious freedom activists, particularly those linked to a network of pro-democracy activists. Many of the targeted blogs, bloggers, and lawyers have criticized Vietnam's policy toward China or have links to pro-democracy activist groups. As mentioned above, members of the ethnic minority group the Cham say that the Vietnamese government has harassed members who have criticized the planned construction of Vietnam's first two nuclear plants because they would be located in a Cham village. In November 2013, the United Nations General Assembly elected Vietnam to a seat on the United Nations Human Rights Council. That same month, Vietnam's National Assembly ratified new amendments to the country's constitution. Many voices called for lessening the VCP's role in society and policy. However, according to many observers, the final changes did little to weaken the Party's and the government's monopoly on power and legal ability to deny basic freedoms. Some sources argued the changes strengthened the VCP's authority and that new clauses added to protect basic rights were negated by other provisions in the revised constitution. As was true of their predecessors, Obama Administration officials have continuously expressed concerns—including via public criticisms—about human rights in Vietnam. Additionally, the two countries reportedly have often disagreed in the formal human rights dialogue that generally occurs every year. In general, however, bilateral differences over human rights have not prevented the United States and Vietnam from improving the overall relationship. Barring a dramatic downturn in Vietnam's human rights situation, U.S. officials appear to see the matter not as an impediment to short-term cooperation on various issues, but rather as a ceiling on what might be accomplished in the longer term. Over the past five years, criticisms of Vietnam's human rights record, including from Members of Congress, appear to have played a significant role in convincing the Administration to delay or oppose a number of items desired by Hanoi. Additionally, concerns about Vietnam's human rights record are likely to complicate Congress's debate over a TPP agreement, if the current negotiations are successful. It is unclear to what extent the Obama Administration has attempted to link the TPP negotiations directly to Hanoi making changes in its human rights conditions. Analysts offer different opinions about the extent to which such U.S. pressure would affect Vietnam's domestic policies, particularly when many in the Vietnamese polity view expressions of dissent as an existential threat to the current regime. Differences over human rights do not appear to have spilled over into the 123 agreement negotiations between the two governments. Human rights activists and other Vietnam watchers have argued that the United States should not advance bilateral ties with Vietnam in many areas until progress is made on the human rights agenda. During a January 2014 Senate Foreign Relations Committee hearing, some Senators called for the passage of a separate human rights bill in tandem with the U.S.-Vietnam nuclear cooperation agreement. As required by Section 123b of the Atomic Energy Act, the President announced in February 2014 his determination that a nuclear cooperation agreement with Vietnam "will promote, and will not constitute an unreasonable risk to, the common defense and security." The White House transmitted a package of documents to the Senate Foreign Relations Committee and the House Foreign Affairs Committee, to include the text of the agreement itself, a Nonproliferation Assessment statement, the presidential determination, and letters of concurrence by the Secretaries of Energy and State, and the Nuclear Regulatory Commission Chairman. The nuclear cooperation agreement complies with all the terms of the Atomic Energy Act as amended and therefore is a "non-exempt" agreement. This means that it may enter into force after the 90 th day of continuous session (a period of 30 plus 60 days of review) following its submittal to Congress on May 8, 2014, unless a joint resolution disapproving the agreement is enacted by both the House and Senate. Members of Congress may introduce resolutions of disapproval or approval during this time. If no resolution of disapproval is passed into law, then the agreement would automatically be eligible to enter into force after the 90-day review period is concluded. If a resolution of approval is passed before the 90 days have expired, then the agreement could enter into force sooner. Even before the official congressional review period, Members of Congress have weighed in on the debate over the U.S.-Vietnam nuclear cooperation agreement and Section 123 agreements generally. In December 2013, Representatives Ileana Ros-Lehtinen and Brad Sherman introduced a bill ( H.R. 3766 ) that would strengthen congressional approval procedures for agreements that did not include certain nonproliferation standards, including the pledge not to enrich or reprocess. The Senate Foreign Relations Committee held a hearing on January 30, 2014, on Section 123 agreements. Debate during the hearing spent some time on the issues surrounding the Vietnam nuclear cooperation accord. Some Senators said that a human rights bill on Vietnam would need to be passed if a nuclear cooperation agreement was to go forward. Three bills have been introduced to date that would approve the agreement with Vietnam. Senate Foreign Relations Committee Chairman Robert Menendez introduced a resolution that would approve the agreement ( S.J.Res. 36 ) on May 22. This bill was passed by the full Senate on July 31, 2014. On June 9, Senator Majority Leader Harry Reid introduced S.J.Res. 39 and Representative Adam Kinzinger with Ranking Member of the House Foreign Affairs Committee Eliot Engel introduced H.J.Res. 116 . As noted above, the 90 th day of the congressional review period was September 9, 2014. Since the agreement was not disapproved in that time, it may enter into force. Typically, such agreements enter into force after an exchange of diplomatic notes between the two countries.

U.S.-Vietnamese cooperation on nuclear energy and nonproliferation has grown in recent years along with closer bilateral economic, military, and diplomatic ties. In 2010, the two countries signed a Memorandum of Understanding that Obama Administration officials said would be a "stepping stone" to a bilateral nuclear cooperation agreement. This agreement was signed by the two countries on May 6, 2014, and transmitted to Congress for review on May 8. The required congressional review period for this agreement was completed in early September, and the agreement will enter into force after an exchange of diplomatic notes between the two countries. Under the agreement, the United States can license the export of nuclear reactor and research information, material, and equipment to Vietnam. The agreement does not allow for the transfer of restricted data or sensitive nuclear technology, and contains required nonproliferation provisions. The nuclear cooperation agreement complies with all the terms of the Atomic Energy Act as amended and therefore is a "non-exempt" agreement. This means that it may enter into force after a review period of 90 days of continuous session after its submittal to Congress (a period of 30 plus 60 days of review) unless Congress enacts a joint resolution disapproving agreement, or approving the agreement at an earlier date. Senate Foreign Relations Committee Chairman Robert Menendez introduced a resolution that would approve the agreement (S.J.Res. 36) on May 22. This bill was passed by the Senate on July 31, 2014. No equivalent bill was passed by the House. Vietnam would be the first country in Southeast Asia to operate a nuclear power plant. Vietnam has announced a nuclear energy plan that envisions installing several nuclear plants, capable of producing up to 14,800 megawatts of electric power (MWe), by 2030. Nuclear power is projected to provide 20%-30% of the country's electricity by 2050. Significant work remains, however, to develop Vietnam's nuclear energy infrastructure and regulatory framework. Since Vietnam has other commercial partners in the nuclear energy field, a lack of agreement with the United States would not be likely to have a significant impact on its nuclear energy plans. Vietnam's Law on Atomic Energy, passed in 2008, forbids the development of nuclear weapons and all forms of nuclear proliferation. In 2007, Vietnam signed the IAEA Additional Protocol, a significant nonproliferation safeguard for nuclear power, which entered into force in September 2012. Vietnamese officials have said they have no interest in developing domestic enrichment or reprocessing capabilities, which can potentially be used to make fissile material for nuclear weapons, but they have not made a binding commitment not to do so. Vietnam is exploring the possibility of eventually mining domestic uranium reserves. At least four issues were debated during the congressional review period for this agreement: (1) whether the agreement should have included stronger nonproliferation commitments such as a legally binding commitment by Vietnam not to build uranium enrichment and reprocessing facilities; (2) the extent to which Vietnam's human rights record should affect the decision to enter into a nuclear energy agreement; (3) the weight that should be given to the growing strategic relationship between the United States and Vietnam; and (4) the extent to which U.S. companies would benefit from an agreement.

govreport

This report provides a chronology of events relevant to U.S. relations with North Korea in 2005 and is a continuation of CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004 , by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. The chronology includes significant meetings, events, and statements that shed light on the issues surrounding North Korea's nuclear weapons program. An introductory analysis highlights the key developments and notes other significant regional dynamics. Particular attention is paid to the Six-Party Talks, inter-Korean relations, key U.S. officials in charge of North Korean policy, Chinas leadership in the negotiations, Japans relationship with its neighbors, and contact with North Korea outside of the executive branch, including a Congressional delegation. In the chronology, key events are marked by bold text. The year 2005 saw little progress in resolving the North Korea nuclear issue. Although adjustments were made, such as changes to senior U.S. officials in charge of policy in East Asia and the addition of human rights and criminal activities to the agenda of items to cover with North Korea, overall relationships and regional trends saw no major reversals or breakthroughs. In the first half of 2005, North Korea escalated the security situation on the Korean peninsula through words and actions. On February 10, Pyongyang officials announced that North Korea had nuclear weapons and would indefinitely suspend its participation in the Six-Party Talks, the multilateral negotiation forum dedicated to the peaceful denuclearization of North Korea made up of the United States, China, Japan, North Korea, South Korea, and Russia. North Korean officials followed up in April with the assertion that the focus of the negotiations should adjust to regional disarmament talks given its status as a nuclear weapons state. Reports of preparations for a possible nuclear test in April further escalated the sense of urgency. In May, North Korea announced that it had removed 8,000 fuel rods from the Yongbyon reactor for reprocessing; experts estimate that the reprocessed plutonium could provide enough material for an additional six to eight nuclear bombs. Later that month, North Korea launched a short-range missile into the East Sea. After nearly a year without meeting, negotiators from the six nations re-convened in Beijing in late July 2005 for a fourth round of talks. The outcome, a joint statement of principles agreed to in September by all parties, was hailed as a major breakthrough. The key statement committed North Korea to abandoning all nuclear weapons and existing nuclear programs and returning at any early date to the treaty on the proliferation of nuclear weapons and to the International Atomic Energy Agency (IAEA) safeguards. In exchange, North Korea was provided with security assurances; South Korea committed to provide 2 million kilowatts of electricity; and the U.S. and Japan pledged to take steps toward normalization of relations with Pyongyang. A crucial disagreement during the talks involved North Korea's right to develop peaceful nuclear energy programs; as a compromise, the United States and North Korea agreed to discuss Pyongyangs right to such a program and its demand for light-water reactors (LWRs) at an appropriate time. The accomplishment proved to be short-lived, however, as, just a day after the statement was issued, a North Korean spokesman asserted that North Korea would return to the IAEAs Nonproliferation Treaty (NPT) only after it received an LWR from the United States. Secretary Rice dismissed the claim, but the sense of significant progress diminished, and additional talks were not held in 2005. After the Six-Party Talks stalled again, hostile rhetoric between Washington and Pyongyang intensified. Incoming U.S. Ambassador to South Korea Alexander Vershbow labeled North Korea a criminal regime and likened the state to Nazi Germany for its criminal activities. The same week, Jay Lefkowitz, the Special Envoy for Human Rights in North Korea appointed under the North Korean Human Rights Act, visited North Korea and called it a deeply oppressive nation while attending a human rights conference in Seoul. The escalated attacks were met with a torrent of hostile responses from North Korean sources. At a brief reconvening of the Six-Party Talks in November, the counterfeiting issue became the main focus: the North Koreans insisted that the imposition of sanctions on a Macau bank for its alleged role in helping North Korea launder counterfeit U.S. dollars constituted a hostile action that made implementation of the Beijing joint statement impossible. Criticism of North Korea's human rights record became more prominent on the U.S. agenda in 2005. Jay Lefkowitz was appointed as the Special Envoy for Human Rights in North Korea, a position created by the North Korean Human Rights Act of 2004. His public statements on the situation facing refugees and North Korean citizens, paired with a high-profile meeting in the White House between President Bush and a prominent North Korean defector and author, amplified the Administrations concern about North Korea's human rights record. Emphasizing this record drew attention to the gap between the United States and South Korea in dealing with the Norths human rights abuses: in order to avoid provoking Pyongyang, Seoul abstained from voting on resolutions condemning North Korea at the United Nations Commission on Human Rights conference and the United Nations General Assembly meeting in 2005. In addition to human rights, North Korea's criminal activities began receiving heightened attention in late 2005. In September, American officials imposed penalties on Banco Delta Asia, a Macau bank that allegedly allowed the laundering of U.S. dollars counterfeited by North Korea. Noting the chilling effect on the Six-Party Talks, some analysts question the timing of the announcement, but Treasury officials insist that the issue is a law-enforcement activity and in no way related to the multilateral negotiations. South Korea has distanced itself from the U.S. accusations and reiterated its stance that raising such matters causes unnecessary friction with Pyongyang and jeopardizes the resolution of the nuclear issue. China, warned by the United States to crack down on illegal North Korean transaction in its banks, has taken some steps to curb such activity, but U.S. officials say it is unclear how aggressively Chinese authorities are moving. Beijing has also urged Pyongyang not to use the issue as a reason to boycott the Six-Party Talks. In December, the U.S. Treasury Department also put out an advisory warning U.S. financial institutions to be wary of financial relationships with North Korea that could be exploited for the purposes of illicit activities. In August 2005, the North Korean government announced it would no longer need humanitarian assistance from the United Nations, including from the World Food Program (WFP), the primary channel for U.S. food aid. In response, the WFP shut down its operations in December 2005 and the United States suspended its shipments of food aid. North Korea also asked all resident foreigners from the dozen or so aid NGOs operating in Pyongyang to leave the country. In November 2005, Pyongyang decided to reject aid from the European Union (EU) after the EU proposed a U.N. resolution on human rights in North Korea. Part of Pyongyangs motivation appears to be have been a desire to negotiate a less intrusive foreign presence, particularly the WFPs fairly extensive monitoring system. Officially, the North Korean government has attributed its decisions to an improved harvest, the decline in WFP food shipments, a desire to end dependence on food assistance, and its unhappiness with the United States and EUs raising the human rights issue. Apparently, North Korea will continue to accept direct food shipments from South Korea and China, and many have accused these countries with undermining the WFPs negotiating leverage with Pyongyang. China, which provides all of its assistance directly to North Korea, is widely believed to have provided even more food than the United States. Since 2001, South Korea has emerged as a major provider of food assistance, perhaps surpassing China in importance in some years. Almost 90% of Seouls food shipments from 2001-2005 have been provided bilaterally to Pyongyang. Notably, China apparently does not monitor its food assistance, and South Korea has a small monitoring system. Several key officials in charge of U.S. policy toward North Korea were reshuffled in 2005. Critics of earlier U.S. policy were optimistic that Condoleezza Rices confirmation as Secretary of State in January would bring a greater degree of coherence to U.S. policy because of her reputation as one of President Bushs most trusted confidantes. U.S. Ambassador to South Korea Christopher Hill, a career foreign service officer with a reputation as a strong negotiator, was selected to be Assistant Secretary for East Asia and the Pacific, as well as the chief envoy for the Six-Party Talks. As Rice began her post at the State Department, policy analysts studied her language for clues about the U.S. approach to North Korea. During her confirmation hearing, Rice included North Korea among the list of outposts of tyranny, thereby appearing to signal a tough approach to the North. However, her declaration during a March swing through Asia that North Korea was a sovereign state was interpreted as a willingness to negotiate with Pyongyang. Apparently operating with more authority than his predecessor, Hill engaged the North Koreans in bilateral meetings and, eventually, in the Six-Party Talks. Two figures that appeared later in the year, however, were seen by many in the policy community as delivering a more hardline message to the North Koreans: Alexander Vershbow, the incoming U.S. Ambassador to South Korea, and Jay Lefkowitz, Special Envoy for Human Rights in North Korea. (See statements above.) Pyongyang-Seoul relations, though typically moving in fits and starts, overall definitively advanced toward stronger cooperation. Major progress was achieved in developing the Kaesong Industrial Zone, an inter-Korean project of 15 South Korean firms employing about 6,000 North Korean workers. South Korea started electricity flows to firms operating in the zone, located in North Korea territory north of the Demilitarized Zone (DMZ). Tourism numbers ballooned (although all from South Korea to North Korea, and only in controlled areas), and inter-Korean trade topped $1 billion in 2005. Ministerial talks, the first in over a year, were held in June, a military hotline was established, and a variety of negotiations, if not concrete results, on joint river surveys, fishing, farming, and transportation went forward. Significantly, the South Korean Defense White Paper decided not to label North Korea as its main enemy, and instead designated it as substantial military threat. North Korea demanded 500,000 tons of fertilizer from the South, but Seoul officials only provided 200,000 tons because of Pyongyangs refusal to return to the Six-Party Talks. Ties between Washington and Seoul were often strained by the capitals different approaches to North Korea, despite official declarations that they shared the same goal of eliminating North Korea's nuclear weapons program through a diplomatic process. The Roh Administrations public embrace of a framework aimed at balancing the nuclear issue with North-South reconciliation contributed to the impression in many corners that South Korea was asserting a distinctly independent foreign policy stance, sometimes at odds with stated U.S. goals. A disagreement between the U.S. military command in Korea and the South Korean Defense Ministry on the contingency plan, known as OPLAN 5029, to respond to an internal crisis in North Korea, was diffused, if not fully resolved. Despite these tensions, Presidents Bush and Roh held a summits in June and November in which they reiterated their shared strategic goal but declined to work out tactical differences. Indicating a need to strengthen the bilateral relationship, the two leaders announced a new strategic dialogue and the intention to move forward with possible Free Trade Agreement (FTA) negotiations at their meeting preceding the November Asia-Pacific Economic Cooperation (APEC) summit in Busan, Korea. Though the North Korea nuclear issue remains unresolved, China has burnished its leadership credentials as host of the process. Beijing was praised as an effective broker and drafter of the breakthrough joint statement issued at the fourth round of Six-Party Talks. As the party viewed with having the most leverage over Pyongyang, China was called upon to re-engage North Korea after the February 10 announcement that it possessed nuclear weapons. Beijing officials have carefully timed their high-level visits to the Koreas, with an eye on balancing their interests with both. Chinese President Hu Jintaos visit to Pyongyang in October highlighted the consolidation of strong political and economic relations between the nations, and provided a significant counterweight to his visit to Seoul for the APEC summit the following month. Many analysts view Chinas strategy as largely successful in serving its national interests: avoiding major diplomatic crises, preventing the collapse of North Korea, strengthening its economic relations with South Korea, deflecting potential U.S. criticism on other issues such as human rights because of its leverage over North Korea, and enhancing its own reputation as a major diplomatic power. Apart from the dynamics surrounding the on-again, off-again Six-Party Talks, historical issues continued to simmer in Northeast Asia, generally at Japans expense. Early in the year, a dispute over the historical claims to the Tokdo/Takeshima islands, a set of small uninhabited rocks now controlled by South Korea, erupted between Seoul and Tokyo. Most observers saw the controversy as inflamed by domestic politics on both sides; as a result, a relatively minor issue derailed major diplomatic initiatives. Japanese Prime Minister Koizumis fifth visit to the Yasukuni Shrine in October prompted outraged responses from both Beijing and Seoul, and both canceled upcoming summits with Tokyo in protest. Japans attempts at moving the normalization process forward with North Korea also faltered. The appointment of Taro Aso as foreign minister and Shinzo Abe as chief cabinet secretary, both known as conservative figures who support the Yasukuni visits, was viewed by many in the region as an indication of Japans drift toward the right. Regional leaders voiced opposition to Japans bid for a permanent place on the United Nations Security Council. On the whole, Japans relations with the region declined as long-standing historical resentments and ascendant suspicions of Japans intentions hurt bilateral relationships with its neighbors. U.S.-Japan relations, meanwhile, continued to advance as leaders announced a major revamping of the military alliance that calls for Japan to take a more active role in contributing to regional stability. North Korea continued to allow periodic visits by non-Administration officials and specialists; some observers viewed the receptions as part of Pyongyangs strategy of creating divisions and distractions within the U.S. policy community. In January, Representative Curt Weldon led a congressional delegation to Pyongyang. After trying to assure senior North Korean officials that the United States was sincere about wanting to peacefully resolve the nuclear weapons issue, Weldon reported back that North Korea was ready to rejoin the Six-Party Talks. He also revealed that the North Koreans claimed to have nuclear weapons, a claim that later was announced publicly and which contributed to an increase in tension and delayed return to the Talks. High-level North Korean officials also received Selig Harrison, a North Korea specialist known for his pro-engagement views, and impressed upon him that Pyongyang was unwilling to dismantle its nuclear weapons program until the United States moved to normalize relations. This message from the North Koreans reinforced their repeated demand that they receive assurances and assistance at the front end of any exchange, while the United States maintained that any deal was predicated on first the elimination of all nuclear programs in North Korea. Stanford University professor John Lewis and former Los Alamos National Lab Director Sig Hecker also visited Pyongyang and delivered messages about the status of North Korea's nuclear program back to the Administration. Finally, former Clinton Administration official and New Mexico Governor Bill Richardson met with officials in Pyongyang in October in between sessions of the Six-Party Talks. CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004 , by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. CRS Issue Brief IB98045, Korea: U.S.-Korean Relations Issues for Congress , by [author name scrubbed]. CRS Issue Brief IB91141, North Korea's Nuclear Weapons Program , by [author name scrubbed]. CRS Report RL31696, North Korea: Economic Sanctions Prior to Removal from Terrorism Designation , by [author name scrubbed]. CRS Report RS21834, U.S. Assistance to North Korea: Fact Sheet , by [author name scrubbed]. CRS Report RL31785, Foreign Assistance to North Korea , by [author name scrubbed]. CRS Report RL32493, North Korea: Economic Leverage and Policy Analysis , by [author name scrubbed] and [author name scrubbed]. CRS Report RS21391, North Korea's Nuclear Weapons: Latest Developments , by [author name scrubbed]. CRS Report RS21473, North Korean Ballistic Missile Threat to the United States , by [author name scrubbed]. CRS Report RL32167, Drug Trafficking and North Korea: Issues for U.S. Policy , by [author name scrubbed]. DMZ - demilitarized zone dividing North and South Korea DPRK - Democratic Peoples Republic of Korea EU - European Union GNP - gross national product HEU - highly enriched uranium IAEA - International Atomic Energy Agency KCNA - Korea Central News Agency (North Korea's official news agency) KEDO - Korea Peninsula Energy Development Organization NGO - non-governmental organization NLL - Northern Limit Line NPT - Nuclear Non-Proliferation Treaty PRC - Peoples Republic of China PSI - Proliferation Security Initiative ROK - Republic of Korea TCOG - Trilateral Coordination and Oversight Group (United States, Japan, and South Korea)

This report provides a chronology of events relevant to U.S. relations with North Korea in 2005 and is a continuation of CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004, by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. The chronology includes significant meetings, events, and statements that shed light on the issues surrounding North Korea's nuclear weapons program. An introductory analysis highlights the key developments and notes other significant regional dynamics. Particular attention is paid to the Six-Party Talks, inter-Korean relations, key U.S. officials in charge of North Korean policy, China's leadership in the negotiations, Japan's relationship with its neighbors, and contact with North Korea outside of the executive branch, including a Congressional delegation. Information for this report came from a variety of news articles, scholarly publications, government materials, and other sources, the accuracy of which CRS has not verified. This report will not be updated.

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